My father-in-law has $260K in his bank account. What is the best way of breaking it up into chunks less than the FDIC $100K insurance limit? The sum is distributed among savings, checking, certificates. I don't know in what proportion.
The bank suggested we have the accounts re-titled with my father-in-law, my wife, and her brother as co-owners. Would this be considered a gift and subject to a gift tax? What are the implications for probate?
Are there safe alternatives with a better yield that someone who grew up during the depression might accept?
Thanks, Gary
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For most things, if you retitle them from one person to being joint tenancy with another person (other than a spouse), there are gift tax implications. If you retitle a house, for example.
There is a specific exception, however, for bank accounts and US Savings Bonds. In those cases, the gift is not considered to have been made unless and until the added person (who did not fund the account) extracts the money.
Upon the original depositor's death, the account automatically and fully belongs to the added person, but it *is* still part of the estate and counts towards estate taxes.
It takes that account out of probate and out from under the control of the will. Effectively it disinherits anyone else from that asset. If your entire estate was, say, a $99,000 checking account and your will says to split your estate amongst your three kids, but you made the account a joint account with one of them, you've just disinherited the other two. And if, after your death, the joint owning child decides to do the right thing and split the $99,000 with his two siblings by giving each of them $33,000 - he now owes gift taxes on the $21,000 each above the annual limit. (naturally, he could make the gifts to his sibs over three years, but that's not the point).
It also may cause a bit of trouble if, by some horrible chance, both joint tenants die at the same time. Wills often have language which manages that cleanly.
Depend on what you mean by "safe". I think of FDIC-insured bank accounts as "safe" only in the sense of that the money is safe for very very short periods of time. Over longer periods of time, it gets ravaged by inflation and income taxes - ie. it's *not* safe for long-term retirement money.
Of course, you almost certainly mean "safe" in the sense of "no credit risk". The only thing with as little credit risk as an FDIC-insured deposit is a US Treasury Bond, and yields on them right now stink. Moreover, any such Treasury with a maturity longer than a very very short time is subject to interest-rate risk -- if held to maturity, you will definitely get your money back, but if, say, you buy a 10-yr Treasury and need the cash in, say, two years - when you sell it, you may get a lot less than you paid for it if rates have gone up in that time.
At this point, Treasuries with maturities shorter than
7 years are paying yields which are less than you can get on regular savings deposits at some banks - especially if you don't mind online banking. If you Father-in-law has a regular checking account at his local bank, you can help him link it to one of the online banks where he can get pretty decent bank interest and very very easy transfers right back to his checking whenever he wants. ETradeBank is currently paying 3.3%, INGDirect 3.0% and HSBCdirect 3.5%. I've used ETrade and ING and have been very happy with both. They all also have CDs with various maturities out to 5 years, most of which are paying between 3 and 4% as well, all FDIC insured.
Anyway, if your father-in-law likes his existing bank and he's getting a decent rate there, their suggestion to split and retitle is prefectly reasonable - if and only if it doesn't screw up estate planning and he trusts his kids completely. In fact, it may be to his advantage to have his kids able to write checks from his accounts on his behalf anyway (ie. to pay bills).
One last thing to note - if any of that money is in an IRA, the IRA is already considered a separate title from his non-IRA money, and IRAs have a $250,000 limit for FDIC, rather than the $100,000 limit for non-IRA money.
Note, qualified retirement accounts are insured to $250K.
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Moving his money into different banks, no more than $100,000 each. This option was conveniently not given to you by your banker, strangely enough.
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Does anyone happen to know (or know where to look for) what percentage of banks fail in a given time period?
The large number of posts regarding FDIC insurance over the past few days is no doubt in the wake of IndyMac. I get the feeling, but have no statistical proof, that many people are sweating bullets over an outcome that is highly unlikely to happen. I think it's unwise to take on numerous and significant risks just to mitigate the unlikely "risk de jour".
Of course, if all of your holdings are all ready in "safe" investments, then inflation is probably decimating your account anyway and I guess there is no cost in adding in another layer of protection (except time and paperwork).
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By "very very short periods of time" you mean on the order of 5-10 years or less, right?
The father-in-law (anyone old enough to *be* a FIL) is most likely no younger than his late forties, possibly much older, and may well be 10 years or less from retirement, or already in retirement. Oh wait, OP stated the FIL "grew up during the depression", I guess that puts him in his eighties. Are you and Kastnaa seriously suggesting that bank accounts are a bad, risky, unsafe place for him to keep his money?
