Do Bank Accounts with Beneficiaries Have to Go Through Probate?

Posted Mar 5, 2024

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Adding a beneficiary to an asset account generally avoids probate. This applies to bank accounts. If the owner of a bank account dies, some banks freeze it. What does this mean if there is a beneficiary? Does the account still have to pass through probate?

Being Unprepared When the Owner Passes

Families are often unprepared when a loved one passes. This means there was no trust, estate plan, will, or beneficiaries for any of the owner’s assets. This leaves the surviving family members in a difficult (and sometimes impossible) situation. Below are a few of the scenarios family members may have to navigate through when accessing a bank account.

Banks will only discuss a bank account with someone legally entitled to access it. These include:

  1. Personal representative of the estate
  2. Beneficiary
  3. Joint account owner (i.e., co-owner)

The personal representative of the estate is an option if you are not currently one of the options listed. In that case, you’ll need to file a petition with the probate court.

The owner may have had a will. If the will identifies you as executor, you still will not have access until you file with the probate court and are formally accepted.

In some cases, a family member is listed as an authorized signer. However, being listed as an authorized signer may not provide access to the account if the primary account holder passes.

Let’s now discuss options set up before the owner passes.

Preparing Your Bank Account For Ownership Transfer

There are several ways to transfer bank account ownership upon death. The first one we’ll discuss is POD — payable on death.

Not every bank offers POD. POD works through affidavits. These are set up at the bank and paid to a specific person(s) on the death of the primary account holder. A POD only releases a bank from liability for releasing funds to a designated POD person. POD doesn’t transfer ownership. The POD can also conflict with the estate plan if different people are listed to inherit the account.

POD usually requires a death certificate and an affidavit from surviving heirs. It can take a few months to receive a death certificate. If money is needed immediately, heirs may have to pay out of their own pocket.

POD is not a gift, so there are no gift taxes involved. There’s also no step-up in basis because the asset is cash.

In short, POD may not be the most effective way to access a bank account when the owner passes.

A revocable living trust allows the successor trustee to take over the account and access funds immediately. The beneficiary of a bank account can be a trust.

A beneficiary is someone with a social security number or an entity such as a trust or charity that takes full ownership of the account if the owner dies. This is the simplest and quickest method of accessing an account. It can also be changed at any time by the owner. But it needs to be set up before the owner dies.

The account owner can add multiple beneficiaries. The first beneficiary is the primary, and then it goes down the line of listed beneficiaries. If the primary beneficiary passes away, the second beneficiary in line will take ownership. Beneficiaries can also avoid probate court.

If there is no beneficiary or co-owner, the account must be handled through the state’s probate court. This can result in assets transferring to the owner’s heirs after all debts are paid to creditors. If there are no heirs or debts, the account can be transferred to the state. It may even be abandoned. After a while, it can still be transferred to the state.

Listing a beneficiary does not mean they have a right to your account. It’s only after you die that they become the account owner.

A Word on Co-Ownership

An account may start with one owner, and instead of adding a beneficiary, the owner makes someone a co-owner. The account owner may do this for convenience. For example, a surviving spouse gives their child access to the account so they can pay bills and other things.

You can probably already see the potential issues. Someone else has full access to the account and can do whatever they want with the funds in that account. Perhaps at some point, the parent could decide to make the child a beneficiary and remove them as a co-owner. That isn’t so easy. The child will need permission to be removed.

Unless it is necessary, it’s better to list someone as a beneficiary. In the event of your passing, they won’t have to navigate through probate court and will have full ownership of the account.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Examples shown are hypothetical and for illustrative purposes only.

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