Which two ways can a Michigan landlord hold a security deposit?
A Michigan landlord can hold a deposit untouched at a regulated financial institution, or post a bond with the state to use it.
The first route keeps the money in place until it is needed. The second keeps the deposit at the institution but posts a bond with the state, which lets the landlord use the money for other purposes.
The difference matters for a small business or a landlord who holds deposits for several tenants or clients. The first route keeps the money available and easy to account for. The second gives the landlord use of the funds, but only after a bond is in place.
This post explains both routes and where FDIC insurance fits. FDIC coverage only applies when the bank is FDIC-insured, and it works differently from the bond. Read the sections below in order, because the bond route builds on the first.
Where does a Michigan security deposit have to be kept?
A Michigan security deposit has to be held in a regulated financial institution. The statute states this as its starting rule, in these words: "(1) The security deposit shall be deposited in a regulated financial institution." ( Michigan Legislature, MCL 554.604)
That sentence is short, and it does a lot of work. It sets the default for every security deposit in the state, regardless of how the landlord plans to use the money afterward. A landlord who simply keeps a tenant's money in a bank account is following that default. A landlord who wants to use the money has to satisfy the same starting rule first and then the bond condition on top of it.
Before opening an account, ask the bank whether it is a regulated financial institution, and ask whether it is FDIC-insured. Those are two separate questions, and the answers can differ from one institution to another.
It also helps to think about the account as a single place where the deposit is held, rather than as a loose pile of cash. Keeping each deposit traceable to a specific tenant or client makes it easier to show where the money sits at any point. For a related approach, see Month-end client balances: 4 checks before you chase. That habit does not come from the statute, but it makes the account easier to manage when a deposit has to be returned or applied.
When you talk to the bank, bring a short list of questions about the account itself. Ask how the account is titled, who the owners are on paper, and whether the bank can show the balance you are holding for each tenant or client. Ask whether a second account would be useful for a different group of deposits, and what the bank would need from you to set it up. The answers do not change the statute's starting rule, but they shape how the account can be counted for FDIC purposes, and that is easier to settle before money is deposited than after a problem arises.
Does FDIC cover protect a tenant's deposit in the bank?
FDIC coverage can protect a deposit held at an insured bank, but the amount covered depends on how the account is titled and who owns it. ( FDIC, "Your Insured Deposits")
Joint accounts are the first category to understand. The FDIC notes that "[t]he balance of a Joint Account can exceed $250,000 and still be fully insured." That sounds like a large cushion, but the coverage follows each owner's share rather than the total balance. The FDIC gives an example of two co-owners of joint accounts: "John's ownership share in all joint accounts is the same as Mary's, so $80,000 of John's deposits is uninsured." In the same guidance, a different owner's share is worked out from the account value: "Robert's ownership share in all joint accounts equals ⅓ of the CD, or $90,000, so his share is fully insured."
The lesson from those examples is that a joint account does not protect every owner equally just because it is labeled joint. Each owner's share has to be worked out under the FDIC's rules. If a landlord holds deposits in an account that another person also owns, the share calculation is the first thing to check, and the bank can confirm how the FDIC would count it.
The same logic applies to a landlord who holds deposits in an account that only the landlord owns. In that case the ownership question is simpler, but the balance should still be reviewed against the coverage limits that apply to the account's title. A business owner who mixes deposits with operating cash in one account may find the coverage question harder to answer. Keeping deposits in their own account, where the title makes the owner clear, usually makes the coverage easier to explain.
Trust accounts are the second category. Under the FDIC's general rule, each owner of a trust account is insured up to $250,000 for each different eligible beneficiary, up to a maximum of $1,250,000 for five or more beneficiaries. The same guidance adds a date-specific note: as of April 1, 2024, the maximum for a trust owner with five or more beneficiaries is $1,250,000 ( FDIC, "Your Insured Deposits").
A trust account is only one kind of title, and a landlord's account may not be set up as a trust at all. The point for a reader is that the account title controls the coverage. If you are unsure which category your account falls into, the bank that holds it is the right place to ask, and the FDIC guidance is the place to check the rules that apply.
Reading the FDIC guidance in this way also explains why two landlords with the same total deposits can end up with different coverage. The first may hold the money in a joint account with a partner, while the second holds it in a single-owner account. Each account is counted under its own title, so the same dollar amount can be covered differently depending on how the account was set up.
How can a landlord use the deposit money instead of keeping it?
