Many clients wonder what to do about bank accounts for estate planning purposes. There are three (or four, see below) main options to consider:
Do nothing;
Designate a beneficiary for your bank account(s);
Add someone(s) else as owner(s) of your bank account(s); or
If you have a Revocable Living Trust, retitle the bank account(s) in the Trust's name.
The best option(s) for you may not be the best option for another person. And it might not be what your friend or family member did (or told you to do). Each option has pros and cons, and I always encourage clients to consider which option(s) meet their goals best. Keep reading for the basics on each option, along with some points of consideration.
Do nothing. If you are the sole owner of a bank account, at your death - the funds in that account become the property of your estate and are subject to the probate court process. That means that the terms of your Will apply, or if you don't have a Will - the rules of your state's intestacy laws apply. If that's your intention, doing nothing is just fine.
If you own a bank account jointly, the surviving owner becomes the sole owner at the first person's death (and it becomes a solely owned bank account). The only hiccup in this is if the first person died with debts exceeding their assets. If that is the case, the court may order the surviving owner to use account funds to pay those debts.
Designate a beneficiary for your bank account(s). Like life insurance and retirement accounts, bank accounts also can have beneficiary designations. You can create a "Pay on Death" (POD) or "Transfer on Death" (TOD) designation for your account(s) by completing paperwork with your bank/financial institution. After your death (and upon receipt of proper proof), your bank/financial institution will pay or transfer the funds in your account as you specified. Doing this prevents your bank account assets from being subject to the probate process. And/but it also means that funds in the account(s) are not available to pay any of your final expenses and bills unless the new owner(s) decide to use them in that way.
If you have a Revocable Living Trust, you can use a TOD to get your bank account assets into your Trust (if you choose not to do option 4 below).
Add someone(s) else as owner(s) of your bank account(s). When you add someone as an owner to your bank account, it becomes a joint account. Check out option 1 above (do nothing) for what happens to a joint account at the first owner's death.
Many people expect this to be the best option because it has the added benefit of the added owner(s) ability to access the account and assist with financial matters during the first owner's lifetime. However, because the funds in the bank account are equal property of all owners, that benefit comes with a few liabilities too:
Any owner can use funds from the account as they wish for any purpose; and
If any of the owners have debts, the creditors can demand payment using funds from the account.
If you have a Revocable Living Trust, retitle the bank account(s) in the Trust's name. (Or, if the financial institution requires it, close the bank account in your name and open a new bank account in the Trust's name.) Once the Trust owns the bank account, the terms of the Trust Agreement control the use of the account assets, both during life and after death. And assets held in trust are not subject to the court's probate process.
And, no, if you're wondering, I didn't forget the option of adding an authorized signer to a bank account. Adding an authorized signer gives that person limited rights with the account assets. Authorized signers typically can make deposits and withdrawals (including writing checks and using the account's debit card). Authorized signers can only act on behalf of the account owner and have no personal ownership rights to the assets. And when the account owner dies, the authorized signer's authority ends. And unless other actions were taken during the owner’s life, the account will be subject to the process detailed in option 1 above, “do nothing.”
