What Is a Letter of Instruction for a Bank?

A Letter of Instruction (LOI) is a formal written directive from an account holder to their financial institution. This document is a tool for communicating specific financial requests and authorizing actions related to bank accounts. It ensures banks receive clear guidance on how to proceed with certain transactions or account changes. An LOI helps prevent misunderstandings and provides a record of the account holder’s wishes.

Understanding a Letter of Instruction

A Letter of Instruction is a formal, written document, signed by the account holder or authorized representative, that directs a bank to perform a specific action on their account. Banks require an LOI for certain transactions to ensure security and prevent fraud. This document carries legal weight, unlike informal or verbal instructions.

Unlike a general inquiry, an LOI is a binding directive for the bank to act on, assuming conditions are met. Financial institutions rely on these formal communications to comply with regulatory requirements like anti-money laundering (AML) and Know Your Customer (KYC). The LOI provides an audit trail for complex or high-risk transactions. It safeguards both the account holder and the bank, confirming the legitimacy of the requested action.

When an LOI is Needed

Banks require a Letter of Instruction for transactions involving significant financial movement, account ownership changes, or complex administrative actions. This includes large wire transfers or electronic fund transfers (EFTs), especially for new recipients or amounts exceeding daily online limits. An LOI provides the authorization and details for these fund transfers.

An LOI is also essential when closing a bank account, especially if funds need transfer or specific disbursement. Changing account ownership, adding or removing signatories, or altering a business account’s structure also requires an LOI. For estate accounts, an LOI is required to instruct fund management and distribution to beneficiaries, ensuring compliance with probate orders or trust documents.

An LOI can authorize a third party to access account information or perform limited actions (e.g., viewing statements, making deposits) under clear limitations. Banks request an LOI for updating complex account details beyond simple address changes, such as restructuring investment directives or modifying recurring payment instructions. These situations highlight the bank’s need for clear, documented instructions to protect all parties.

Key Information for Your LOI

A Letter of Instruction must contain specific information to ensure efficient and secure processing. Begin by identifying account holder(s) with full legal names, account number(s), and contact information (phone, email). This allows identity verification and contact for clarification.

Include the bank’s full name and, if applicable, branch. The core of the LOI is the clear, specific instruction detailing the exact action. This might be “transfer $10,000 from checking account X to savings account Y,” or “close account Z and issue a cashier’s check for the remaining balance.” Ambiguity can cause delays or rejection.

If the instruction involves a transfer or distribution, provide complete recipient or beneficiary details: full name, account number, routing number, and financial institution name and address. Specify the desired effective date or timing. Required account holder signatures, matching those on file, are imperative for verification, along with the letter’s date. Depending on the transaction, supporting documentation (e.g., government ID, trust documents, death certificates, court orders) may be needed to validate the request.

The Submission Process

Once a Letter of Instruction is prepared, the next step is submitting it to the bank through an approved channel. Common methods include in-person delivery at a branch, certified mail, or a secure online portal. Some banks may accept faxed copies for specific transactions, though less common for high-value requests.

Upon receipt, the bank initiates a verification process, which involves confirming signature authenticity against records and sometimes contacting the account holder to validate. This security measure prevents fraud and protects assets. Processing times vary by instruction complexity and bank procedures, from a few business days to over a week for intricate requests.

After the instruction is executed, the bank provides confirmation, such as an updated statement, email, or mailed letter. Account holders should retain a copy of the submitted LOI for their records. This copy serves as a reference and proof, should questions arise.