What Is the Law for Beneficiary Designation for Bank Accounts?

By Christine Funk, J.D.

What Is the Law for Beneficiary Designation for Bank Accounts?

By Christine Funk, J.D.

Most people know they can have a bank account with more than one signer. In this situation, both people have access to the funds in the account. A beneficiary designation, however, is different. Instead of sharing the account with another account holder, setting up a this kind of designation is a form of estate planning that allows an account holder to leave a bank account's contents to a loved one or organization upon their death.

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For an account with more than one signer, when one person dies, the other person continues to have access to the funds. With a beneficiary designation, only the owner of the account has rights to the funds while they are alive. However, upon the death of the account holder the recipient immediately becomes the legal and rightful owner of the account.

Setting Up and Selecting Beneficiaries

Financial institutions usually maintain an official form for setting up a beneficiary designation. You must complete and sign this form then return it to the bank to set up your designation. Once you meet these requirements, the decision takes effect. The bank account becomes payable on death, or POD, which means the account becomes payable to the recipient upon the death of the account holder.

When setting up this type of account, it is important to keep in mind that you may name more than one person. An account holder may choose to list both of their children as equal beneficiaries. However, an account holder can also choose to list individuals in unequal amounts. For example, you could designate a primary beneficiary to receive 50 percent of the funds and two secondary beneficiaries who receive 25 percent each.

Distributing Property in a Will vs. Through a Beneficiary Designation

Understanding the importance of beneficiary designation on bank accounts is a critical part of estate planning. If you simply leave all your assets to loved ones in your will, this could have unintended consequences. Before a person's property can be distributed in accordance with the will, the document must go through probate. During probate, which can take months or even years from start to finish, no assets can be distributed.

Additionally, before the distribution of any assets, the deceased person's appointed executor must pay all of the deceased person's financial obligations existing at the time of their death. This includes taxes, debts, and expenses. When money is left to someone in a will, the money only goes to that person when there is money left over after taking care of these obligations.

But with a beneficiary designation, the funds are immediately available to the person named. There is no need to wait for the completion of the probate process before the funds are transferred.

If you are considering how to distribute your assets after your death, remember that you can avoid some of the complications of probate by designating a beneficiary to your financial accounts. By doing this ahead of time, you'll eliminate confusion after your death and give your loved ones more efficient access to the property you're leaving behind for them.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.