You can ensure that funds held in your bank account do not have to pass through probate by adding a joint owner with rights of survivorship to your account or by naming a pay-on-death (POD) beneficiary on it. However, despite the similarity in terms of probate avoidance, there are many differences between joint accounts and POD accounts that range from account access during your lifetime to insurance coverage.
When you add someone as a signer to your bank account, that person becomes a joint owner. In most states, joint bank accounts are set up as joint accounts with rights of survivorship. This means you and the co-owner have equal rights to the funds in the account, and either one of you can close the account at any time. When one owner dies, the surviving owner becomes the sole owner. If you name a pay-on-death beneficiary to your account, that person has no right to access the account prior to your death.
Bank deposits are protected by the Federal Deposit Insurance Corporation (FDIC) up to a maximum of $250,000 per account owner. Therefore, if you have a joint account with rights or survivorship, the FDIC insures your account up to $500,000. The FDIC also provides $250,000 of coverage for POD beneficiaries. However, the FDIC provides coverage for beneficiaries not as individuals but on a per owner basis. This means you and the co-owner of your account could each name the same person as a POD beneficiary on your account, and the FDIC would provide $500,000 of coverage for that one individual -- $250,000 for being your beneficiary and $250,000 for being the joint owner's beneficiary. Therefore, rules for insuring beneficiaries differ from rules for insuring joint account owners.
State Versus Federal
Federal laws enable you to name a pay-on-death beneficiary on your account and for that person to gain full control of funds in the account when you die regardless of where you live. However, state laws on joint ownership accounts vary among states. In some states, joint owners do not have survivorship rights as accounts are held jointly as tenants in common. This means that when you die, your share of the account goes to your estate, and the rest goes to the surviving owner.
To comply with the requirements of the USA PATRIOT Act, banks must gather the Social Security number, name, date of birth, physical address and one form of identification from all account owners prior to adding them to an account. However, if you die, in most states the joint owner can close the account without having to notify the bank of your death. Conversely, you can add a POD beneficiary to your account simply by providing the bank with that individual's name. You do not need the Social Security number or proof of identification for a beneficiary. When you die, the beneficiary must provide the bank with a certified copy of your death certificate to close the account. Additionally, the beneficiary must show the banker closing the account a form of identification, but POD beneficiaries do not have to provide any other information, such as their Social Security number.
- Bankers Online: Who Signs Withdrawals, Joint Without Survivorship; Ken Golliher; April 2005
- Federal Deposit Insurance Corporation: Ownership Categories Revocable Trust Accounts
- Federal Deposit Insurance Corporation: Deposit Insurance Frequently Asked Questions
- Federal Deposit Insurance Corporation. "Your Insured Deposits." Accessed Sept. 28, 2020.
- Securities and Exchange Commission. "Transfer on Death (TOD) Registration." Accessed Sept. 28, 2020.