Bank Account Beneficiary Rules: A Guide

If you have a retirement account or a life insurance policy, you’re probably familiar with the process of naming a beneficiary, but did you know that bank accounts can have beneficiaries as well?

The point of designating beneficiaries is to specify who will inherit your assets when you die. When you open a new bank account, you may have the option to add one or more beneficiaries. You can also typically name beneficiaries later, even years after you open the account. You can generally name a beneficiary for a checking account, savings account, certificate of deposit (CD), or money market account.

Naming beneficiaries to bank accounts is something you might consider as part of a broader estate plan. Read on to learn about the benefits of adding a beneficiary to a bank account and how to do it.

What Is a Beneficiary?

A beneficiary is a person or entity chosen to receive assets or financial benefits when the original owner passes away. The types of assets that allow beneficiary designations include:

•   Checking accounts

•   Savings accounts

•   Certificates of deposit (CDs)

•   Money market accounts

•   Brokerage accounts

•   Retirement accounts like 401(k)s and IRAs

•   Health savings accounts (HSAs)

•   Life insurance policies

While you are not required to name a beneficiary for your bank account, doing so helps ensure a smoother transfer of assets to your loved ones. You can designate multiple primary beneficiaries, which typically splits the balance equally, though some institutions allow you to assign specific percentages to each person. Alternatively, you can name a contingent beneficiary who will inherit the funds only if the primary beneficiaries pass away or cannot be located.

Beneficiaries can be a person, organization, or business. For example, you might choose to add a nonprofit organization as a beneficiary of a bank account. In that case, you would need to provide details about the organization rather than a person’s information.

Beneficiary Bank Account vs Writing a Will

A will is a legal document that allows you to specify how you’d like all the assets included in your estate to be distributed among your heirs after you pass away. You can also use a will to leave funeral or burial instructions or name a legal guardian for your minor children.

A beneficiary designation, on the other hand, assigns a person or party to receive benefits from a specific account or financial product, such as a checking account, savings account, retirement account, or life insurance policy. Beneficiary designations are unique to each asset and are managed by the institution or company that holds that asset.

Beneficiary designations generally supersede the intentions stated in a will. So if you’ve named your spouse as the beneficiary to your 401(k), for example, you wouldn’t be able to leave that asset to someone else in your will.

Should You Add a Beneficiary to Your Bank Account?

Bank accounts, including savings and checking accounts, typically allow you to name a beneficiary — often called a payable on death (POD) designation — and doing so is generally a good idea.

Naming a beneficiary for a bank account allows that person to inherit those assets once you pass away without having to go through probate. Probate is a legal process in which a deceased person’s estate is divided up among their heirs. Assets can be divided according to the terms of a will. If there isn’t a will, then state inheritance laws can determine what happens to the deceased’s estate.

Probate can be time-consuming and costly. Adding a beneficiary to a bank account allows them to sidestep all of that. Your beneficiary can collect any money in the account without a lengthy wait. They may need to verify their identity and provide a death certificate, but it’s typically a much simpler process than probate.

You might choose to add a beneficiary if you want to make sure that they’re able to access those assets right away. Your beneficiary designations for a bank account won’t affect your designations for life insurance policies, retirement accounts, or other assets.

Steps for Adding a Named Beneficiary on a Bank Account

Adding a beneficiary to a bank account is not required and it may not be part of the sign-up process when you open an account. However, banks typically allow you to add a POD designation to a new or existing account. The process varies by institution, but typically involves these steps.

1. Decide Which Accounts Will Have a Beneficiary

The first thing to consider is which accounts to name beneficiaries for. You might have a checking account, savings account, and money market account at the same bank, for instance. Since the accounts are separate, you’d have to decide which ones will have beneficiaries and whether the beneficiary for each one will be the same person.

2. Choose Your Beneficiaries

Next, you’ll need to decide who will be the beneficiary for your bank accounts. If you’re married, that might be your spouse. If you’re unmarried or widowed, you might choose to name one of your children, another relative, or a close friend.

Keep in mind that you may not be able to name minor children as beneficiaries. If you want your bank account to go to a minor child, consider leaving the money in a trust so it can be managed responsibly until the beneficiary reaches the age of majority.

3. Update Your Beneficiary Preferences

The actual process for naming a beneficiary to a checking or savings account will vary by bank. At some banks, it may be as simple as logging in to online banking, navigating to your account settings, and entering your beneficiary’s information. That may include their name, address, date of birth, and Social Security number.

Other banks may require you to submit a beneficiary designation form, either online or in person at a branch. Again, you’d need to provide the beneficiary’s identifying information to add them to your account.

Note that adding a beneficiary designation does not grant that person access to your account during your lifetime. They would only be able to access the money in the account upon your death.

What Is a POD Account?

