What Is a Beneficiary Account?

What Is a Beneficiary Account?
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Do you have an account beneficiary named on any of your bank or investment accounts? Are you curious about the purpose of a beneficiary account?

If you’re familiar with the concept of a beneficiary account, you may think of IRAs, trust funds, mutual funds and other investments, or even life insurance policies.

What Is a Beneficiary Account? 

In simple terms, a beneficiary account is an account where the funds will be passed on to someone else after the owner of the account dies. But beneficiary accounts aren’t just designed for life insurance, retirement savings or large investment accounts. You can name a beneficiary on a bank account, as well.

Creating a beneficiary account will keep your bank account funds out of probate after you die. Probate is a legal proceeding that determines if a will or trust is valid, or if you didn't create a will, probate determines who inherits your estate.

If you have a beneficiary account, the funds in that bank account will automatically be passed on to the beneficiary. This may help your loved ones cover funeral costs or living expenses, such as rent or mortgage and utilities, that haven’t stopped with your death.

However, as long as you’re alive, beneficiaries have no access to your account. They cannot make withdrawals from the account unless you provide them with your debit card and PIN. If your beneficiary should become the subject of a lawsuit, owe back taxes, or get into significant debt, their creditors cannot touch the money in your account.

Types of Bank Accounts

While beneficiary accounts are common for IRAs, mutual funds, and other investments, you may want to establish a beneficiary for your bank account, too. You can establish beneficiaries for three of the most common types of bank accounts:

Checking account:​ Most people use a checking account for everyday spending. You may have your pay deposited directly into this account and use your debit card linked to this account to make purchases or pay bills online. You would want to name a beneficiary on your checking account to give your loved ones access to immediate cash for living expenses if you should die.

If you have a joint checking account with a partner or spouse, they will retain access to the money if you die. However, you should name a beneficiary – perhaps a child, close relative, or friend – in case both account holders pass away.

Savings account:​ A savings account linked to your checking account gives you a safe place to park money you’ll need soon, but not immediately. It’s a good idea to make a beneficiary designation to avoid the probate process and get money into the hands of your loved ones faster should you die.

Money market account:​ Like a savings account, a money market account holds funds allocated for longer term use. Many people keep three to six months emergency savings in a money market account, which may offer slightly higher interest rates than a regular savings account.

How to Open a Beneficiary Account

Financial institutions make it relatively easy for customers to open a beneficiary account or put a beneficiary designation on an existing account.

But you have to make sure to ask for a beneficiary; unlike other types of accounts such as IRAs, you are not required to have a named beneficiary on a bank account. Most financial institutions today provide beneficiary accounts which are “payable on death,” or POD accounts, as a standard feature on checking, savings, and money market accounts.

Paperwork Required to Open a Beneficiary Account

Establishing a beneficiary account, or adding a named beneficiary to an existing account, is easy. Ask your bank for the forms to name a beneficiary on your account. Your banker should provide you with paperwork previously called a Totten Trust. You can name a primary beneficiary and contingent beneficiary on the same paper.

Your beneficiaries do not need to be present or sign any paperwork for you to open a beneficiary account.

Information Needed to Complete the POD Form

You will need the following information to create a POD bank account or turn your existing account into one with POD benefits:

  • The beneficiary’s full legal name
  • Their relationship to you
  • Email address
  • Primary phone number
  • Date of birth
  • Social security number

Additional Steps in Estate Planning

Naming a primary beneficiary and contingent beneficiaries should be part of your estate planning. But once you’ve established the POD, there are a few more steps to take.

First, make sure to let your beneficiaries know they’ve been added to your POD account and how to access the funds should you pass away. In most cases, they will need to visit the bank with their legal ID, such as a drivers’ license, military ID, or non-driver state ID card and a copy of your death certificate.

Also, once you establish a beneficiary account, it’s important to make sure your will matches the POD account. Any differences in beneficiaries between your will and your accounts could tie up the money in probate.

Your beneficiaries should also understand the tax ramifications of a POD account once they inherit the funds. The IRS doesn’t collect an inheritance tax, but your beneficiary may owe state taxes on their inheritance.

If your heirs are subject to an estate tax due to the size of the inheritance, any POD accounts will be included – and taxed – as part of your estate.

Advantages of a Payable on Death Account

Establishing a beneficiary account is one of the easiest ways to ensure your money gets passed on to your heirs when you die without legal hassles or delays.

A beneficiary account has several advantages. It requires no third-party involvement and doesn’t need notarized signatures. It may also eliminate the probate process should you die without a will.

Do You Need a Living Trust If You Have a Beneficiary Account?

If you have multiple accounts, investments, and assets, you may also want to establish a revocable living trust. A living trust puts all your assets into a trust, giving you complete control over those assets during your life. Your “successor trustee” would then act on your behalf upon your death, distributing assets to your beneficiaries. You can change your successor trustee – or “revoke” their rights as a trustee – at any time during your life.

A living trust is private, whereas a will is public. However, creating a living trust is not as simple as creating a will or a POD account, and estate planning attorneys typically charge more for the service.

Even if you have a living trust, you’ll want to establish named beneficiaries on your POD accounts so your successor trustee knows how to distribute funds upon your death.

Combining a living trust with a beneficiary account, or multiple beneficiary accounts for each of your bank accounts, can help keep the financial aspects of your death simple for your loved ones during a difficult time.