How Bank Accounts Pass on to Beneficiaries When Someone Passes Away

Did you know that you don’t necessarily need a will to ensure assets in your bank accounts pass on to beneficiaries? Many bank accounts are payable-on-death, which means the assets in them are paid to the named beneficiary or beneficiaries as soon as they document that the owner has passed away — without going through formal probate processes.

Typically, the beneficiary presents a death certificate to the financial institution in question. That’s all that’s needed to kick off the process of transferring the assets to the beneficiary. However, payable-on-death accounts, sometimes called transfer-on-death accounts, do require you to do a bit of proactive paperwork ahead of time.

While a payable-on-death designation may make the process of transferring an account easier than going through probate, this technique should only be used in very limited circumstances. That’s because a revocable trust can offer many more benefits than avoiding probate. Generally, at Boyd & Boyd, P.C., we recommend that our clients use payable-on-death designations only on their day-to-day checking accounts and, in some cases, share accounts at credit unions. Savings accounts, money market accounts, and CDs should instead, generally, be owned by your revocable trust.

Remember, your revocable trust may be built with estate tax reduction techniques, income tax reduction techniques, and asset protection for the heirs who receive what you gift at death. Some of the tax savings will only work if your revocable trust is properly funded before your death. Payable-on-death accounts often bypass these benefits. But if you use payable-on-death designations, it is often best to name your revocable trust as the beneficiary. You may not get all of the benefits built into your trust, but at least you might get some of them.

Learn more below about how various types of bank accounts pass on to beneficiaries when the account owner passes away. Then discover how you can pair payable-on-death accounts with other tools, including revocable trusts, to keep assets out of probate and cut down on the time and expense required to ensure your loved ones are taken care of after you’re gone.

Accounts That Are Solely Owned With Beneficiary Designations

In this scenario, the account is owned by one person. That means there aren’t any joint account holders, as you would find when spouses have a checking account together.

The account in question is a payable-on-death account, which means that the owner has the option to designate one or more beneficiaries for the account. Common payable-on-death accounts include most savings and checking accounts, money market and certificate of deposit (CD) accounts, and certain types of investment accounts.

If the owner of the account designates one or more beneficiaries, the assets in the account pass to those beneficiaries when the owner dies. The assets don’t go through probate, and your will does not control the assets or who gets them.

You do have to ensure that you have completed a beneficiary form with your financial institution. You can often complete these forms online, but if you don’t see an option in your account, ask your bank. In most cases, you can update these forms whenever you like, which means you can remove or add beneficiaries in the future. You may also be able to dictate how much of the assets each beneficiary gets. For example, you might say that one beneficiary receives 70% of the assets in the account while another receives 30%. But remember, if you have a trust, it is usually best to name the trust as the 100% beneficiary.

Accounts That Are Jointly Owned

If you have accounts that are jointly owned with a right of survivorship, the assets in the account typically go to the joint owner when you pass away. A common example of this is when two spouses own a joint checking or savings account. In most cases, the ownership of the assets within that account automatically remains in full with the surviving spouse. You should consider adding a payable-on-death designation that will transfer your day-to-day checking account at the death of the surviving spouse (or in case you both pass in a common accident), naming your revocable trust as the pay-on-death designee.

You don’t have to be married to have a joint account, though. You might open a joint account with an adult child, for example, or your long-time significant other, even if you aren’t married. But try not to use joint accounts with a non-spouse because this creates a significant risk to your assets. If the joint account holder gets sued, files for divorce, or needs to file bankruptcy, your account is at risk of being taken or lost simply because you made it a joint account.

Accounts That Are Solely Owned With No Beneficiary

There are cases where someone owns a bank account or other financial account solely but has not named any beneficiaries. In this case, the assets in the account are handled by an executor as part of the estate. That typically means:

  • The executor will marshal, or gather information about, all of the accounts.
  • The executor will include those funds in the estate’s value.
  • He or she will use the assets of the estate to pay any bills and taxes.
  • Once the debts of the estate are settled, the executor will distribute the remaining assets to the heirs according to the will. If no will is present, the assets will be distributed according to the inheritance laws of the state.

Typically, this process, known as the probate process, will take a minimum of one year, often longer. During the probate process, your heirs cannot use the assets for their own needs. And of course, probate is often an expensive process.

Do You Need to Name All Your Bank Accounts in Your Will?

No, you don’t need to detail all your bank accounts in your will if you are using beneficiary forms for those accounts. In fact, it is usually a bad idea to identify specific assets in your will or trust as going to specific people. That is because those assets may change in value or not even exist at your death. Consequently, if an heir in your will is identified to receive a particular account at your death and that account has been closed or doesn’t exist, that person will not inherit. Or worse yet, there may be some confusion that arises if you choose both methods.

Consider this hypothetical example:

  • You name someone as the beneficiary for your savings account via a beneficiary form with your bank.
  • You also create a will, include that account in the will, and name that same person as the heir to receive those funds.
  • At a later date, you decide to add a beneficiary to the savings account. Now you have two beneficiaries on your form at the bank and you stipulate that each person receives 50% of the funds in the account if you pass away.
  • However, you forget that you included this account in your will. Now there are two different versions of how the assets should be treated, and that can cause confusion and potential disputes among your heirs later.

Learn How an Estate Attorney Can Help Safeguard Your Assets

In some limited circumstances, payable-on-death accounts are an easy way to ensure some of your assets quickly transfer to loved ones upon your death. When you set up payable-on-death designations properly, these assets don’t get hung up in probate. However, not all assets can be transferred this way, so you might need a more comprehensive plan for handling your estate.

At the Law Offices of Boyd & Boyd, P.C., we can help you proactively plan to pass your assets on and leave a legacy for loved ones. Contact us at 508-590-9821 and make an appointment to find out how our services can help.