Tuesday, August 12, 2008

Case Study: How to lose customers

As I read the Wall Street Journal yesterday I came across an interesting article on the Opinion section of the paper. Its title: Cigarette Tax Burnout.

Smoking is a big business, whenever I asked a smoker why he/she smokes the answer is "I like it" or "it relaxes me". Anyways, even though I am not a smoker and I personally consider smoking as burning money away (literally), I believe smokers have a right to smoke. Now, they buy a product that is heavily taxed by state governments, the government states the tax on cigarettes funds other projects and many smokers are OK with paying some taxes, however, politicians need to take a business class to teach them the basics of Price and Demand. Politicians think the increase in the tax on cigarettes does not have any effect on the demand, but now they are learning that it does.

This is a perfect example on how you can price yourself out of business... the government increases the tax on cigarettes, smokers buy less cigarettes, cigarette companies report less profit, share holders make less money, employees may work less hours and state governments have less money to balance their budget or fund other projects.

"Politicians in Annapolis are scratching their heads wondering what happened to all those chain smokers who were supposed to help balance Maryland's budget. Last year the legislature doubled the cigarette tax to $2.00 a pack to pay for expanded health-care coverage. Eight months later, cigarette sales have plunged 25% and the state is in fiscal distress again."

Here is the link for the full article.


Monday, August 11, 2008

FDIC Part VI: Employee Benefit Plan Accounts

Employee benefit plan accounts are deposits of a pension plan, profit-sharing plan or other employee benefit plan.
Employee benefit plan deposits are insured up to $100,000 for each participant's non-contingent interest in the plan.

This coverage is known as "pass-through" insurance because the insurance coverage passes through he plan administrator to each participant's interest or share.
Coverage for a plan's deposits is not based on the number of participants, but rather on each participant's share of the plan. Because plan participants normally have different interest in the plan, insurance coverage cannot be determined by simply multiplying the number of participants by $100,000.
To determine the maximum amount a plan can have on deposit in a single bank and remain fully insured, first determine which participant has the largest share of the plan assets, then divide $100,000 by that percentage. For example, if a plan has 20 participants, but one participant has an 80% share of the plan assets the most that can be on deposits and remain fully insured is $125,000 ($100,000 /.80= $125,000).

FDIC Part V: Irrevocable Trust Accounts

Irrevocable trust accounts are deposits held by a trust established by statute or a written trust agreement in which the grantor (the creator of the trust - also referred to as a trustor or settlor) contributes deposits or other property and gives up all power to cancel or change the trust.

An irrevocable trust also may come into existence upon the death of an owner of a revocable trust. The reason is that the owner no longer can revolve or change the terms of the trust. If a trust has multiple owners and one owner passes away, the trust agreement may call for the trust to split owned by the survivor. Because these two trusts are held under different ownership types, the insurance coverage may be very different, even if the beneficiaries have not change.

The interest of a beneficiary in all deposit accounts established by the same grantor and held at the same insured bank under an irrevocable trust are added together and insured up to $100,000, only if all of the following requirements are met:

  • The insured bank's deposit accounts records must disclose the existence of the trust relationship.
  • The beneficiaries and their interests in the trust must be identifiable from the bank's deposit account records or from the trustee's records.
  • True trust must be valid under state law.

FDIC Part IV: Revocable Trust Accounts

Revocable Trust Accounts
A revocable trust account is a deposit owned by one or more people that indicates an intention that the deposits will belong to one or more named beneficiaries upon the death of the owner(s). A revocable trust account can be revoked (or terminated) at the discretion of the owner. The term "owner" means the grantor, settlor, or trustor of the trust.
There are both informal and formal revocable trusts.

Informal revocable trusts, often called "payable on death" (POD), "Totten trust" or "in trust for" (ITF) accounts, are created when the account owner signs an agreement usually part of the bank's signature card stating that the deposits are payable to one or more beneficiaries upon the owner's death.

Formal revocable trusts known as "living" or "family" trusts are written trusts created for estate planning purposes. The owner controls the deposits and other assets in the trust during his or her lifetime. Upon the owner's death, the trust generally becomes irrevocable.

All deposits that an owner has in both informal and formal revocable trusts are added together for insurance purposes, and the insurance limit is applied to the combined total.

Payable on Death (POD) Accounts
The owner of a POD account is insured up to $100,000 for each beneficiary if all of the following requirements are met:
  • The account title must include a commonly accepted term such as "payable on death," "in trust for," "as trustee for" or similar language to indicate the existence of a trust relationship. The term may be abbreviated (for example, "POD," "ITF" or "ATF").
  • The beneficiaries must be identified by name in the deposit account records of the insured bank.
  • The beneficiaries must be the owner's spouse, child, grandchild, parent, or sibling. Adopted and step children, grandchildren, parents, and siblings also qualify. Others including in-laws, cousins, nieces and nephews, friends, organization (including charities) and trusts do not qualify.

Wednesday, August 6, 2008

FDIC Insurance: Ownership: Joint Accounts Part III

A joint account is a deposit owned by two or more people. To qualify for insurance under this ownership category, all of the following requirements must be met:

1. All co-owners must be people. Legal entities such as corporations, trusts, estates, or partnerships are not eligible for joint account coverage.

2. All co-owners must have equal rights to withdraw funds from the account. For example, if one co-owner can withdraw funds on his or her signature alone but the other co-owner can withdraw deposits only with the signature of both co-owners, the co-owners do not have equal withdrawal rights.

