IS EARNEST MONEY SAFE if the bank holding it fails?

The recent bank failures of Silicon Valley Bank in California and Signature Bank in New
York have raised questions regarding the safety of funds in trust accounts.

Trust Account Funds Are Insured
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the
US federal government that provides deposit insurance to protect depositors in case a
bank fails.

Attorneys and realtors hold funds for others in trust accounts or fiduciary accounts,
insured by the FDIC. As of March 2023, the standard insurance amount is $250,000
per depositor, per insured bank, for each account ownership category. Even though
trust accounts often hold far more than the $250,000, the funds in trust accounts are
treated as an individual’s funds, not the attorney’s or the realtor’s funds. That means
that each person’s funds are insured up to $250,000. Although land or commercial
transactions may have earnest money deposits into trust accounts as high as
$250,000, most residential transactions do not. In the case of very high earnest
money deposits going into an RMAA trust account, consult with a member of the
Broker Team.

Exception
If a depositor of trust funds also has a personal account at the same bank as the bank
holding funds in trust, then the two (or more) amounts are aggregated for insurance
purposes. FDIC insurance coverage is per depositor, per insured bank, and not per
account. So, if a depositor with a personal account holding $225,000 also has $50,000
at the same bank held in trust for a real estate transaction, (total of $275,000) then the
$250,000 limit is exceeded by $25,000 and $25,000 would not be insured.

The Good News
Right now, the US government is backstopping all deposits, even those over the
$250,000 limit. The likelihood of loss at this time is a small risk. However, the
government may stop covering amounts over $250,000 at any time.
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Many thanks to Seth Weissman of Weissman Law for the idea for this Broker Corner.
See his video “Safe Real Estate” in today’s MAX MAIL.