A payable on death or POD account is a bank account that enables you to automatically transfer money to a designated beneficiary or beneficiaries after you die. They do not have access to the account during the primary account owner’s lifetime.

There’s generally no cost to make or change a POD designation, nor any cost for a designated beneficiary to receive money from a POD account.

A POD beneficiary designation will override instructions left in a will. When there are multiple beneficiaries to a payable on death account and no percentages assigned, assets in the account are split between them equally.

How Marriage Impacts POD Accounts

Marriage can impact the way a POD account works. If you live in a community property state, your spouse would be entitled to half of the assets in the account, excluding ones you owned before the marriage or ones that you inherited. This can impact how much money would go to your named beneficiary. If the account was jointly owned by you and your spouse, a named beneficiary cannot access the funds until your spouse dies.

Keep in mind that if you named your spouse as the beneficiary to a bank account and you end up getting divorced, they would still be entitled to receive assets from the account. You’d need to contact your bank to update your POD beneficiary designations to make sure those assets go where you want them to once you pass away.

Recommended: Marriage and Money Guide

Alternatives to Adding a Beneficiary to Your Bank Account

Adding a beneficiary is not the only way to pass your bank accounts to loved ones. You can also use joint accounts or living trusts.

Opening a Joint Bank Account

Opening a joint bank account is something you might consider if you’d like the person you’d otherwise choose as a beneficiary to have access to the account while you’re alive. For example:

•   You might choose to set up a joint account with a spouse if you have a high level of financial trust between you.

•   If you’re unmarried, then you might choose to open a joint bank account with your adult child, a parent, or a sibling.

•   You might be asked to open a joint bank account with someone else if you’re assuming responsibility for managing their finances. For instance, an aging parent might want to set up a joint account so you can help them with managing bills.

Before opening a joint bank account, consider the relationship you have with the other person and how much control you’re comfortable allowing them to have. For instance, what if you’d like them to inherit the assets in your bank account but not be able to make withdrawals right now? You may be better off naming them as a beneficiary instead of opening up a joint account with that person.

Recommended: What Happens to Joint Bank Accounts When Someone Dies

Setting Up a Living Trust

A living trust is a legal entity that holds your assets, including bank accounts. As the trustee, you maintain full control during your lifetime. You also name a “successor trustee” to manage and distribute the assets according to your instructions if you pass away or become incapacitated.

While a trust avoids the delays of probate, it requires upfront legal fees to set up. You must also formally rename your bank accounts in the name of the trust.

The Takeaway

Bank accounts generally allow for beneficiary designations upon request. Whether you should add a beneficiary to your account will depend on your financial and personal situation.

If you want to ensure that a loved one can easily and quickly claim your checking, savings, or any other type of bank account after you die, it’s a good idea to add them as a beneficiary to the account. This ensures they will be able to claim the funds quickly and with minimal paperwork. If you want that person to be able to access your account while you’re alive, however, setting up a joint account might better suit your needs.

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FAQ

What if there is no beneficiary on a bank account?

If an account holder dies with no beneficiary, a joint owner automatically inherits the funds. If there is no joint owner, the account is frozen and sent to probate court. Here, the money is combined into the estate. The estate must first use these funds to pay off debts, taxes, and funeral costs. Remaining assets are then distributed according to the deceased’s will, or by state law if no will exists.

How many beneficiaries can you have on one bank account?

You can typically name as many beneficiaries on a single bank account as you want, though some financial institutions may limit you to a maximum number. If you list multiple people, the account funds are usually divided equally among them upon your death unless you explicitly specify different percentage allocations. You can also typically name primary beneficiaries alongside contingent ones who only inherit if the primary choices pass away before you.

How does a beneficiary receive their money?

A bank account beneficiary will typically need to verify their identity and the death of the account owner before receiving any money from the account. Once the bank approves the claim, the beneficiary can generally choose how to receive the money. Options may include an electronic transfer into their personal bank account, a physical cashier’s check mailed or handed to them, or moving the funds into a new account at the same bank.

Who overrides a named beneficiary on a bank account?

Generally, no one overrides a named beneficiary on a bank account because it functions as a legally binding contract with the financial institution. A will or trust cannot override this designation; the money automatically bypasses probate and goes straight to the named individual.

However, a surviving joint account owner takes priority over a beneficiary if the account was held jointly with rights of survivorship. In addition, a surviving spouse may successfully challenge the designation in community property states or if they file a specific legal dispute.

Can you easily change a bank account beneficiary name?

Yes, you can easily change a bank account beneficiary name at any time. You may be able to do this through your online banking portal or you might need to visit a local branch or mail a completed beneficiary designation form. The process is typically free, and you can usually modify, add, or remove names as often as needed.

Photo credit: iStock/Alessandro Biascioli

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