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Regarding Federal Deposit Insurance and Large Client Balances in the Trust Account

The situation of client deposits exceeding the FDIC insurance limit also occurred before the advent of unlimited insurance coverage a few years ago. The key things to remember are that you owe your clients a high duty of care, but you are not an insurer. Also, it is perfectly fine to discuss the deposit insurance issue with the clients and let them help formulate a strategy. Finally, the deposit insurance limits apply per client, so long as your account is labeled a trust account and you have records showing the exact interest of each client in the account. With those considerations in mind, here are some thoughts:

  1. Choose a strong bank to do business with. It is a good idea to monitor the bank watch lists to ensure your bank is not on the list, for example.
  2. For deposits that will be around for an extended period of time, you will want to split the funds over two or more banks to get coverage for the amount in its entirety.
  3. If a deposit is not going to be around long enough to make splitting it up over several banks practical, just get the money in and out as soon as possible. Speed is your friend, in this situation. Electronic or wire deposits and transmittals are best for this purpose.
  4. If you routinely have deposits in excess of the insurance limit, you might want to talk with your banker regarding commercial deposit insurance. This is an expense that could be passed along to the clients, so long as you address it in your fee or engagement agreement.
  5. Remember that some clients will have their own deposits at the same bank where your trust account is located, so it is imperative to discuss the insurance issue with them to ascertain if their personal deposits will affect coverage for what you have in the trust account.

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