June 2003 " Insuring Your Investments: FDIC and SIPC"
PLANNING FOR WEALTH AND SECURITY
By attorneys Jennifer and Jeff Hawkins
INSURING YOUR INVESTMENTS: FDIC AND SIPC
Most banks indicate in their advertisements and letterhead nowadays that they are members of the FDIC. You may also notice that securities brokers advertise their membership in SIPC. What does this mean?
FEDERAL DEPOSIT INSURANCE CORPORATION
The FDIC’s full name is the Federal Deposit Insurance Corporation, established by Congress in 1933 to make American bank deposits safer. The insurance protects depositors’ funds from a bank’s financial failure. If a bank becomes “bankrupt”, the FDIC will pay insured deposits as soon as possible after the banking institution is closed by its chartering authority.
The FDIC insures bank deposits, such as checking, savings, and certificates of deposit up to $100,000 per account in each financial institution. A depositor could put $100,000 in each of several banks and each deposit would be separately insured. Also, depositors can open accounts under various names and account relationships and cause each account to be a separately insured account within a single banking institution. For example, a husband and wife could have a joint checking account that would serve as one account and each of them could have separate accounts in their individual names that would count as additional insured accounts. Furthermore, if the husband and wife have engaged in estate planning, they can set up trusts and cause the trusts to be owners of deposit accounts also.
The establishment of FDIC insured accounts is an important estate planning matter. You should always consult your estate planning attorney before shuffling accounts to cause them to be FDIC insured. Errors in opening accounts can create tremendous confusion and require expensive corrections.
SECURITIES INVESTOR PROTECTION CORPORATION
The Securities Investor Protection Corporation (the “SIPC”) was created by Congress in 1970 to protect money that investors have entrusted to securities dealers. The SIPC is not the FDIC and a securities investor cannot expect the same kind of protection that the FDIC provides. SIPC helps investors recover money, stocks or other securities that are lost or stolen by a broker if the broker fails or otherwise goes out of business.
Some investors expect mistakenly that SIPC protects their investments from market losses. SIPC does not protect your investment from the kinds of losses that occur when stock or bond prices fall and reduce investment values.
COMPARISON OF FDIC AND SIPC
A comparison of the protections provided by FDIC and SIPC may help explain their differences. If a depositor invests $100,000 in certificates of deposit in an FDIC-insured bank account, the depositor will receive the entire $100,000 even if the bank runs out of money and is forced to close. If an investor invests $100,000 in stocks, bonds, or mutual funds through a local securities broker, the investor will still get the stocks, bonds or mutual funds back if the broker fails and goes out of business, but SIPC will not reimburse the investor if the value of the investment decreases because of market fluctuations. However, if investment markets flourish, an FDIC-insured depositor will still only get the original investment plus the agreed amount of interest on the investment, whereas a securities investor may reap lucrative market rewards.
The FDIC and SIPC websites provide wonderful information to help explain their respective programs. The FDIC website is located at: www.fdic.gov. The SIPC website is located at www.sipc.org. Both websites offer information that prudent investors can use to make better investment decisions. Remember, investing in any investment involves risk (see the May issue of this column) and a diverse investment mixture is usually the safest plan.
THIS ARTICLE IS NOT LEGAL ADVICE. ALWAYS CONSULT AN ATTORNEY DIRECTLY BEFORE RELYING UPON THIS ARTICLE OR CHANGING AN ESTATE PLAN.
© HAWKINS & HAWKINS LLC 2003. All rights reserved.