With settlements requiring court approval, such as wrongful death or infant compromise, it can take months, or even a year, for a court to authorize the distribution of the funds. Most plaintiff’s lawyers deposit the funds into their attorney’s escrow account, where the funds earn no interest for your client and are only protected by the maximum FDIC insurance of $250k. That is a mistake.
When you make a multi-million deposit of settlement money in your attorney escrow account, you’re rolling the dice with your client’s money. If your bank fails (liabilities exceed assets), your client can lose their money, subject to the maximum FDIC insurance of $250k. Won’t happen to your bank? Bank failure is not common, but went it happens, it can be devastating to your clients. In 2008, Washington Mutual was brought into receivership by the FDIC with over 100 billion in deposits and other smaller banks fall into insolvency every year.
When you make a motion for court approval in a wrongful death or infant compromise case, ask the Court for permission to deposit the client’s settlement funds into a CDARS (Certificate of Deposit Account Registry Service) account, rather than your attorney’s escrow account.
If your settlement does not require court approval, make sure you inform your client is the risks of depositing the settlement funds in a single account, e.g., checking, savings, money market and CD accounts. Whenever the settlement funds exceed the amount of FDIC insurance ($250k), make sure your client deposits them into a CDARS account.
What is CDARS?
CDARS is the easiest way to access FDIC insurance on large settlements. With a CDARS, everything is handled through one bank. Your client’s settlement funds are broken into smaller amounts and placed with other banks that are members of the CDARS Network. Then, those banks issue CDs in amounts under the standard FDIC insurance maximum, so your client’s investment is eligible for FDIC protection. By working with one bank, you can receive FDIC insurance through many.
You enter into one CDARs Deposit Placement Agreement. You select a rate and maturity that match your investment goals and using CDARS, your funds are submitted for placement at member banks. The member banks issue CDs in denominations under the FDIC maximum, so your investment is eligible for FDIC coverage.
You earn one rate per maturity on your client’s entire investment and you receive one regular account statement listing all of your client’s CDs, along with the issuing banks, maturity dates, and interest earned.
How CDARS can Help Your Clients
The deposit of settlement money occurs in increments below the standard FDIC insurance maximum ($250k), so that both principal and interest are eligible for FDIC insurance. For example, with a $2.25 million settlement, you can have 9 CDs under $250k issued by 9 different banks in the CDARS network.
The CDARS program can provide your clients with multi-million FDIC coverage while working with one bank. No depositor has ever lost a penny on FDIC-insured deposits.
- One Rate: Earn CD-level returns with one interest rate per maturity on CD investments placed through CDARS. There is no need to negotiate multiple rates per maturity.
- Full FDIC Insurance: Make large deposits eligible for FDIC coverage without running around town to open accounts at multiple banks.
- One Statement: You receive one statement detailing all of your client’s CD holdings with the exact amount of the CDs, including principal balance and accrued interest.
- No Hidden Fees: There are no annual fees, subscription fees or transaction fees for using CDARS.
- Flexibility: You can select various maturities ranging from 4 week to 260 weeks (5 years).
Hundreds of banks across the country participate in CDARS; there are 59 banks in the CDARS network in New York. You can find a financial institution in your area at www.cdars.com/home/find/find-cdars.