Some financial assets, like bank accounts and retirement portfolios, are designed to pass from one person to another. This designated recipient is known as a “beneficiary,” meaning that you have named the person who will take possession of any given account when you die. If you haven’t named a beneficiary for a specific bank account that account will transfer through the ordinary estate and probate process when you die. Estate planning can be complicated and difficult if you go about it on your own. Instead, consider working with a professional financial advisor to help protect your assets.
What Is a Beneficiary?
When you open a financial account, like a bank account or a retirement fund, your institution may ask for a “beneficiary.” Beneficiaries are the person or persons who you want to take control of these assets should anything happen to you.
You can name any legal person as your beneficiary, meaning you can name individuals, nonprofits or business entities to take over your money. Depending on the specific circumstances you can sometimes name multiple beneficiaries to an account. In this case, depending on the nature of the account and state laws, they will either take joint custody of the account or split the assets held in that account.
In most cases, a beneficiary will receive this account on your death. Occasionally other circumstances can trigger a beneficiary transfer, such as if you are missing, but these are rare and highly case-specific. Legal incapacity is, in most cases, not enough to trigger a beneficiary transfer. In those cases, your accounts will remain your own but will be administered by a court-appointed guardian.
The critical thing to understand about beneficiaries is that they do not inherit your accounts. Instead, when you die, control of any given account transfers to that account’s named beneficiary automatically. They do not inherit the account because they already had a legal interest in it. This interest simply converts into full ownership. As a result, this does not trigger the estate and probate process and avoids any estate or inheritance taxes that may apply.
Your named beneficiaries are unique to every financial account. This means that if you name someone as your beneficiary on a life insurance account, they won’t also automatically receive the funds in your savings account. You need to nominate a specific beneficiary for each account even if it’s the same person every time. Some institutions make this easy by asking you to name your beneficiaries upfront. This is common with end-of-life-related products such as retirement accounts.
What Happens to a Bank Account Without a Beneficiary?
It’s important to understand that issues surrounding death and inheritance are extremely state-specific. Every state handles property transfers differently, so be certain to consult an attorney about the laws in your own jurisdiction. Nevertheless, there are some broadly applicable rules.
When you die, a bank account will transfer according to five general steps:
1. Joint or Co-Ownership
The first question is whether your shared ownership of this bank account with anyone else. If you had any joint or co-owners of the account, their ownership will not change. The details of how this works will depend entirely on the nature of your joint account, and specifically on whether you shared ownership of the entire account or whether you each had partial ownership of the account.
If you shared the account entirely, then you will simply no longer be an owner. For most, if not all, jurisdictions your estate will not have a claim on this account because it will belong to the surviving parties. If you each had partial ownership of the account, then your co-owner(s) will keep their share of the account’s assets while your portion passes on according to the rules outlined below.
2. Marital Assets
Depending on the state in which you live, a legal spouse may automatically take possession of your bank accounts. The details on this range widely, but it’s common for states to hold that a surviving spouse automatically takes possession of some portion of their household’s marital assets.
For bank accounts, this broadly applies to accounts opened and money earned during the course of the marriage. A surviving spouse may take possession of some, none or all of the assets in your bank account depending on the state.
This does not apply to joint accounts that you held with your spouse. Those don’t need to transfer; as noted above, your spouse is already an owner of that account. When a state does have marital transfer laws, they apply separately from any estate or probate process. As far as the state is concerned, because these are marital assets, your spouse doesn’t need to inherit the account. They already own it.
If you have named any beneficiaries to your bank account, they will now take possession. This can be complicated by the first two steps in posthumous transfer.
If you named a beneficiary to a joint account, for example, they may take possession or they may have to wait for all owners of the account to die. It depends on the facts of the case and local laws. Or, if you named a beneficiary to an account in which your spouse has a marital interest, they will receive whatever does not automatically transfer to your spouse.
Otherwise, your beneficiary will now take control of the bank account. This does not involve the inheritance process. Like joint owners and spouses, they already have an ownership interest in the account. That interest merely converts to ownership on your death.
4. Named Heirs
If your bank account does not have a named beneficiary or any other third-party interests, it will pass through estate and inheritance law. If you have a will, your account will pass based on how you wrote your bequests. Since cash is considered a fungible asset, you can leave the proceeds of a bank account in two ways. First, you can transfer the account with specificity. If you bequeath “Account #123ABC at My Bank” to an heir, they will receive control and ownership of that account in entirety whether or not it has anything on deposit.
Alternatively, you can leave simple cash bequests, for example, “$10,000 to Steve Rogers.” If you do this, the executor of your estate will draw funds from your bank accounts at their discretion.
It’s generally easier to make bequests this way, by giving each heir an amount of money rather than control of an account, as it avoids potential conflicts between earmarked accounts and general funds for the estate. If you have not named a specific heir for this bank account or its funds, it will pass to whoever you named for the residue and remainder of your estate.
5. Probate Law
For accounts with no named beneficiary and no designated heirs, state probate law applies. Probate is the law of general inheritance and applies to assets from million-dollar portfolios to piggy banks. These laws are also highly state-specific.
In most states, probate law passes your assets first to a spouse, then to immediate family in order of relation. If you have no close relatives, usually defined as far out as first cousins, the state takes possession of your assets. This is why it is critical to include a “remainder” clause when writing your will. This is the person who will inherit anything that’s left after your heirs receive specific bequests. If you omit this clause and your estate has undistributed assets, they will pass through state probate law.
The beneficiary process can help your heirs avoid the potentially lengthy estate and probate process. While it is extremely unlikely that your estate will pay estate taxes, as these only apply (in 2022) to people with more than $12.06 million in net worth, naming a beneficiary can reduce any potential estate tax liability as well. However, it also reduces your flexibility. It’s generally easier to update your will than to change the beneficiaries named on every given account. And any account with a named beneficiary will be unavailable when you want to make bequests through your will and estate.
What Happens to FDIC Insurance of the Bank Account When Someone Dies?
The Federal Deposit Insurance Corporation (FDIC) protects up to $250,000 in bank accounts at approved financial institutions, typically at banks or credit unions. When an individual passes away as the only account holder then there are certain rules that pertain directly to the FDIC insurance protection.
Essentially, the account will still receive that insurance protection for up to six months after the account holder dies. Within that time period, the spouse, beneficiary or individual that receives the funds within the account needs to move those funds to their own account in order to receive the FDIC insurance again.
The Bottom Line
Beneficiaries are named people who take ownership of a financial account after you die. If you die without naming a beneficiary, your bank account will transfer through your will and through probate law, as appropriate. The way that an account is distributed after your death when you don’t have a beneficiary will depend on whether you’re married, if you have any named heirs or if you have children.
Tips for Estate Planning
Consider working with a financial advisor as you do estate planning. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
One of the main advantages of having a bank account beneficiary is that it helps your estate avoid potential estate and inheritance taxes. Learn more about the potential tax liability of inheritance.
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