The FDIC knows that the deposit insurance rules can be confusing—for consumers and for bankers—and that’s a concern for everyone. Why? “When an insured institution fails, this confusion can mean, in some cases, a substantial loss of funds for depositors who think that they are fully insured but discover too late that they are at least partly uninsured,” says Chris Hencke, an attorney in the FDIC’s Legal Division in Washington.

To help solve this problem, the FDIC Board of Directors recently adopted changes that will make the rules easier to understand. The major change inserts into the rules a variety of straightforward examples that will help a depositor read the rules and quickly understand the scope of insurance coverage at an FDIC-insured bank or thrift.

The FDIC also adopted three substantive changes that:

•    Provide a six-month grace period after a depositor’s death for the survivors to rearrange the accounts if necessary to avoid going over the $100,000 insurance limit. Grieving families often need time to put their affairs in order after a death. But under existing rules, for example, a joint account for a husband and wife likely would automatically become the surviving spouse’s money when the other dies. That alone could put some of the survivor’s insurance coverage over the $100,000 limit. To reduce the chances this might occur, the FDIC is adding the grace period.

•    Give the FDIC more flexibility to insure deposits made by agents (such as escrow companies or title companies) on behalf of their customers. Money from the sale of your home may be temporarily deposited by a real estate agent in an escrow account he or she maintains at a bank, perhaps for you and other clients, too. If the bank’s records clearly indicate that the agent’s account is for several clients, the account would be insured to $100,000 for each client, not just to $100,000 in total. The new rule makes it easier for the FDIC to reach that conclusion in the absence of clear records on file at the bank.

•    Warn owners and beneficiaries of a “living trust account” about conditions that might limit the insurance coverage of the account. A living trust account is a type of payable-on-death (POD) account opened in connection with a formal trust agreement that the owner can cancel or change during his or her lifetime. If certain conditions are met, the share of each beneficiary in a POD account qualifies for $100,000 of insurance separate from the coverage on other accounts that the owner or beneficiary has at the same institution. The new FDIC rule clarifies one such condition for receiving the extra insurance — a requirement that the funds definitely will pass to the beneficiary upon the owner’s death. Given that most living trust agreements do contain restrictive clauses — such as a requirement that a young beneficiary graduate from college before inheriting the money — the FDIC is warning people who set up living trusts to be aware of the insurance implications. Living trust accounts with these kinds of strings attached will be combined with the owner’s individual accounts for up to $100,000 in total, and not separately insured as a POD account.

The FDIC’s new rules will go into effect July 1, 1998. For more information about the insurance rules in general or the changes in particular, you may contact the FDIC’s Division of Compliance and Consumer Affairs.