-Mark Bole
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Well, maybe "under 5 years". It depends on a variety of things - the investor's risk tolerance and goals especially.
All we know about this particular father-in-law is that he's wants "safe" (as I said, presumably credit safety), and grew up in the Depression. That says that he's quite old and probably doesn't need to plan on a 30 year time horizon.
I certainly suggested no such thing. In fact, I suggested other banks and ways to keep that money in his bank. My point about long-term risk was for general readership (and to bring up the point that there are other forms of risk besides just credit risk).
And most are quite small. In Jan, 1 with $58million in assets.
IndyMac got a lot of attention because it's large - $32billion.
Only three in '07 - with total assets of less then $3billion. None in '06 or '05 Four in '04 with total assets of about $125million.
etc. etc.
The total sum of assets of all the banks which have failed and gone to FDIC in all the years from '94 through now - excluding IndyMac - adds up to something like $10billion. IndyMac alone dwarfs 14 years worth.
For perspective on size and how that compares to bank assets out there - Bank of America *alone* has total assets of $1.3 *trillion*. Yes, trillion with a T.
Pretty much.
But it does happen, and there's no reason, in general, to have more than the FDIC limits in savings accounts. Not, at least, for average consumers and savers.
Note, too, that bank failures don't mean that all the bank's assets disappear. Generally it means there was a liquidity crisis and perhaps *some* losses. But just because IndyMac failed doesn't mean that the Feds had to come up with $32billion. I'm sure the actual costs have not yet been figured out, but it's a lot less than that.
Even if he's fully in retirement, I wouldn't likely advocate 100% in fixed income and even if I did I wouldn't advocate it be at a bank. A quick search of my posts will undoubtedly expose you to my opinion of banks.
That aside, I clearly referenced the "large number of posts regarding FDIC insurance over the past few days". I was making a general comment that it is not smart to mitigate an insignificant risk at the threat of increasing one's exposure to significant risk. IOW, never take on big risk to eliminate small risk. I also clearly stated that my concern was for anyone thinking about jumping into bank products, not those all ready caught in their web.
I speculate that it is much more likely that fixed income products will have a negative real return than it is likely that a given bank will go belly-up. I could be wrong (that's why my post opened with a question).
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Many brokerage companies now offer checking, debit cards, and automatic money market sweep on all cash balances in a brokerage account for little or no cost. On that same brokerage account, you can also buy brokered CDs from banks around the country (including Puerto Rico). By spreading around which banks you buy the CDs from, the client could potentially have MILLIONS invested in CDs, yet have ALL the money FDIC insured AND receive one statement AND have the money in one account. The only risk is that the custodian itself, go bankrupt, in which case SIPC kicks in (which has higher limits than the FDIC).
So again, yeah, I'm seriously suggesting that the OP oust the bank.
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I assume the sweep account is actually through an affiliated bank (such as E*Trade Bank, the one I'm familiar with) and is a MMDA (money market deposit account), not a true money market investment (where shares are targeted, but not guaranteed, to maintain a value of $1).
I hadn't heard of brokered CD's, but of course you don't get something (higher return) for nothing. I couldn't find that E*Trade offered them, but a quick internet search revealed at least one link highlighting some of the "hidden risks" of same:
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I agree with the general concept that aggressive investing is needed to stay ahead of inflation, and I personally have all my long-term retirement funds in the stock market.
But when I read (in previous threads as well) that a bank account represents a "huge risk" because of inflation, I just can't get too alarmed. But then, I still think the word "huge" actually means something, I definitely am *not* caught up on "word inflation" ;-) Note also the use in this thread of words "ravaging" and "decimating" regarding the effect of inflation on savings accounts.
First, inflation goes up and down, just like everything else, and not everyone even agrees exactly how to measure it. It was just five years ago we were worried about *deflation*, and one investor newsletter I read recently predicts that it may come back yet again to haunt us within the next five years.
Second, a stable, predictable one or two percent loss due to inflation sounds a lot less risky than swings of plus 15%/minus 20% in the stock market over the same one or two year period. I thought the conventional wisdom, this group and elsewhere, was that money needed in the next five years or less should *not* be invested in stocks or bonds! If it turns out that *bank accounts* are too risky as well because of inflation, then by golly, physical gold here I come!
Third, if despite the above, today's inflation really *is* such a huge factor in 1-2 year investment decisions, then why shouldn't I max out my home equity credit line and invest it in the stock market, knowing I will be paying back with cheaper, inflated dollars? Isn't that just a natural extension of the same arguments I'm reading here?
