You’ve named beneficiaries to accounts many times already when you opened an IRA, bought an insurance annuity, a life insurance policy, started an investment account, signed up for a pension, or bought shares in a mutual fund. These are the accounts that come to mind when people think about beneficiary designations. However, according to a recent article in Forbes titled “Do You Need a Beneficiary for Your Bank Account?” they are not the only financial instruments with beneficiary designations.
Most retail banks don’t ask you to name a beneficiary when you open a bank account, but it’s not because you can’t. If the bank allows beneficiaries on their accounts, it’s usually a pretty simple process. In most cases, you’ll be asked to fill out a form or go through the bank’s process online.
Banks don’t push for beneficiary accounts because they are not required to do so. However, this is a smart move and can be a helpful part of your estate plan. The biggest benefit: funds in the account will be distributed directly to the beneficiary upon your death. They won’t have to go through probate and won’t be part of your estate. Otherwise, whatever assets you keep in your bank accounts will be counted as part of your estate and subject to probate.
Probate is a court process to validate the will and the named executor, supervising the distribution of assets from your estate. In some cases, it can be not very easy and can take months to complete. Depending on the size of your estate, this can also be expensive. If the money in your bank accounts does not go to a beneficiary, Those accounts may pay off estate debts instead of going straight to a beneficiary.
For married people, bank account funds are treated differently. Half of the balance goes to your spouse upon death; the rest goes through probate.
Naming a beneficiary can be a better alternative. The beneficiary may collect the money immediately. They’ll need to go to the bank with an original or certified copy of a death certificate, required identification (usually a driver’s license), and transfer the money to them.
If you are married and don’t live in a community property estate, a surviving spouse may be able to dispute the terms of a beneficiary arrangement, but that will take time.
Another means of transferring assets in a bank account is to change your accounts to POD or Payable On Death accounts. There are other names: In Trust For (ITF), Totten Trust, or Transfer on Death (TOD). The named beneficiary is referred to as the POD beneficiary.
There is considerable flexibility when naming a POD beneficiary. You can name a living person or an organization, including a nonprofit charity or other trusts through beneficiary designation,
Beneficiary designations override wills, so if you forget to change them, the person named will still receive the money, even if that was not your intent. You should review beneficiaries for all of your accounts every year or so. Divorce, death, marriages, births, and other life events are also reasons to check on beneficiary designations.
Just like any other planning device, there are pros and cons to this approach. We have had numerous probate cases in the last few years where this approach has caused problems. We have had probate cases with have no cash because of the use of beneficiary designations. The problem is that there is no money to pay bills, especially when the Last Will specifically give all other assets away,
But how pays for the funeral, taxes, final medical expenses, court costs, attorney fees, personal representative commissions and other needed changes, like property taxes, insurance, and maintenance while probate is proceeding.
Also, if you have a disability, who pays the bills? If someone pulls the money from one account, they are changing your chosen asset division and possibly disinheriting a loved one by doing so.
Please don’t get so carried away with avoiding court with beneficiary designations, as they essentially have no post-death flexibility.
Trusts are better choices because they avoid court and allow the trustee to use discretion in dividing assets. They can protect assets if a beneficiary dies before you, is incapacitated, is underage, or has special needs.
Reference: Forbes (July 9, 2021) “Do You Need a Beneficiary for Your Bank Account?”