Adding a beneficiary to an asset account generally avoids probate. This goes for bank accounts as well. In the event the owner of a bank account dies, some banks will freeze the bank account. What does this mean if there is a beneficiary? Does the account still have to go through probate?
Being Unprepared When the Owner Passes
It isn’t uncommon for families to be unprepared when a loved one passes. Meaning there was no trust, estate plan, will, or beneficiaries to any of the owner’s assets. This leaves the surviving family members in a difficult (and sometimes impossible) situation. Below are a few of the scenarios family members may have to go through when trying to gain access to a bank account.
Banks will only discuss a bank account with someone who has a legal right to access the account. These include:
- Personal representative of the estate
- Joint account owner (i.e., co-owner)
If you are not any of the above, you can try to become #1. In that case, you’ll need to become a personal representative of the estate and file a petition with the probate court.
The owner may have had a will. If the will identifies you as executor, you still will not have access until you file with the probate court and are formally accepted.
In some cases, a family member is listed as an authorized signer. However, being listed as an authorized signer may not provide any access to the account if the primary account holder passes.
Let’s now discuss options that are set up before the owner passes.
Preparing Your Bank Account For Ownership Transfer
There are several ways to transfer ownership of your bank account upon death. The first one we’ll discuss is called POD — payable on death.
Not every bank offers POD. POD works through affidavits. These are set up at the bank and paid to a specific person(s) on the death of the primary account holder. A POD only releases a bank from liability for releasing funds to a designated POD person. POD doesn’t transfer ownership. The POD can also conflict with the estate plan if different people are listed to inherit the account.
POD usually requires a death certificate and affidavit by surviving heirs. It can take a few months to receive a death certificate. If money is needed immediately, heirs may have to pay out of their own pocket.
POD is not a gift, so there are no gift taxes involved. There’s also no step-up in basis because the asset is cash.
In short, POD isn’t the best way to gain access to a bank account when the owner passes.
A revocable living trust allows the successor trustee to easily take over the account and access funds immediately. The beneficiary of a bank account can be a trust.
A beneficiary is someone with a social security number or an entity such as a trust or charity which takes full ownership of the account if the owner dies. This is the simplest and quickest method for gaining access to the account. It can also be changed at any time by the owner. But it does need to be set up before the owner dies.
The account owner can add multiple beneficiaries. The first beneficiary is the primary, and then it goes on down the line of listed beneficiaries. If the primary passes, the second beneficiary in line will take ownership. A beneficiary is also able to avoid probate court.
If there is no beneficiary or co-owner, the account must go through the state’s probate court. This can result in assets going to the owner’s heirs after all debts are paid to creditors. If there are no heirs or debts, the account can go to the state. It may even be recognized as abandoned. After a long while, it can still go to the state.
Listing a beneficiary does not mean that person has a right to your account. It’s only after you die that they become the account owner.
A Word on Co-Ownership
An account may start with one owner, and instead of adding a beneficiary, the owner decides to make someone a co-owner. The account owner may do this out of convenience. For example, a surviving spouse gives their child access to the account so the child can pay bills and other things.
You can probably already see the potential issues. Someone else has full access to the account and can do whatever they want with the funds in that account. Maybe at some point, the parent decides they want to make the child a beneficiary and remove them as co-owner. That isn’t so easy. The child will need to provide permission to be removed.
Unless it is necessary, it’s better to list someone as a beneficiary. If the event of your passing, they won’t have to go through probate court and will have full ownership of the account.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Examples shown are hypothetical and for illustrative purposes only.