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When you name someone as a beneficiary on a financial account, you're giving them permission to inherit your account assets upon your death. This can make it easier to pass your wealth on to your loved ones after you're gone.
You can choose beneficiaries for life insurance policies, investment accounts and retirement accounts, as well as checking and savings accounts. The process can vary depending on the financial institution, but it's usually pretty straightforward. The first step is understanding the rules and how it works.
What Is a Bank Account Beneficiary?
An account beneficiary is someone you've authorized to take ownership of your account assets after you die. You aren't required to name a beneficiary on your account, but if you do, that money won't have to go through probate. This is the legal process of transferring someone's property after they pass away—and it can be expensive and time-consuming. If an account has a beneficiary, any assets held in the account will go straight to that person (assuming there aren't any outstanding debts or taxes in the account holder's name).
You can name a beneficiary on the following types of accounts:
Rules and Regulations for Bank Account Beneficiaries
If you're thinking about adding a beneficiary to a bank account, you'll want to keep these important rules in mind. Being aware of these details can help you streamline the process and avoid confusion.
- You can have multiple beneficiaries. You can select a contingent beneficiary to serve as an alternate if the primary beneficiary is unable or unwilling to take ownership of the assets. You can also split account assets between more than one person.
- Beneficiaries typically must be 18 or older. To leave account assets to minors, you'll need to open a trust and appoint a trustee to manage the assets on the minor's behalf until they come of age. Alternatively, you can appoint a custodian as your account beneficiary. They'll be tasked with managing the funds on the child's behalf until they become an adult.
- The beneficiary won't have access to the account while you're alive. The only exception is if your beneficiary is also a joint account holder. Otherwise, you'll retain full control of your account during your lifetime.
- Beneficiary designations supersede a person's will. That means the beneficiary could receive account assets even if it goes against the final wishes outlined in the account holder's will.
- The spouse might take priority. In community property states, which include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, the spouse is automatically listed as the primary beneficiary on a life insurance policy. You'll have to get your spouse's written consent to change the beneficiary to someone else. For bank accounts, your spouse may still be entitled to half of your account assets—even if you've named someone else as the beneficiary.
- You can change your beneficiaries at any time. You aren't restricted when it comes to your beneficiary designations. You might choose to update your beneficiaries if you get married or divorced, have a child or simply want to select a different person.
- Joint accounts have different rules. If you pass away with a joint account, those assets won't automatically go to the beneficiary. They cannot inherit those assets until all of the original account holders have died.
- Custodial accounts don't have traditional beneficiaries. If a child has a custodial account, an adult is named as a custodian who manages those assets for the minor until they come of age.
- If the minor passes away before becoming an adult: The account will be included in their estate and distributed according to the laws in their state.
- If the custodian passes away: The account will need another adult to step into that role. If the original custodian did not name a successor, the responsibility might go to the minor's guardian. In some cases, the court may appoint a new custodian.
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How to Designate a Bank Account Beneficiary
The process for naming beneficiaries can vary depending on the type of account. If you're looking to name a beneficiary on an investment account like a 401(k), IRA or brokerage account, you can probably do so by filling out a form with your financial institution. It's a similar process for insurance policies.
Bank accounts work a little differently. To name a beneficiary, you'll need to contact your bank or credit union to start the process.
- Understand the language. An account that names a beneficiary is commonly called a payable-on-death (POD) account, but it might also be called a tentative or informal trust.
- Clarify the process for naming a beneficiary. It may be possible to fill out the required forms online or through an app, but every financial institution is different. Some might require you to visit a local branch or designate your beneficiary over the phone. Either way, you'll likely need your beneficiary's full name, birth date and Social Security number.
- Keep your beneficiaries up to date. Consider periodically updating your beneficiaries, especially if you've experienced a major life change. If you've gotten divorced, for example, you'll probably want to remove your ex-spouse as a beneficiary.
You might choose a beneficiary who'd benefit from your account assets, like a friend, family member or charitable organization. Either way, it's a good idea to let them know they'll be inheriting those assets when the time comes. That information might be important to their own financial planning.
The Bottom Line
Having beneficiaries on your financial accounts is an important part of estate planning. It can ensure that your wealth is distributed according to your wishes—and help your loved ones avoid the probate process. Every bank is different, so you'll want to clarify the process for naming a beneficiary. It's also wise to update your beneficiaries as you move through different stages of your life.