A fiduciary in a UTMA

A fiduciary deposit account is an account that’s owned by one or more persons but managed by another. The owner is known as the principal, while the manager is known as the fiduciary. These accounts are sometimes used to handle estate or trust assets, among other purposes. Their legal status and their insurance coverage are determined by the Federal Deposit Insurance Corporation (FDIC). Here’s what you need to know about this type of account.

Fiduciary Deposit Account, Defined

A fiduciary deposit account, also known as a principal account, is a deposit account that a person or other entity, acting as a fiduciary, establishes to benefit one or more persons who own the assets in the account, according to FDIC rules. The individual who opens the account doesn’t have ownership of it nor any ownership interest.

Some examples of fiduciaries of these accounts are trustees, agents, nominees, custodians and guardians. Fiduciary accounts are used in various ways:

  • Uniform Transfers to Minors Act (UTMA) accounts
  • Uniform Gifts to Minors Act (UGMA) accounts
  • Decedent estate accounts
  • Real estate and other escrow accounts
  • Brokerage deposits
  • Accounts with a power of attorney

When FDIC Pass-Through Insurance Coverage Applies

All deposits managed by a fiduciary on behalf of the account’s owner or owners are insured by the FDIC for the full $250,000 on a pass-through basis. This means that all the deposits are considered to be deposits made directly from the principal as long as three requirements are met:

  1. The owner of the funds must be the principal and not the fiduciary who set up the account. The FDIC may review the fiduciary and owner’s agreement on the account as well as state laws to confirm this.
  2. The record of the insured depository institution (IDI) account must indicate the agency nature of the account. For example, the ownership of the account may read ABC Company as custodian, ABC for the benefit of (FBO) or Sally Rowe UTMA John Rowe, Jr.
  3. The IDI, fiduciary and third-party records must show the owners’ identities and the ownership interest(s) in the deposit account.

For example, let’s say XYZ Brokerage firm establishes an account for Sally Rowe at ABC Bank. In this example, Sally Rowe is the owner, or the principal, of the money in the account. This account would then be added with any other single accounts she owns at ABC Bank, which would be insured as a single account for up to $250,000.

If we assume Sally has more single ownership accounts at ABC Bank, she will not receive additional coverage because XYZ Brokerage firm opened the account for her. With a fiduciary account, coverage is provided as though the actual owner opened the account at the IDI, assuming all responsibilities are met.

Pass-through coverage is also possible if a guardian retains part of the interest paid by the IDI as a guardian fee.

When FDIC Pass-Through Insurance Coverage Doesn’t Apply

Couple sets up a UTGA with their financial advisor

If requirements of a fiduciary account are not met, the account will be insured under the fiduciary, not the intended principal. In this case, the fiduciary will own the deposits and the account will be categorized as a single account or corporate account. These deposits will then be combined with other deposits the fiduciary holds in the same ownership at the IDI where funds are held. The total sum will be insured up to $250,000.

For example, let’s say a customer of a deposit broker is assured by the guardian (fiduciary) that he or she will earn 5% on a deposit when the IDI is paying only 3%. The guardian would not be a guardian then; he or she would be a borrower with an independent responsibility to pay 5%. In this case, the deposits are no longer eligible for pass-through coverage for the principal. Instead, the deposits are now considered corporate deposits belonging to the guardian.

The Takeaway

A minor principal of a fiduciary deposit account

A fiduciary deposit account is an account set up by someone for another person, who actually owns the money. The one who sets up the account and manages it is known as the fiduciary, while the owner of the money is known as a principal. This kind of arrangement is used to handle assets in trusts, escrow accounts, brokerage accounts and decedent estates, among other uses. It’s important that these arrangements carefully follow all the FDIC’s legal requirements, as well as applicable state regulations, to qualify as a fiduciary deposit account.

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