HOW SAFE IS YOUR CASH?

If your bank failed tomorrow, are you absolutely certain that you would recover all of your deposits? 

Today, more than 40% of all bank deposits in the U.S. are not insured by government deposit insurance. And while some deposits are insured outside of the U.S., many are not. Do you know which countries offer the best deposit insurance?  

If you don’t fully understand the deposit insurance system, the risk of loss could be high.

Today’s newsletter looks at two examples to help protect your cash in the U.S. and in offshore banks even when balances are above government insurance limits. And we'll see how a trust can significantly reduce your financial risks.

But it’s important to understand……..

The Risk of Losing Money on Bank Deposits Has Never Been Greater

According to the FDIC, since 2000, five hundred and sixty one (561) U.S. banks have failed in America. Within the last year six (6) banks have failed, and a very large number during the GFC (admittedly, I lost count) between 2008 and 2010. Since 1980 more than 1600 U.S. banks went bust or received government financial assistance. And there’s no reason to believe that bank failures in the coming year or two will be any different than in the past.

How can you tell if your bank is on the FDIC Problem Bank List?

The unofficial Problem Bank List currently totals 252 institutions, but the real number is a closely held secret by the FDIC. The FDIC does not publicize the true list for fear of causing a run on the banks involved.

Ironically, the historic low for the FDIC Problem Bank List was reached just before the onset of the 2007 Global Financial Crisis. Today, the number of 'disclosed' banks on the FDIC’s Problem Bank List remains at historic highs. 

In the U.S., deposits are sometimes covered up to limits of US $250,000 by the FDIC. Outside the U.S. government guaranteed deposit insurance varies between none and $250,000, valued in the local currency.

According to the IADI (International Association of Deposit Insurers) at last count 106 countries have instituted some form of explicit deposit insurance.

Thirty three of the 35 OECD countries have deposit insurance or government guarantees, but New Zealand and Israel are the two notable exceptions that do not. Last I looked, below are seven examples of government guaranteed deposit coverage schemes:

Australia: Deposits in banks, building societies and credit unions are guaranteed by the Australian Government up to a maximum of A$250,000.

Canada: The Canada Deposit Insurance Corporation, guarantees deposits up to C$100,000 by resident, non-resident and non-Canadian citizens, if funds are held in eligible deposits.

Britain: The UK's Financial Services Scheme, formed in 2001, guarantees up to £85,000 (+/- US$105,000).

France: This scheme includes all deposits, including those in all European and non-European currencies up to a €100,000 (+/- US$120,000) guaranteed, with a 7 day time limit.

Germany: Four German banking associations have supplementary voluntary guarantee schemes, in addition to the state's €100,000 guarantee.

Norway: The Norwegian Banks' Guarantee Fund, which has one of the highest guarantees, covers deposits up to NOK2 million (+/- US$250,000) per deposit per member bank.

New Zealand: A New Zealand Retail Deposit Guarantee Scheme in the amount of NZ$250,000 was introduced in October 2008, but terminated in December 2011. Today, if a bank fails, depositors are mere creditors subject to a ‘haircut’ on deposits. 

In a past newsletter titled Getting Cyprused I explained how this is a worrying trend, as schemes today are gone tomorrow. Not just in New Zealand, but the new model going forward for the U.S. and other countries.

Before opening an account you should reconfirm the current deposit insurance scheme as laws change and it may be out of date.

It may come as a surprise that in the U.S. nearly one-half of all bank deposits are not insured. At last count, total domestic deposits at FDIC-insured institutions in the U.S. were more than $7.5 trillion, and total insured deposits were $4.5 trillion. This means that total uninsured deposits were more than $3 trillion before Covid19 arrived. This is a staggering 40% or more of all bank deposits receiving paltry or no returns while the risk of loss is great.

What’s more troubling is that in 1990 the FDIC insured more than 16,000 institutions nationwide. According to the latest FDIC quarterly report there was a significant decline in the number of institutions insured by the FDIC. In 2002 the number of insured institutions dropped to 7,780 and by 2018 to an all time low of only 4,708 insured financial institutions. 

