Should you have a beneficiary on your bank account?

Bank accounts are a fundamental component of personal finance, offering a secure place for individuals to manage their money, from daily transactions to long-term savings. An important aspect of managing these financial assets involves considering their disposition upon the account holder’s death. This is where the concept of a beneficiary becomes relevant. Designating a beneficiary means formally naming an individual or entity who will receive specific financial assets, such as funds held in a bank account, after the original owner passes away. This proactive step helps ensure that assets are transferred according to the owner’s wishes, providing a clear path for their distribution.

Understanding Beneficiary Designations on Bank Accounts

A beneficiary designation on a bank account specifies who receives the funds held in that account upon the account holder’s death. These designations typically fall under “Payable on Death” (POD) or “Transfer on Death” (TOD) arrangements. These mechanisms are designed to facilitate the direct transfer of funds to the named individual or entity, bypassing the often lengthy and public legal process known as probate. This direct transfer means the funds held in these accounts do not become part of the deceased’s general estate, which is typically managed according to a will or state intestacy laws.

POD and TOD designations are available for various types of bank accounts, including checking accounts, savings accounts, money market accounts, and Certificates of Deposit (CDs). The core function of these designations is that upon the account holder’s death, the named beneficiary can claim the funds by presenting a death certificate and identification to the financial institution. This process allows for a more prompt and private distribution of assets compared to assets that must go through probate.

Adding and Managing Beneficiaries

Establishing a beneficiary designation for a bank account is a practical step that helps streamline asset transfer. The process begins with gathering specific information about the intended beneficiary. This typically includes their full legal name, their relationship to the account holder, current contact information, and often their Social Security Number or Taxpayer Identification Number. Providing accurate and complete details helps prevent delays or complications when the beneficiary eventually claims the funds.

Account holders can typically obtain the necessary designation forms directly from their financial institution. These forms are usually available at bank branches, through online banking portals, or by contacting customer service. The forms enable the account holder to specify primary beneficiaries, who are the first in line to receive the funds, and contingent (secondary) beneficiaries, who would inherit the assets if the primary beneficiaries are unable to. Account holders can also designate how funds should be distributed among multiple beneficiaries, such as specifying equal shares or particular percentages for each individual.

Once the forms are completed, they must be submitted to the bank. It is important to confirm with the financial institution that the designation has been properly recorded. Regular review of beneficiary designations is also important, particularly after significant life events such as marriage, divorce, the birth of a child, or the death of a named beneficiary. Updating these designations ensures that the account holder’s wishes regarding asset distribution remain current and accurately reflected.

Implications of Beneficiary Designations

Once a beneficiary designation is in place, the account holder retains full control over the funds in the account during their lifetime. This includes the ability to withdraw money, transfer funds, close the account entirely, or change or revoke the beneficiary designation at any time without the beneficiary’s consent. The named beneficiary has no rights or access to the funds until the account holder’s death.

Upon the account holder’s death, the process for beneficiaries to claim the funds is generally straightforward. The beneficiary typically needs to present a certified copy of the death certificate and a valid form of identification to the bank. The financial institution will then process the transfer of funds directly to the named beneficiary or beneficiaries. If multiple beneficiaries are named, the funds are typically distributed according to the percentages or shares specified by the account holder.

For minor beneficiaries, banks generally do not release funds directly to them. Instead, the funds may require management by a court-appointed guardian or the establishment of an account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) until the minor reaches legal age. Importantly, beneficiary designations on bank accounts supersede any instructions in a will or living trust for that specific asset. This means the funds will go directly to the named beneficiary, regardless of what other estate planning documents might state.

Regarding tax considerations, funds transferred via beneficiary designation generally bypass probate, which can save time and costs. However, these funds are still considered part of the deceased’s taxable estate for federal estate tax purposes. Federal estate tax typically applies only to very large estates, with exemption amounts set at $13.99 million per individual for 2025. Beneficiaries usually do not pay income tax on the principal amount inherited, but any interest earned on the account after the account holder’s death may be considered taxable income to the beneficiary.