If you have an individual retirement account, taxable brokerage account, or life insurance policy, you’ve almost certainly named a beneficiary before. And if you had kids or were in a committed relationship at the time, you probably didn’t give it much thought. Your closest loved ones — your children and spouse or domestic partner — were the obvious choices.
Don’t have a retirement account or brokerage account or life insurance policy yet? You still can — and should — name a beneficiary on your checking and savings accounts. If you have other types of bank accounts, like a money market account or certificate of deposit, you should name beneficiaries on those as well.
Reasons to Name a Beneficiary on Your Bank Account
There are several good reasons to name a beneficiary on your bank accounts at your earliest convenience.
1. The Account Balance Avoids Probate
Once you’ve named a beneficiary or beneficiaries on your bank account, you can rest assured that ownership of the account will transfer to them immediately at your death.
The cash in the account bypasses the costly, time-consuming probate process, where it’s vulnerable to claims by your creditors and potentially other surviving family members whom you don’t want to enrich. If you die without a will, probate can be even more burdensome. Designating bank account beneficiaries ensures at least some of your assets pass quickly to your heirs.
2. You Have More Choice Over Who (Or What) Gets Your Money
If only to avoid probate, you should designate a beneficiary even if they’re the obvious choice: say, your spouse or kid. But it’s even more important if your wishes are less obvious or more complicated.
A beneficiary designation allows you to choose who gets your money after you die — and, perhaps more important, who doesn’t.
For example, you might change your beneficiary designations to remove a former or separated spouse. Or, if you’re not partnered and don’t have kids of your own, you might designate a younger relative (say, a nephew or niece) to bypass the person or people who’d normally inherit your assets (say, a rich, annoying brother who doesn’t need the money). And if you don’t have any deserving humans in your life, you can even designate a nonprofit organization as the account’s beneficiary.
3. You Can Keep the Money From Your Heirs or Survivors Until You Die
A sole-ownership account with a designated beneficiary gives you more control over its contents than alternatives like joint accounts (owned collectively by you and your spouse and/or children) and trust accounts. If you don’t want your heirs to have access before you die to the assets they’ll eventually inherit, this is the way to go.
4. It’s Less Complicated and Expensive Than Setting Up a Trust
A revocable trust can also help you bypass probate. And it’s not an either-or situation: If your finances are complex, it could make sense for you to set up a revocable trust for your heirs while also designating beneficiaries on your cash accounts.
That said, beneficiary designations should come first. When your financial life is relatively simple — you have a couple bank accounts and maybe an IRA but that’s about it — you don’t need to bother with a trust, which can cost hundreds or thousands of dollars (and require several hours of work on your end) to set up. Just designate bank account beneficiaries and call it a day (for now).
5. It’s Clearer Than Writing the Transfer Into Your Will
When you designate a beneficiary on a bank account, you leave no room for interpretation. When you die, the beneficiary gets the cash.
This is clearer (and easier) than spelling everything out in your will, especially if you’re preparing your will on your own with the help of will-writing software rather than the guidance of a human estate lawyer. For example, splitting your assets evenly between your two kids might sound fair, but dividing the contents of multiple bank and investment accounts in a truly fair way is more difficult than it appears. One is likely to get more than the other.
Likewise, a will is more time-consuming and costly to write (and change) than a beneficiary designation. If your will lists specific accounts and their inheritors, it becomes outdated the moment you open a new account not mentioned in it.
6. You Can (Probably) Override Your Will Without Changing It
Though the rules vary by state and you’ll definitely want to speak with an estate lawyer to be sure, it’s generally the case your beneficiary designations supersede your will.
This is useful if you want to write someone out of your estate plan, like an ex-spouse. You should probably update your will anyway after you separate or get divorced, it’s quicker to update your beneficiary designations.
How to Name a Beneficiary on Your Bank Accounts
It’s easy to name a beneficiary on a bank account. As with other estate planning odds and ends, the biggest hurdle is just finding the time to do it.
The specific process might vary depending on the account type, ownership structure, and bank, but this is generally how it’s done.
- Check the Account Ownership Structure. You don’t need to name your co-owner as the beneficiary on a joint account. If you die before them, it’s still theirs.
- Get Your Spouse’s Permission, If Needed. If you live in a community property state, you may need to get your spouse’s written permission to name a beneficiary other than them. If you don’t live in a community property state, you can ignore this step.
- Choose Your Designation Type. Depending on the account type, you may have two beneficiary options: “payable on death” or “in trust for.” Account assets payable on death go right to the beneficiary when you die, so they’re best for adults. Accounts in trust are better for younger beneficiaries and others for whom an uncontrolled windfall might cause more problems than it solves. You put a trusted adult in charge of managing it for them.
- Provide the Beneficiary’s Information. At the bank counter or in your online account dashboard, provide the requested information for each beneficiary: full legal name, date of birth, Social Security number, and any other details the bank asks for. If you’re naming a nonprofit organization or revocable trust as your beneficiary, you may need to provide additional information and documentation (such as a trust agreement).
- Choose How to Split the Account. If you’re designating multiple beneficiaries on the same account, you can choose how much of it each one gets.
- Make It Official. You may need to sign a paper form (if you’re doing this in person) or e-sign a digital form (if you’re doing it online) to make everything official. For what it’s worth, every beneficiary designation I’ve done in the past few years has been a super-quick online process.
Mistakes to Avoid When Making a Beneficiary Designation
Designating a bank account beneficiary isn’t super difficult or time-consuming, but it isn’t totally foolproof either. Avoid these common pitfalls that can come back to bite you (or your beneficiary) later.
