James L. Goldsmith, Esquire

Good news! In a previous article, we advised brokers to limit the amount deposited at each federally insured financial institution to $100,000, based upon the FDIC's insurance. As a result of recent events, the FDIC has temporarily increased the limit of insurance and issued a policy on fiduciary accounts.

Historically, the FDIC insured deposits at a federally insured bank up to $100,000. Recently Congress increased the limit to $250,000, however, this is set to expire on December 31, 2009. The FDIC insures funds deposited by a fiduciary and determines such insurance based upon ownership of the deposit. The FDIC defines fiduciary account as "an account containing funds deposited by a fiduciary on behalf of one or more principals." The FDIC insures these accounts as though the principals themselves deposited the funds.

As long as the fiduciary account is properly established by the real estate professional (i.e., the fiduciary nature of the account is disclosed in the account name and in the bank's deposit account records), the deposits are attributable to each principal, not the real estate professional.

An example provided by an FDIC attorney provides a better illustration:

A Broker has an escrow account, properly set up as a fiduciary account, at an FDIC-insured bank. The Broker deposits all earnest money received on behalf of his clients, A and B, into the escrow account. The Broker also maintains all of his personal accounts at the Bank. The Broker's personal accounts total $225,000, while he has $50,000 in his escrow account. Client A has accounts at the Bank totaling $250,000 in aggregate, while Client B does not have any accounts at the Bank but does have accounts at other banks exceeding $250,000. If the Bank goes into receivership prior to 12/31/09, then:

1. All of the Broker's personal accounts would be fully insured since the escrow account (a fiduciary account) does not apply to his personal account totals.

2. Client B's $25,000 in the escrow account would be fully insured because she does not have any other money deposited at the Bank.

3. Client A would have $25,000 of her deposits at the Bank not protected by FDIC insurance since her total deposit at the Bank exceeds the $250,000 limit.

As always, keep accurate records, inform your clients in writing of the location of the escrowed funds and if you have questions, contact your friendly attorneys at the PAR Legal Hotline.