Since FDIC money to offset loan losses comes from the fees it charges member banks, member contributor fees are now substantially reduced when they are needed most. If taxpayer bailouts can no longer be affored, then what?

Contrary to the FDIC game of hide and seek with troubled banks, I’d sure like to know if my bank was at risk of closing its doors….wouldn’t you?

You’re probably familiar with old name banks like Indy Mac Bank, Countrywide, Corus Bank, Umbrella Bank, and New South Federal. These are but a few long time familiar names. I became intimately involved with each of these 'secure' banks that failed as I personally worked through a number of bank failures with clients with large deposits that had banking relationships with each one of them at the time they failed.

Because these forward thinking clients with large deposits planned ahead and took important steps well in advance of the bank failures they were protected from losing any money when the banks failed….. even with deposits far in excess of FDIC coverage limits.

How did they do it?

First, Know Your Bank’s Health

How do you know if your bank is at risk of failing? If they were struggling to keep the doors open, do you think your banker would tell you? Fat chance.

The first step to protecting liquid assets is to understand the financial health of your bank. It’s not really that difficult, if you care to know. While the FDIC maintains a “watch list” of banks experiencing financial problems, it is not available to the public.

However, private companies do publish ratings on banks, and the FDIC has compiled a list of these private ratings services. Some of the private firms are listed at this site.

Taking the initiative to know your bank – and if your money is safe – is a step that has never been more important than today.

Then, keep a close eye on your bank’s evolving financial health. It changes from month to month, and quarter to quarter. This knowledge also provides you added leverage in trying to negotiate better deposit terms. If you see that your bank has a liquidity problem and you are comfortable you have sufficient FDIC coverage against loss, then you can often negotiate better rates with larger deposits.

And if your bank’s not doing well, ask them why. If you have a valued relationship, your banker should be willing to provide their perspective of the problems.

But remember that reports and financial statements are often months or quarters old by the time they are released, published and analyzed, so you’re always looking at your bank’s performance through the rear window. And at the end of the day, your banker is selling you on the bank’s ongoing good status, so listen to what they tell you with a critical ear.

But by being even more proactive and forwarding thinking you have a far greater opportunity to fully protect larger deposits. How?

How to Increase Your Level of Deposit Insurance Protection

What if you have cash funds in excess of the deposit insurance cover?

You could move to multiple banks offering the same type of FDIC protection. For high net worth individuals with large cash holdings this becomes cumbersome. Or better yet, you could retitle how you hold your savings without having to go to numerous financial institutions.

What follows first is one simple example of a basic level of retitled savings accounts at the same U.S. bank to obtain $2,500,000 FDIC coverage, ten times the normal coverage. This example means that you are personally holding assets in your name and likely have no - or very limited - asset protection planning. For this reason I don’t recommend this first example of holding assets in your personal name.

But first, for simplicity sake, suppose John Customer retires and liquidates his assets. He deposits $250,000 at his local bank in his name. He then opens a joint account with his wife, for another $250,000.  Then, with $750,000 he opens accounts with his three siblings, payable upon death for $250,000 each. Further, Mr. Customer opens four additional accounts for $250,000 each, totaling $1M, payable at death to his four children. And he sets up an IRA account in his name for $250,000.

The entire $2.5M is fully insured by the FDIC at the same bank if created correctly, at least so says the FDIC. However, he has added numerous other risks associated with multiple individuals as part of the planning.

While the above FDIC coverage may work, is it really desirable from an estate planning or an asset protection planning perspective? And is it wise to keep all eggs in one basket?

What’s better than the above option?

Planning for Large Depositors

Some of our clients will be familiar with the below planning strategy, but for those new to class we’ll try and keep it simple.

Many of our clients begin with an International Trust or a Standby International Trust © that integrates both the life side and death side of planning. This means it integrates both estate planning and asset protection planning strategies.

The life side of the trust provides the client with rights to distribution to themselves during their life, protective supervision over the trustees and the trust purposes, superior asset protection against a broad range of risks in general, and for some, specific pre-nuptial or post-nuptial planning.

