If you died unexpectedly, the money in your bank accounts could be tied up in a probate court for quite a while. That can leave your loved ones in a tough spot, as they may need access to that money to cover funeral expenses and other costs.
That’s why it’s important to name a beneficiary (or multiple beneficiaries) for your bank accounts. It can make it faster and easier for your money to reach the right person after you die.
Depending on your situation, however, it may not be obvious who you should choose as your bank account beneficiaries. Here’s what to consider, and how to set up your accounts properly.
Benefits of having bank account beneficiaries
Designating bank account beneficiaries has quite a few benefits and no significant drawbacks. Here are some of the main advantages.
You have a say in what happens to your money
If you have family members who would benefit from the money in your checking and savings accounts, and you want them to have that income promptly after your death, you’ll want to designate one or more of those family members as a beneficiary.
If you want your kids to have your money, and they’re under 18, it’s a good idea to talk to a financial adviser or estate planner about setting up a trust where the funds would be held and managed by a trustee until the minor reaches a specified age.
Even if you don’t have any loved ones that you’d want to receive funds, you still may want a bank account beneficiary. For instance, you could give the honor to a favorite charity. In this case, you would grant the nonprofit — just as you would a family member or friend — as a POD (payable on death) designation.
You may save your heirs time and money
Without designated beneficiaries, it can take a while for a probate judge to sort through who should get what. Even if the probate process goes smoothly and a family member quickly gets the money in your bank accounts, there will likely be costs involved. Once your spouse, kids, uncle, or whomever you hope the money goes to gains access to the funds, several hundred dollars (at least) may need to go toward court fees.
Read more: What happens to a bank account when somebody dies?
How to choose a bank account beneficiary
Choosing beneficiaries for your bank account is an important decision that can impact how your assets are distributed after your death.
When deciding who to designate, consider the current financial status of potential beneficiaries. Do they need the money for specific purposes such as education, medical expenses, or housing?
Many people choose their spouse as a primary beneficiary, especially if they share finances and financial responsibilities. If you have children, you may also want to designate them as beneficiaries. But it doesn’t have to be limited to immediate household members; anyone you financially support, such as an elderly parent or a grandchild, could be a good candidate for becoming a beneficiary.
How to designate a beneficiary
Designating a bank account beneficiary is simple. You’ll do it when you set up the bank account, either listing the bank account beneficiary on a form, or add them via your online banking platform or mobile app.
If you have trouble finding where to add your beneficiaries, you can always call customer service or visit your bank’s branch. And you can also contact the bank after opening the account to add or change a beneficiary.
You’ll need your beneficiary’s full legal name and a few key details, such as their mailing address, email, phone number, and Social Security number.
Some states may handle things differently, but typically, you can put as many beneficiaries down as you like. You can also specify the percentage of funds each beneficiary should receive, but must ensure that the total adds up to 100%. For example, say you wanted to put your spouse and your sister down as beneficiaries. You could choose to split their funds 50/50, or select different proportions, like 60/40.
Understanding bank account beneficiary rules
Bank account beneficiary rules are typically a combination of what your financial institution allows and state laws. Here are a few guidelines to keep in mind:
-
There is no rule that says you have to have a bank account beneficiary, though it’s highly recommended.
-
Bank forms don’t always ask for a beneficiary; you may need to contact your bank to add a beneficiary.
-
In order for the beneficiary to get their money, they will likely need to first furnish the account holder’s death certificate.
-
If the account is overdrawn at the time of your death, there won’t be any funds to give to beneficiaries. On the bright side, your beneficiary won’t be responsible for making the account current.
Also, keep in mind that not every bank account needs a beneficiary. For example, jointly owned accounts may already have survivorship provisions. The appropriate setup depends on the account’s ownership and your broader estate plan.
What’s the difference between a bank account beneficiary vs. will?
The key difference between a bank account beneficiary designation and a will is how and when your assets are distributed to other people after your death.
With a bank account beneficiary, the funds can be claimed directly from the bank after providing the required documentation. The account doesn’t have to go through probate.
A will, on the other hand, is a legal document that provides broader instructions for distributing property that’s part of your estate. It can cover assets that don’t have their own beneficiary designation, as well as other estate-planning matters, such as naming an executor or a guardian for minor children. Assets distributed according to a will generally go through the probate process.
Bank account beneficiary FAQs
Is it a good idea to put a beneficiary on a bank account?
Yes — there is no downside to naming a beneficiary on a bank account. In fact, it can make the process of distributing your assets after your death much simpler and faster. If you want to know that your loved ones will receive crucial funds in a timely manner, naming bank account beneficiaries is a crucial step.
Do you pay taxes if you are a beneficiary on a bank account?
In general, beneficiaries are not responsible for paying taxes on money received from a POD account. That money is typically treated as a cash inheritance, not income.
That said, if the funds are held in an interest-bearing account after your death, but before being distributed to the beneficiary, they may need to pay taxes on the interest income. This could happen with a CD that hasn’t yet matured, for example; the beneficiary may want to wait to close the account until it has matured to avoid early withdrawal penalties. In this case, they’d be responsible for paying income taxes on any interest accrued during that time.
Does a beneficiary on a bank account override a will?
Yes — beneficiary designations typically override instructions in a will. Banks consider a beneficiary designation to be a binding contract. The money is typically disbursed directly to the beneficiary without going through probate — regardless of what’s stated in the will.
Can a beneficiary take money out of a bank account?
No — as long as the primary account holder is alive, beneficiaries have no access to the funds in the account. Funds will be disbursed to the beneficiary only after a death certificate has been presented to the bank.