When a person passes away, their assets—including bank accounts—must be properly handled and distributed according to estate planning and probate laws.

Understanding what happens to a deceased person’s bank accounts can help ensure that their wishes are honored and that the distribution process goes smoothly. Several factors determine what will happen to these accounts, including how the accounts were set up, if there was a will, and the involvement of probate.

1. Joint Accounts

If the deceased person held a joint bank account with another individual, the surviving account holder usually gains full control of the account. In most cases, this transfer occurs automatically due to the “right of survivorship.” This means that the joint account holder becomes the sole owner of the funds after the other party’s death, without the need for probate.

Joint accounts typically come with the right of survivorship. Upon one account holder’s death, the other party immediately owns the balance in full.

However, it’s important to note that while joint accounts avoid probate, they are not protected from creditors. If the deceased had outstanding debts, creditors may still have a claim on the account.

Also, the use of a joint bank account as a substitution for an estate plan can lead to unintended consequences. For example, some families name trusted family members and friends on an elder’s bank account so he or she can help the elder with paying bills. However, absent common estate planning documents—such as a trust or power of attorney nomination—that trusted person may receive ownership of the account and any funds within after the elder passes away.

2. Payable-on-Death (POD) Designation

Another common way to manage a bank account is through a payable-on-death (POD) designation. A POD account allows the account holder to name a beneficiary who will automatically inherit the funds upon their death. The account holder usually designates a beneficiary through a specific form provided by the bank which may need to be notarized. The advantage of a POD account is that it bypasses probate entirely which allows your family to access those funds immediately rather than after a judge grants them permission.

When the account holder passes away, the named beneficiary will need to provide the bank with the death certificate and identification. Once the bank verifies the information, the funds are released to the beneficiary.

This method is an efficient way to ensure the smooth transfer of assets, making it a popular tool in estate planning. One problem, however, is that beneficiary forms are often out of date within a year of the bank account being established. Births, deaths, weddings, and divorces continue happening while your beneficiary form from ten years ago still names your high school sweetheart as your beneficiary. An estate plan will address these issues and ensure each bank account beneficiary designation aligns to what your family needs today and in the future.

3. Individual Accounts Without Beneficiaries

If the deceased person’s bank account was solely in their name and there was no beneficiary designated (such as a POD), the funds will typically go through the probate process. Probate is the legal process of validating a will, settling debts, and distributing assets to heirs. During this process, the bank account will be frozen until the court appoints an executor to handle the deceased’s estate.

The court-supervised probate process ensures that the deceased person’s debts are paid before distributing the remaining funds to beneficiaries or heirs as outlined in the will. If no will exists, the estate is distributed according to state intestacy laws.

Probate can be a lengthy and costly process. Most states outright require you to hire an attorney to begin probate. The cost and complexity of probate is why many people use estate planning strategies to avoid it, such as setting up POD accounts and establishing trusts during their lifetime.

4. Bank Accounts Held in Trust

Some individuals choose to place their assets, including bank accounts, into a trust. When a bank account is held in trust, the designated trustee takes control of the funds after the account holder’s death. Because the assets are owned by the trust, they avoid probate entirely, and the trustee is responsible for distributing the funds according to the terms of the trust.

Trusts offer more privacy and control over the distribution of assets. They can also help reduce estate taxes and ensure that funds are distributed to beneficiaries according to specific instructions, such as staged disbursements for minors or special-needs dependents.

5. Debts and Creditors

Before the funds in any bank account are distributed to beneficiaries, it’s important to address the deceased’s outstanding debts. Even if an account bypasses probate, creditors may still have claims against the estate. In cases where the deceased had significant debt, the estate’s executor must settle these obligations before distributing any remaining funds.

In the probate process, creditors have a limited period to file claims. For non-probate assets like POD accounts or joint accounts, creditors may still pursue their claims, but the details vary depending on the state.

6. What Happens if There is no Will?

If the deceased person died intestate (without a will), the bank accounts that do not have a joint holder or beneficiary designation will go through probate. In Florida and Texas, for example, both states’ intestacy laws determine how assets, including bank accounts, are distributed. Generally, the assets will be divided among the closest living relatives, such as a spouse, children, or parents.

What are Some Estate Planning Tips for Bank Accounts?

To ensure that your bank accounts are distributed according to your wishes and to avoid unnecessary legal complications, it’s important to integrate them into your estate plan. Consider the following estate planning strategies:

  • Establish a Payable-on-Death Beneficiary: Naming a POD beneficiary is a simple way to ensure that your bank accounts transfer seamlessly after your death.
  • Create a Trust: For more complex estates or specific disbursement instructions, setting up a trust can help ensure that your wishes are carried out while avoiding probate. If you purchase and title your property correctly after setting up a trust, your family may never need to see the inside of a courtroom after you pass away.
  • Review Your Estate Plan Regularly: Life changes, such as marriage, divorce, or the birth of children, may necessitate updates to your estate plan. Regularly review your bank account designations to ensure that your estate plan reflects your current wishes.

RTRLAW Can Help Secure Your Loved One’s Finances

When a person passes away, how their bank accounts are handled depends on factors like account ownership, beneficiary designations, and whether or not the account is subject to probate. By incorporating effective estate planning strategies—such as creating trusts and naming POD beneficiaries—you can help your loved ones avoid probate and ensure as smooth a process as possible for everyone involved.

RTRLAW offers compassionate guidance in estate planning and elder law to help you create a comprehensive plan that addresses all of your assets, including bank accounts. Contact us today and let us help make sure that your wishes are legally protected and your loved ones are cared for. Call 1-833-HIRE-RTR or email [email protected] to schedule a consultation.