By JACK HOUGH
It's a nice problem to have, but a problem nonetheless: Some savers have more than $250,000 in cash, the current limit for protection by the Federal Deposit Insurance Corporation.
But there are easy workarounds that can provide much higher coverage: $3.5 million for a family of five, for example. And they don't involve sending money to a dozen different banks.
At the moment, savers have a reason to shift cash to banks from investment companies. Although yields on liquid investments won't make anyone rich, money market deposit accounts offered by banks recently paid as much as 0.9%. That's six times the highest yield available to most investors in the money market funds offered by Wall Street (see "Time to Leave Your Money Market Fund").
Bank accounts also come with an added layer of safety, up to a point. With the signing of the Dodd-Frank Act into law in July 2010, the FDIC protection limit was permanently raised to $250,000.
Here's a subtle but important point from the fine print. The FDIC limit isn't "per person, per bank," as is sometimes stated. It's "per depositor, per insured depository institution for each account ownership category," according to the FDIC's website.
What's an account ownership category? It has nothing to do with whether the funds are put in savings, checking or money market accounts. It has to do with the title of the account. Individual accounts all contribute toward the same limit, so a saver with $100,000 in checking and $150,000 in savings at the same bank has maxed out his protection as an individual there.
But that same saver may hold an additional $250,000 in an individual retirement account at the same bank, because IRAs fall under a different type of ownership. The same goes for joint accounts -- and the FDIC limits are doubled for those.
Martin Becker, senior consumer affairs specialist at the FDIC, offers the following example of how a family of five can stretch their protection limit to $3.5 million -- at a single bank.
Suppose a husband and wife each have individual accounts and IRAs worth $250,000 apiece, plus a joint account with $500,000. That's $1.5 million.
The husband opens a revocable trust with his wife as beneficiary, worth $250,000. He gets the earnings on the money while he's alive, she gets the money when he dies and he can alter the terms of the trust in the future.
The trust has its own $250,000 FDIC limit. The wife, naturally, opens her own revocable trust with her husband as beneficiary, with another $250,000. That brings the family's total coverage to $2 million.
Here's the big one: The husband and wife open a revocable trust with their children as beneficiaries.
With joint accounts you simply "count heads" to determine the coverage, says Mr. Becker. But with a revocable trust you multiply the grantors by the beneficiaries. That's two grantors times three kids, times $250,000 of coverage apiece, which equals $1.5 million.
Grand total: $3.5 million in FDIC coverage.
Savers can open revocable trusts simply by asking about "payable on death" accounts at their banks.
"Informal revocable trusts are fine for someone with a simple estate planning objective, like splitting their money among their kids," says Mr. Becker. "Someone with more complicated goals, like providing ongoing care for a child with special needs, should see an attorney to create a formal trust."
Of course, the example is theoretical. Not all savers happen to have three kids, and not all of them have large IRA accounts for both husband and wife. Also, investors may want to distribute money among more than one bank, even if they're under the FDIC limit. In the event of a bank failure, after all, there may be a wait for the FDIC to make good on deposits.
"Just because there's a safety net doesn't mean you should be careless on the trampoline," says Peter Crane, president of Crane Data, which tracks money market funds.
Also, families with more than six beneficiaries receiving $2.5 million or more with unequal allocations should contact the FDIC, says Mr. Becker, because special formulas apply.
Of course, here's a formula that applies to everyone: short-term savings yields minus the rate of inflation (3% over the past year) leave less than zero.
So while it's possible to protect a large cash deposit from bank failure in the short term, doing so won't necessarily shield it from a gradual erosion of buying power over the long term.