A Michigan landlord can use deposit money for other purposes if the landlord posts a bond with the Secretary of State. The statute's wording is "[a] landlord may use the moneys so deposited for any purposes he desires if he deposits with the secretary of state a cash bond or surety bond written by a surety company licensed to do business in this state and acceptable to the attorney general to secure the entire deposits up to $50,000.00 and 25% of any amount exceeding $50,000.00." ( Michigan Legislature, MCL 554.604)
That sentence has three parts a reader needs to understand. First, the landlord still starts by depositing the money in a regulated financial institution, as the first rule requires. Second, the bond can be a cash bond or a surety bond, and a surety bond has to come from a surety company licensed in Michigan and acceptable to the attorney general. Third, the bond amount is set by a formula: it secures the entire deposits up to the statutory threshold, plus 25% of any amount above it.
Working through the formula is simplest when the steps are kept separate. First, add up the total of the security deposits the landlord holds. Second, compare that total with the threshold in the statute. Third, if the total is at or below the threshold, the bond must secure all of it. If the total is above the threshold, the bond must secure the threshold amount in full and a share of the excess. Use the figures in the statute, and confirm the result with the secretary of state before posting anything.
Because the 25% share applies only to the amount above the threshold, the bond requirement grows more slowly once deposits pass that point, but it still grows with the total. A landlord whose deposits change over the year should recheck the figure whenever the total moves, rather than relying on a number from the first posting.
It is also worth noticing what the statute ties the spending permission to. The landlord's right to use the money depends on the bond being in place, so the permission is not something the landlord can assume before the bond is posted. A landlord who spends deposit money first and posts the bond later is outside the sequence the statute describes.
The bond route is therefore a trade. The landlord gets the use of the money, but takes on the cost and paperwork of a bond. For a small operation with modest deposits, the cost of the bond may outweigh the value of the funds. For a larger holder, the math may point the other way. The statute does not tell a landlord which choice to make, and this post does not either.
What protects a tenant when a landlord posts a bond?
The bond protects the people who made the deposits, and the statute gives them a way to collect on it in court. The statute says that "[t]he bond shall be for the benefit of persons making security deposits with the landlord." ( Michigan Legislature, MCL 554.604) The bond is not a form of FDIC insurance. It is a separate protection, distinct from FDIC coverage.
The statute also says who may act on the bond and where. It provides that "[a] person for whose benefit the bond is written or his legal representative may bring an action in the district, common pleas or municipal court where the landlord resides or does business for collection on the bond." ( Michigan Legislature, MCL 554.604) In practice, a tenant or a legal representative may bring an action for collection on the bond in the court where the landlord resides or does business.
This is the key difference between the two routes. The bank account route depends on the bank and on FDIC coverage rules, if they apply. The bond route depends on a bond posted with the state and a claim brought in a Michigan court. A landlord who chooses the bond route should understand that the statute ties tenants' collection rights to the bond.
Claim procedures, forms, and deadlines are outside what this post covers, so check the full current statute and talk to the court before relying on them.
Which route fits a small business or landlord better?
The better route depends on whether you need the money to stay in the account or whether you want to use it. If the money should stay untouched, the bank account route is the simpler choice, and FDIC coverage can add protection when the bank is insured and the account title fits the FDIC's categories. If you want to use the money, the bond route is the only one the statute describes for that purpose, and it comes with the cost and paperwork of a bond.
Consider two holders in similar positions. The first is a landlord with a single rental unit and one deposit to hold. The second is a property manager holding deposits for dozens of tenants across several buildings. That holder may find the bond worth pricing out, because the total is larger and the amount the bond must secure grows with it. Neither example is a rule. They show how the same statute can point different holders toward different choices.
Most readers will find that the decision comes down to three questions. Does the bank hold the deposit as a regulated financial institution? Is the account titled in a way that FDIC coverage would count clearly? And, if the money is going to be used, does the bond cost make sense for the deposits you hold? Answering those questions in order gives a practical picture of the choice.
Whichever route you pick, keep records that show where each deposit sits and who owns the account. For a related step, see Reconcile bank statements in software: 4 matching steps. Those records help with the bank's coverage questions, with any bond you post, and with any claim a tenant or client brings later. Clear records also make it easier to explain a decision later, because you can show what was done with each deposit and when it was done.
This post covers the two holding routes and the parts of the statute and FDIC guidance quoted above. It does not set out every rule for security deposits in Michigan. For the rules that apply to your situation, read the statute in full and speak with the bank, the Secretary of State, or an attorney who works on landlord-tenant matters.
General information, not legal or tax advice.