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What happens to your bank account when you die?
How assets are divided up depends on whether there's a will.
When someone dies, their estate is divided up according to the will. But with a will, dividing up assets depends on the state you’re in.
What happens if the sole owner of an account dies?
When someone dies, their bank accounts are closed. Any money left in the account is granted to the beneficiary they named on the account. If no beneficiary is named, the executor of the estate is in charge of dividing it up according to the will, the legally binding document that outlines who gets the deceased’s assets after they die.
If someone dies without a will, assets and property is passed by intestate succession to their heirs. Intestate succession laws depend on the state the deceased lived, and a court appoints an administrator who divides up the assets. In most cases, a majority, or even all of the money, goes to their spouse, and the remainder is divided up among their children.
Any credit card debt or personal loan debt is paid from the deceased’s bank accounts before the account administrator takes control of any assets.
Required documents
Before the deceased’s estate is settled and their bank accounts closed, the financial institution needs documents showing proof of death and the person responsible for handling the state. In most cases that includes a death certificate and a letter from the probate court naming the estate’s executor or administrator.
Contact the financial institution to start the process of settling the deceased’s bank accounts. The financial institution provides a letter with next steps once they receive notice of death.
Payable on death accounts
Any bank account with a named beneficiary is a payable on death account. When an account owner dies, the beneficiary collects the money. There’s no probate process or lengthy waiting period. The beneficiary needs to show the financial institution a photo ID and the deceased’s death certificate.
If the beneficiary dies before the account owner, the bank releases the money to the executor of the estate who distributes it either according to the deceased’s will or state law.
Payable on death (POD) account pros and cons
Pros
- Easy to set up. Naming a beneficiary typically takes a few minutes through your bank.
- Simple to change. You can change your beneficiary at any time as long as you have their name, Social Security number and date of birth.
- Avoids probate. Perhaps the biggest benefit of naming a POD beneficiary is that the money usually avoids a lengthy probate process.
- Joint accounts. If you set up your POD as a joint account, the account only goes to the beneficiary after the death of both account owners.
- Multiple beneficiaries. You can have more than one beneficiary and each receives an equal share of the money unless you specify otherwise.
Cons
- Can’t name alternate beneficiaries. You typically can’t list back-up beneficiaries. If the beneficiary dies before a new one is added, the account automatically goes to probate.
- The POD always wins. If the beneficiary in the deceased’s estate plan, will and POD don’t match, the POD designation almost always wins. Some states have laws to override this, but it’s not the norm.
- Accounts transfer only upon death. If you become unable to care for yourself as a result of dementia, Alzheimer’s or a similar disease, and your family needs to gain access to the account to pay for your care, they’ll need to go to court to establish a guardianship or a conservatorship.
- Not an estate plan. To ensure that you protect yourself and your beneficiaries in case you become unable to care for yourself, consider putting together a will, power of attorney and an advance medical directive.
How to avoid complications
Talk to an estate planning professional to minimize issues that can arise if you become unable to care for yourself. Consider the following when you meet with a professional:
- Add a power-of-attorney (POA). There are many different types of POAs. But a durable POA has the broadest powers and makes decisions about your health, finances and legal affairs while you’re alive.
- Create a trust account. There are many different types of trusts, so it’s important to speak with a professional about the best one for your situation.
- Spell out your wishes. Once your trust is established, layout how you want to distribute your bank account upon death.
Payable on death accounts vs. trusts
Both payable on death accounts and trusts are designed to help you avoid the probate process. But they both have notable differences.
Payable on death accounts typically list one or more primary beneficiaries. When the account holder dies, the money is split evenly between the beneficiaries. All beneficiaries have equal control over the money, so they must unanimously decide how to use the funds. If there isn’t a living beneficiary, the money automatically goes to probate.
Trusts offer more flexibility than payable on death accounts. With trusts, the account owner can list as many primary and secondary beneficiaries as they wish. Plus, they decide how and when the account is split up between heirs. To simplify the process, they can appoint a trustee who distributes the assets according to the plan.
Bottom line
If someone has a named beneficiary on their account, that person can withdraw money after the account owner dies. If not, the bank account is closed and its balance will be divided up according to the deceased’s will or the intestate succession laws of the state.
If you’re putting together a plan for your assets after you pass, use an estate planning checklist to help make sure you haven’t missed anything important.
Frequently asked questions
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