Payable on Death Accounts Can Increase FDIC Insurance

Joshua Kennon is an expert on investing, assets and markets, and retirement planning. He is the managing director and co-founder of Kennon-Green & Co., an asset management firm.

Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics.

The FDIC maintains a $250,000 coverage limit on deposits held at single financial institutions, but this could leave wealthier retirees in a bind when trying to protect their assets. That $250,000 limit includes every account: savings accounts, checking accounts, certificates of deposit, and money market accounts. Keep in mind that money market accounts are different from the non-FDIC insured money market mutual funds.

There is one easy-to-use trick available to increase your total coverage limits to at least $1,250,000: that's the "payable on death" designation.

Key Takeaways

• Making a "payable on death" designation can increase your FDIC-insured coverage limit to $1.25 million; this is up from the standard $250,000.
• When an account is designated as payable on death, the person whom you've named becomes the owner of the account when you die.
• Drawbacks of this strategy could include specific state laws that make it more difficult if you were to change your mind.
• Keep in mind that you cannot override your payable on death instructions—which are a type of revocable living trust—with a will.

What Does Payable on Death Mean?

When you designate a bank account as payable on death, the person whom you've named is not entitled to any of the money until you pass away. When you do, they suddenly become the owner of the account. It bypasses your estate. It's even more powerful than your last will and testament.

The account is a type of revocable trust in that there is someone else who has a beneficiary interest in the account. That is the reason that these types of accounts are often referred to as the "poor man's trust fund." For virtually no paperwork or cost, they achieve many of the same net effects as a basic trust fund. The assets in the account get to skip probate entirely.

Because of that beneficiary interest, the FDIC currently allows you to cover as much as $1,250,000 at a single financial institution. You can designate up to five payable on death beneficiaries, but none of them can be covered for more than $250,000.

How Can You Increase Your FDIC Coverage Limits?

Imagine that you are a doctor, and you have five grandchildren. You want to keep all of your money in a single bank, but you also want to sleep well at night knowing you are covered by FDIC limits. You don't want to deal with parking your money in Treasury bills, bonds, or notes.

Instead of dumping $1,250,000 into a checking account or savings account, you would, instead, do something like this:

• $250,000 certificate of deposit; designated payable on death to Jane Smith
• $250,000 checking account; payable on death to Andrew Smith
• $250,000 savings account; payable on death to Jason Smith
• $250,000 money market account; payable on death to Sarah Smith
• $250,000 savings account; payable on death to Heather Smith

Now, suppose the bank were to fail in a catastrophic collapse. In this case, the FDIC would come in and restore the entire $1,250,000. That would be five times the ordinary coverage limits.

To test whether you are doing it correctly, take a moment to play around with the FDIC EDIE calculator (Electronic Deposit Insurance Estimator), which will let you run scenarios to see whether you are protecting your assets by showing how much cash you would recover in a bank closing.

Drawbacks to Payable on Death Accounts

As with all things in life, there are some drawbacks to using the payable on death designation to increase your FDIC insurance limits on things such as savings accounts or certificates of deposit. Many states around the country have specific laws on the process that must be followed if you change your mind and want to change the designated beneficiary on a payable on death account.

In other parts of the country, people might give you an odd look if you request such an account. Instead, you may have to tell them you want a "Totten Trust."

The Bottom Line

Keep this in mind: You cannot override your payable on death instructions, which are a type of revocable living trust, with a will. Suppose you were to name your son as the beneficiary on the account form. Later, you leave the money to your daughter in your will. In the end, your daughter would receive none of those funds.

Important

Payable on death accounts/Totten trusts are revocable living trusts that become irrevocable once you pass away.

Your daughter would have practically no recourse, and your son wouldn't be required to honor your last will and testament at all. The money would be legally and lawfully his to do with as he pleases, because the moment you pass away, the account would become his personal property.

You should be confident that the recipient of the payable on death account is able to responsibly receive the money, because if anything were to happen to you, that is exactly what would occur. You also have to contend with the fact that the money will be unrestricted. If you're concerned about the habits of your beneficiary, consider a spendthrift trust fund instead.