For an increasing number of clients it also includes opportunities for investment diversification both at home and offshore. For a small number it includes pre-migration planning for part time or long term offshore living, or for a few, a potential interest towards expat planning.

The above are only a few of the life side purposes of trust planning. But most importantly, a properly implemented trust offers superior asset protection.

A litigation-gone-crazy society for many has long been the reason to set up an International Trust or Standby International Trust © for asset protection. Global investment diversification for stocks, bonds, currencies or second homes is another. During the past several years, social, political and economic instability has increasingly topped the list. The motivational factors vary from person to person, but the common denominator is the desire to maintain control over hard earned assets and not lose them from frivolous litigation.

On the death side of planning it means minimizing federal estate taxes and a distribution of assets to a spouse, heirs, or charitable organizations. Creating legacies, and controlling what happens to assets after you die, is also important to most individuals. And there are opportunities to “speak from the grave” after your departure.

Visit here to learn more about International Trusts and Standby International Trusts.

One feature of using a trust is that you can protect cash assets through trust-owned LLCs. There could be one LLC, or many LLCs, and it’s the LLCs that hold title to the assets, whether a bank deposit, a home, investment real estate, stocks, bonds, business, or just about any other after-tax asset. Then you, the manager of the LLC, manage and control the assets owned by the LLC.

And all LLCs are not created equal. A select few jurisdictions within the U.S. and outside the U.S. have charging order protection, which means that a court can’t force a distribution of assets held by the LLC for the benefit of a judgment creditor. The bottom line is that it levels the playing field against frivolous law suits, saving you frustration, money, and legal fees.

With the above background in mind, let’s see how this applies to smart, proactive depositors wishing to increase bank deposit insurance coverage.

By way of example, let’s go back to our retired and cashed up Mr. Customer with $2.5M (or more) who desires to obtain FDIC for all bank deposits. Let’s say he established five LLCs when he first created his International Trust. Since all five LLCs are different entities with different taxpayer identification numbers, he could create five different account holders at one bank. If each account held $250,000 each, then $1,250,000 could be FDIC insured at the first bank.

Then, at the second bank Mr. Customer could do the same as above and obtain FDIC on another $1,250,000. This now means that the entire $2.5M is fully FDIC protected, if correctly set up. With more cash, add either more LLCs or another bank. And up to $250,000 could similarly be held in his name at both banks for FDIC protection personally, assuming he is willing to accept the risk of having assets outside of the trust protective structure.

We’ve worked with clients with far greater amounts of cash looking to obtain government deposit insurance protection in the U.S. and abroad. Creating and maintaining more LLCs, and locating deposits at additional banks may seem cumbersome, but it's a very small price to pay for protecting your hard earned money.

Regardless of the values of your cash amount, all amounts mean the same to an owner that wants to protect a lifetime of earnings. 

When an economic environment improves - or we survive the social and political challenges - then the LLCs still have tremendous value for asset protection and investment diversification purposes at home and abroad.

And there’s more if you're looking for investment diversification offshore. Yes, this too will return in due course.

94% of the world’s population lives outside of the US. Two-thirds or more of all investment opportunities are located offshore. And far superior asset protection is available offshore, than at home. Going offshore is perfectly legal, but getting it right is essential.

And best of all?

Many offshore banks outside the U.S. are much better capitalized and receive superior ratings than found in the U.S.

Start Now

There are more International Trust tips found at our site DavidTanzer.com. 

If you’d like to learn more and discuss your planning objectives in a confidential initial review, contact me here.

The book How to Legally Protect Your Assets, 2nd edition, explains how you can use an International Trust to accomplish your objectives. And information on the Standby International Trust © can be found right here. 

Offshore Living & Investing, 2nd edition, takes offshore planning to another level.

Both books are available at reduced prices right here at our web site in quality soft cover, pdf, or Kindle.

And visit our site for nearly 100 other complimentary Past Articles.

Until next time …

David