Not Informing Your Beneficiaries
It’s not the bank’s job to notify your beneficiaries. It’s yours.
So once it’s done, shoot them a text before you forget. Offer to chat if they have questions, or just send them the link to this article. (Thanks in advance.)
Not Updating Your Beneficiaries After Important Life Events
One of the first things you should do when the dust settles after a major life event — marriage, divorce, childbirth or adoption, a spouse’s death — is review your beneficiary designations. You want to make sure the beneficiaries you’ve named are still the people you want to receive your cash when you die (and are still alive to receive it). You should also name contingent beneficiaries — ideally people significantly younger than you — who won’t get anything unless all the primary beneficiaries die first or decline the inheritance.
Missing an Important Account When Designating Beneficiaries
Every account you don’t designate a beneficiary for is an account destined for probate, with all the wasted time and money that entails. Get in the habit of designating a beneficiary right away after opening a new bank account (or any financial account, for that matter).
Missing a Deserving Beneficiary
Hey, it can happen. If you have a large family with complex dynamics, you might miss a kid here or a sibling there.
You won’t have to deal with the ensuing strife because you’ll be dead, but you probably want to avoid putting your loved ones in that position all the same. So: double-check your designations for completeness.
Not Reconciling Your Will With Your Beneficiary Designations
While it’s likely that your beneficiary designations override whatever your will says about who gets what, this isn’t guaranteed to be the case, and any confusion or disputes that result can delay the probate process. It’s therefore best to reconcile your will with your designations. If you’re unsure how to proceed, get an estate lawyer.
Designating a Beneficiary Who Isn’t Ready or Capable
You’ve heard horror stories about multimillion-dollar lottery winners who’ve gone broke (or worse) not long afterward. An heir who isn’t ready to or capable of managing an inheritance can suffer similar consequences, if in less dramatic fashion.
You know your likely heirs best, but in general, you shouldn’t name minor children as beneficiaries, nor any adult who needs help managing their day-to-day affairs. And for what it’s worth, many financial advisors will tell you not to consider a would-be heir an “adult” until they’re 25 or even 30 years old.
To protect younger or less capable heirs’ interests, set up a revocable trust and designate it the beneficiary of your bank accounts (and potentially other financial accounts as well). Work with an estate lawyer to customize the trust as appropriate — for example, spelling out how it holds and distributes assets and when (if ever) its beneficiaries get the rest.
What to Do If You’re the Beneficiary on Someone Else’s Bank Account
You’ve done your duty and named beneficiaries for all your financial accounts. But what if you’re named as a beneficiary on someone else’s account?
That’s pretty easy too. You first need to take stock of which accounts you’re actually named on. Do the following:
- Have a Conversation. Ask your loved ones directly if they’ve named you as a beneficiary on any of their accounts, even if the conversation is a little uncomfortable.
- Find Other Beneficiaries. This doesn’t require any real sleuthing. Just ask people who’ve designated you as a beneficiary if any of those accounts have multiple beneficiaries. For example, your parents might name each of your siblings as primary beneficiaries on the same accounts.
- Make a List. Finally, make a list of all the accounts you’re named as a beneficiary on, including the bank name and account number, and keep it in a safe, secure place. Note your share of the account balance, even if it’s 100%.
When a person who named you as beneficiary dies, you’ll need to do the following:
- Huddle With Other Primary Beneficiaries, If Any. Circle back to those other beneficiaries, who you may already be in contact with as likely heirs of the person who died. In multiple-beneficiary situations, the account balance usually splits equally among all beneficiaries, but you’ll still want to agree on a plan to deal with less liquid accounts like CDs. Unless you need cash right away, it’s usually best to wait until the CD matures and then split the funds according to your share.
- Check the Will for Overrides. You’re probably named in the will anyway, so you might already have a copy. Look for any provisions in the will that contradict your beneficiary designation. These aren’t common and may not be legally enforceable in your state. But if you do find any, you should get in touch with a probate attorney for guidance.
- Get a Certified Copy of the Person’s Death Certificate. Contact the office that keeps death records in the state or county where your loved one died. You can generally order death certificates online and get them mailed to your home, which is helpful if you live far away. Allow several weeks for processing and be prepared to pay a small fee for each copy.
- Bring the Death Certificate and Government-Issued ID to the Bank. You may need to do this part in person, depending on how sophisticated your loved one’s bank was. If they used an online bank, you can likely do everything remotely.
- Fill Out Any Required Forms. Whether online or in person, you’ll need to complete at least one form to make the transfer official. Get them notarized if necessary — the bank may have a notary on staff.
- Ask the Estate Executor for Help If Needed. This process is straightforward, so you probably won’t need hands-on help, and it’s technically not the executor’s job to deal with assets outside probate anyway. But it doesn’t hurt to ask them if you do get stuck or if you’re concerned that the deceased person’s creditors could lay claim to part or all of the account balance.
If it’s still fairly early in your financial journey, your checking and savings accounts might be the only financial accounts to your name right now.
But you should still name beneficiaries on them sooner rather than later, as your life will only get more complicated from here on out. Setting that foundation now ensures your hopefully considerable future bank account balance bypasses the expensive and time-consuming probate process.
Anyway, naming a beneficiary on your current bank accounts is good practice for the other financial accounts you’ll inevitably acquire later. Your IRA, taxable brokerage account, life insurance policy, education savings account — all these and more require (or at least benefit from) beneficiary designations.