Bank Account Designations for Estate Planning Purposes
Many clients come to us upon a family member’s death having been told they are the beneficiaries of said family member’s bank account or that they were joint owners of the bank account and should now have the right to the funds in said bank account. Unfortunately, this is not always the case. The confusion often concerns how the bank account was set up and what beneficiary designations were placed on the bank account, if any. This article briefly describes a few of the potential designations a bank account may have and how they impact the distribution of the account upon the account owner’s death.
1. Joint Accounts
A joint account is owned by two or more persons. Joint accounts may be held as joint tenants with rights of survivorship (“JTWROS”), and you may elect to have a payable on death (“POD”) designation where you name a specific individual to inherit the account after the death of both owners. Typically, if a bank account has these designations, it is considered a non-probate asset and will pass outside of any probate process. However, as explained below, the different designations, or lack thereof, will impact the overall distribution of the bank account.
Scenario 1: Account with no JTWROS or POD
If a joint bank account is not held as a JTWROS and it has no POD designation, it will be considered a probate asset and must be distributed through the deceased account owner’s estate. It’s possible, and even likely, that a bank will freeze this account until the probate process has been completed.
Generally, the distribution of the funds in this bank account will go to the surviving owners in the amounts they contributed to the account. For example, if the account contained $10,000 at Owner 1’s death and Owner 1 contributed $6,000 and Owner 2 contributed $4,000, Owner 1’s estate would receive $6,000 and Owner 2 would receive $4,000.
Scenario 2: Account with JTWROS, but no POD
If a joint bank account is held as only a JTWROS, the funds in the account at the deceased account owner’s death will pass to the surviving account owner(s) without the need for probate. The surviving owners can then make a POD designation if they would like. This cycle will continue until there is only one owner on the account.
Scenario 3: Account with JTWROS and POD
If a joint bank account is held as a JTWROS and has a POD designation, it will pass completely outside of probate. The funds in the account at the deceased account owner’s death will go to the surviving account owner(s), and the POD designation will take effect upon the last account owner’s death, thus avoiding the need to probate the account at any account owner’s death.
2. Single Accounts
An account with a single owner may have a POD designation or a transfer on death (“TOD”) designation. Ultimately, both designations result in the bank account being paid or transferred upon the death of the account owner to the named beneficiary. Similar to joint accounts, single accounts with POD or TOD designations are considered non-probate assets and will usually pass outside of any probate process.
3. Signer Only
An authorized signer can be added to bank accounts to permit that individual to sign checks, make withdrawals, or check balances on behalf of the account owner. However, being a signer on the account does not entitle that individual to any of the funds held in the bank account. If you want the individual you have as a signer to also inherit the bank account, you will need to have a POD designation that names the signer as the beneficiary.
For all the situations described above, if a POD or TOD beneficiary passes before the account owner, the account will not automatically pass to the descendants of the named beneficiary. The POD or TOD beneficiary will need to be updated if you would like the account to pass to a descendant or another individual.
We hope the information above will help our clients and others in preparing their bank accounts in the event of their death. Nonetheless, the bank account designations discussed above should not be a substitute for an estate plan. Please contact us if you would like to discuss an estate plan or read this article about our estate planning recommendations based on your net worth.
*Please note that the information above may differ slightly among banks or other banking institutions, so please contact your local bank representative to ensure your bank accounts are set up the way you want them.
