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The Last Bank Account You Will Ever Need

By Michael B. Nelson, Esq. - Email Editor

April 2010

Dear Valued Reader,

The Federal Deposit Insurance Corporation (FDIC) was created by Federal Reserve Act that codified the Banking Act of 1933.

Deposit Insurance Coverage

Inflation Index

The basic deposit insurance limit of maximum of $100,000 per account is defined for technical purposes as the “standard maximum deposit insurance amount” (SMDIA) and can be indexed to inflation each year for five years beginning April 1, 2010 upon approval by the FDIC and the National Credit Union Administration (NCUA). The adjustment, calculated on an index published by the Department of Commerce, will be adjusted to the nearest $10,000.

Retirement Accounts

Deposit insurance coverage of certain retirement account is increased from $100,000 to $250,000, subject to the same inflation adjustments as that for regular accounts.

Current Deposit Insurance Coverage

Currently, the standard insurance amount was increased to $250,000 per depositor and will temporarily remain in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and certain other retirement accounts, which will remain at $250,000 per depositor.

Basic Deposit Insurance Coverage

Basic Accounts

The FDIC regulations provide that insurance coverage is based on “the ownership rights” in all deposit accounts at the same bank, rather than the number of accounts at that bank.

Revocable Trusts

These are accounts in which the grantor or grantors are able to provide deposit insurance protection for funds payable to qualified beneficiaries in the event the institution fails before the death of the grantor.

P.O.D. Accounts

The most common type of revocable trust is the payable-on-death (P.O.D.) account. These are revocable trusts in which the grantor deposits funds into a revocable trust account, names the beneficiaries and enters the amount they are to receive on a signature card at the institution. The grantor “owns” the funds for deposit insurance and can revoke the trust at any time. The trust becomes irrevocable upon the grantor’s death. If the bank fails before the grantor’s death, the interests of “qualified beneficiaries”—basically the grantor’s spouse, parents, children, grandchildren, and siblings—are insured up to $250,000 each.

The coverage of beneficiaries on these accounts is separate from that afforded to any of the single-ownership accounts held by grantor or by any beneficiary at the same institution. If two or more grantors establish a P.O.D. including a husband and wife, the interests of each qualified beneficiary are insured separately for $250,000 for each grantor.

Using a P.O.D. in estate planning is becoming a common practice for a multitude of reasons including the FDIC element as protection of the estate assets during the lifetime of the decedent and the certainty in passing from the decedent’s estate to the designated beneficiaries. Although Federal Estate Taxation is based on federal law, the property interests are generally based on a state-by-state basis. Recently the state of Wisconsin’s Supreme Court has ruled that the beneficiaries are personally responsible for the payment of the estate tax of the decedent’s estate.

In this recent case, Jessica Schleis was named at the time she was a minor as the recipient of two accounts, one a "Payable on Death" (P.O.D.) account, the other a "Transfer on Death" (T.O.D.) account, totaling over $3 million in the name of James F. Sheppard, the decedent. The Estate’s legal counsel sought to take part of the monies in the P.O.D accounts to help pay an allocated part of the Estate tax liability. Jessica’s counsel advised Jessica that the P.O.D. was not subject to intrusion and payment of the allocated estate tax. The case rose to the Wisconsin Supreme Court and the Supreme Court of Wisconsin official Opinion was filed on May 4, 2010. The Court weighed whether the P.O.D. accounts were to be characterized as inclusive within the gross estate, specifically whether the decedent made "a transfer" during his life by creating the P.O.D. accounts. Wisconsin law governs and the P.O.D. accounts were created in a manner that does not amount to a transfer of property by the decedent to the recipient during the decedent's life. When a depositor opens a P.O.D. account, he or she names a recipient who is to receive the property in the account at the time of the depositor's death. The depositor is not required to notify the recipient when the account is opened or when the recipient is named. Prior to the depositor's death, the depositor maintained control over the principal and income of the accounts and was able to legally change the P.O.D. recipient at any time. The depositor could remove all the assets from a P.O.D. account and close the account at any time before his or her death, without notifying the P.O.D. recipient. The recipient has a right to the account only if the account exists at the death of the depositor and the recipient survives the depositor.

The Court reasoned that estate tax applies to a transfer with a retained life estate. A property interest must be transferred during the owner's lifetime in order for a life estate to be retained. The P.O.D. account did not constitute such a transfer. During his or her lifetime the depositor is the owner of the P.O.D. account and controls the income, the principal, and the right to decide who gets the property at the depositor's death. With a P.O.D. account the depositor remains the owner during his or her life, transfers nothing during his or her life, and retains total control. Therefore, a P.O.D. account belongs to the original payee during the original payee's lifetime and not to the P.O.D. beneficiary or beneficiaries." With respect to T.O.D. accounts, Wis. Stat. 705.26 provides that "[t]he designation of a T.O.D beneficiary on a registration in beneficiary form does not affect ownership until the owner's death."

Even though the decedent died without a Will, the Court found that the Estate must pay the Wisconsin estate taxes generated by the P.O.D. accounts. In Wisconsin, the court has applied the burden-on-the-residue rule for state estate taxes unless a testator directs otherwise. Therefore, Jessica Schleis is not required to pay any portion of the state’s estate taxes and the Estate itself must bear that liability. The net effect of this ruling is that when properly instituted the P.O.D. passes to the beneficiary in total without reduction for state estate taxes.

CONCLUSION:

If you are using P.O.D. accounts for marital deduction trusts and/or other estate planning considerations, you may want to review your specific state law in light of this very recent state Supreme Court decision to ensure that at the date of death of you or your client, the true intent of your wishes are fulfilled without the reduction of the amount passing to the particular individual and that burdensome litigation is avoided.

By Michael B. Nelson, Esq.

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