-Mark Bole
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I can't speak for all brokerage houses, but I have seen brokers that use MMDA through affiliated banks (Smith Barney, frex) as well as brokerage accounts that automatically sweep to a true money market investment (RBC capital mkts, frex). I have employed both at some point.
Nor am I saying they are the end-all beat-all solution. I never claimed brokered CDs offered a higher yield, only that they were a way to take advantage of multiple FDIC limits. But, if a brokered CD does offere a higher yield, it is usually because you are shopping nationally as opposed to locally.
I try not to rely on complaint sites from those who didn't perform their due diligence, but he does make one good point. Brokered CDs are traded on a secondary market IF NOT HELD TO MATURITY and thus have pricing fluctuations.
I won't go too in depth about the link, but his gripe is that a) he wasn't aware of readily available information and/or b) he had a bad broker that didn't inform him of that information and might could have purchased better CDs. Other than his valid point mentioned above, this is anecdotal "user error".
Again, I with the exception of one clearly identified post, I was speaking generally. That is often the best we can do here. You seem to be picking and choosing when statements apply specifically and when they apply generally even though the posts were marked otherwise. Furthermore, we don't even know if the OP has a short time horizon. That's completely speculation. It is possible that even the general warnings I gave in regards to inflation apply to this specific OP.
Given a long time period, inflation WILL decimate an overly conservative account. For this specific OP, there may or may not be considerations (such as time horizon) that make other risks more important than inflationary risk.
The longest time period I could find dated back to 1914. Over that time period we averaged 3.4% inflation. 3.6% over the last 75 years and 4.1% over the past 50. In only one decade (not surprisingly, the
1930s) has the average ever been delfationary (and only 1.94% then).
I never suggested stocks or even bonds. There are lots of fixed income products that historically outperform inflation and provide safety of principal and liquidity. Fixed annuities spring to mind as do _guaranteed_ variable annuities. These, of course, are each a long discussion in themselves, and may or may not be suitable to the OP. They are however, viable alternatives for some.
By the way, even over 5 short years, that one or two percent the OP gives up could be as much as $26k. Perhaps this is all the money he has and is forced to take on extra risks just to ensure his doesn't end up homeless. Or maybe he has another $2M he forgot to mention and he doesn't have any liquidity concerns. Totally speculation and mostly worthless.
Possibly. It would (wait for it...) depend upon the *specifics* of the situation. Job security, net worth, liquidity, risk tolerance, investment time horizon, credit availability, and a dozen other things could make your "natural extension" either plausible or foolish.
Bottom line, I (I won't speak for others) was simply issuing a general warning that inflation can, in fact, "ravish" highly conservative investments. Unless you disagree with that statement, I think we are wasting a lot of time over symantics and misinterpretations. I never said inflation was or wasn't a concern for this OP. It was just a general comment that perhaps applies to one of our many readers out there that currently finds themself in a similar situation.
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E-trade does indeed offer brokered CDs. do a bond search and select CD as the type (vs. corporate, agency, etc).
interesting article on CDs. I don't feel much of a problem with shorter duration CDs, of which I have a nice ladder.
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... CDARS is the Certificate of Deposit Account Registry Service. And it's the most convenient way to enjoy full FDIC insurance on deposits of up to $50 million. With CDARS, you sign one agreement with a participating local bank or other financial institution of your choice, earn one interest rate, and receive one regular statement.
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Nope, I agree with the statement. Note to self to spend some more time learning about brokered CD's and annuities of various types.
-Mark Bole
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Actually, it doesn't take all that long. A 3% inflation rate can decimate (loss of 1/10th) an account in just over 3 years. Getting some nominal interest will lengthen that. But my credit union account is paying all of 0.25%, so it doesn't lengthen it much.
-- Doug
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Are you hopping on a pun, that 'deci' means 1/10? Then, you are correct. But common usage implies a tragic loss greater than 10%. My net worth is down nearly 20% from October, and while I'm not happy about it, I'm not losing sleep, nor do I feel like my worth has been decimated. Joe
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The original meaning of the word "decimate" was "reduce by 10%" (specifically 1 in 10 killed as a form of punishment, as I recall).
Nowdays, the meaning is "substantially reduce".
Brian
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Actually, that is Merriam-Webster's third definition. See
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But we are straying far outside the moderator's tolerance, so let me get the last word.
-- Doug
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