3. All co-owners must sign the deposit account signature card unless the account is a CD or is established by an agent, nominee, guardian, custodian, executor or conservator.

If all these requirements are met, each co-owner's share of every account that is jointly held at the same insured bank is added together with the co-owner's shares, and the total is insured up to $100,000.

The FDIC assumes that all co-owners' shares are equal unless the deposit account records state otherwise.

For example, a husband and wife could have up to $200,000 in one or more joint accounts at the same insured bank and the deposits would be fully insured. The husband's ownership share is insured up to $100,000 and the wife's ownership share is insured up to $100,000.

Insurance coverage of joint accounts is not increased by rearranging the owners' names or by changing the styling of their names. Altering the use of "or," "and" or "and/or" to separate the names of co-owners in a joint account title also does not affect the amount of insurance coverage provided. In addition, using different Social Security numbers on multiple accounts held by the same co-owners will not increase insurance coverage.

Joint Account Example

Account Title*********Deposit Type*****Account Balance

Mary & John Smith***NOW*************$ 25,000

John or Mary Smith***Savings*********$100,000

Mary or John or Robert Smith** *******$150,000

Total Deposits***********************$275,000

Insurance coverage for each owner is calculated as follows:

Depositors**Ownership Share***Amnt Insured**Amnt Uninsured

Mary********$ 112,500************$ 100,000*******$ 12,500

John********$ 112,500************$100,000*******$12,500

Robert******$ 50,000***********$50,000*********$ 0


Friday, August 1, 2008

FDIC Insurance: Ownership: Single: Part II

Single Accounts

What is considered a Single Account?

  1. A single account is a deposit owned by one person.

  2. Accounts established for one person by an agent, nominee, guardian, custodian, or conservator, including Uniform Transfers to Minors Act accounts, escrow accounts, and brokered deposit accounts.

  3. Accounts held in the name of business that is a sole proprietorship (DBA accounts)

  4. Accounts established for a decedent's estate.


If an individual has a deposit account titled in his or her name alone but gives another person the right to withdraw deposits from the account, the account will be insured as a single account only if the insured bank's deposit account records indicate that:

  1. The other signer is authorized to make withdrawals pursuant to a Power of Attorney

  2. the account is owned by one person and the other person is authorized to withdraw deposits on the owner's behalf (a convenience account)

If the insured bank's account records do not indicate that such a relationship exists, the deposit would be insured as a joint account.

Here is an example of Single Account

Account *****************Deposit Type******Account Balance

Marci Jones************** NOW************* 5,000.

Marci Jones****************Savings**********20,000

Marci Jones***************CD***************100,000

Marci's Memories (sole prop)*********checking*******25,000

Total Deposits********************************150,000

Amount Insured*****************************100,000

Amount uninsured***************************$50,000

Your BANK and FDIC insurance Part I (the basics)

In July 11th 2008 IndyMac made headlines when the FDIC office took over the bank. The media showed pictures and video clips of people in front of IndyMac branches trying to take their money out. Since the fall of IndyMac two other banks have also failed, First National Bank of Nevada and First Heritage Bank in Newport Beach in California. Unlike the IndyMac fall, these other two banks did not get same the press coverage. If you visit the FDIC website under Failed Bank list http://www.fdic.gov/bank/individual/failed/banklist.html you will notice that more than 30 banks have failed since 2000. What does this mean for you? is it the fall of our banking system? should we put our money under the mattress? can we still trust our banking system?

Yes. We have a strong banking system and No, we do not need to hide our money under the mattress. As you can see from the list many banks fail but are taken over by the FDIC and the majority of depositors do not lose their money.

In this section: Your Bank and FDIC insurance, I will discuss what is FDIC, the basics of FDIC insurance, what it covers and ownership categories and how to maximize its benefits. The information below is not top secret, you can find it on the FDIC brochure provided by each Financial institution that is FDIC insured.

Who is the FDIC?
It is short for the Federal Deposit Insurance Corporation. It is an independent agency of the United States government. The FDIC protects depositors against the loss of their insured deposits in an FDIC insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.

If a depositor's accounts at one FDIC insured bank or savings association total $100,000 or less the deposits are fully insured. A depositor can have more than $100,000 at one insured bank or savings association and still be fully insured provided the accounts meet certain requirements. In addition, federal law provides for insurance coverage of up to $250,000 for certain retirement accounts.

What does FDIC deposit insurance cover?

FDIC insurance covers all types of deposits received at an insured bank, including deposits in checking, NOW, and savings accounts, money market deposit accounts, and time deposits such as certificates of deposits (CDs). FDIC covers the balance of each depositor's account, dollar for dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank's closing.
The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if these investments were bought from an insured bank. The FDIC does not insure U.S. Treasury bills, bonds, or notes. These are backed by the full faith and credit of the United States government.

How much insurance coverage does the FDIC provide?
The basic insurance amount is $100,000 per depositor, per insured bank. The $100,000 amount applies to all depositors of an insured bank except for owners of certain retirement accounts, which are insured up to $250,000 per owner, per insured bank.

Deposits in separate branches of an insured bank are not separately insured. Deposits in one insured bank are insured separately from deposits in another insured bank.

Deposit maintained in different categories of legal ownership at the same bank can be separately insured. Therefore, it is possible to have deposits of more than $100,000 at one insured bank and still be fully insured.