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What happens to your bank account after you die?

Melanie Lockert
Updated
What happens to your bank account after you die? (simon2579 via Getty Images)

Your money can leave a lasting legacy and live on much longer than you do. And when set up properly, your assets can be transferred to family members easily after you die.

Planning ahead of time can keep things tidy and ensure money in your bank accounts go to the right place. Here’s what happens to your bank account when you die — including how the process works for beneficiaries and joint account holders — and steps you can take now to avoid complications down the line.

What happens to your bank account when you die largely depends on whether you’ve named a beneficiary to receive your assets after you die or you share the account with a joint account holder.

While the process varies, once the bank is notified of a death, it typically freezes or places a hold on the account. It might also cancel transfers and access to debit cards. After that, additional steps depend on the circumstances of the account.

If you’ve named a beneficiary on your bank account, it’s a pretty smooth process: the bank either contacts your beneficiary on notice of death, or your beneficiary can provide a death certificate and proof of ID to the bank to receive the funds.

For bank accounts, this process is typically referred to as payable on death — or POD. Investment accounts have a transfer on death (TOD) designation. In both cases, these designations transfer your assets to your beneficiary, so it’s clear who will get the funds in the associated accounts.

In addition to providing clarity, adding a beneficiary can help you avoid the headache of dealing with probate. Probate can be a potentially time-consuming process that involves a court that manages the distribution of assets after someone has died. For context, probate can take months to years to complete.

“When the account holder passes away, the beneficiary must provide evidence to the bank of the account holder’s death, namely a death certificate, and then the bank will distribute the remaining account assets to the beneficiary and close the account, without the need to open a probate,” explains Lauren A. Klein, Esq., LL.M at Flourish Law Group. “Generally speaking, if there is a beneficiary designation on a bank account, this overrides the estate plan, including the last will and testament and/or revocable living trust.”

If there is a revocable living trust, the bank account will be in the hands of a trustee who’s in charge of distributing the assets to the beneficiary. If there’s a will in place, the appointed executor manages the estate as directed by the document.

Joint account holders have shared responsibility over the account. So if you die, the other account holder typically has the right of survivorship, which means funds can be transferred to the surviving party. But it may depend on the terms of your account and state law, so double-check.

Joint accounts are also subject to changes from the Federal Deposit Insurance Corporation (FDIC). Typically, individual account holders are insured for deposits of up to $250,000, while joint account holders are insured for double that amount, at $500,000.

The FDIC insures the full joint amount of $500,000 for a six-month grace period after the death of a joint account holder. After the grace period, the amount insured drops down to the sole owner. In other words, only $250,000, if that account is insured.

If you are a joint account holder responsible for an account after a death, you might want to move some assets, if you have more than $250,000, to another type of bank account or a new bank.

If you die with no named beneficiary or joint account holder on your bank accounts, it gets more complicated. Without them — and the clear instructions they bring on who the money goes to — the money in your bank account becomes a part of your estate and is likely to go through probate.

“If a bank account does not have a beneficiary and is not held within a trust, then your family members will generally need to open a probate in order to gain access to the account,” says Klein. “Probate can be very expensive and time-consuming, and requires court oversight in order for your beneficiaries to gain access to the account. This can be disastrous if those funds are needed immediately. Probate can be easily avoided with proper planning with a qualified estate planning attorney.”

Estates with limited assets may qualify as “small estates” and have fewer requirements. Check with your state law on the criteria and process. If there is a will, an executor of the state should be named. In the event that there is no will, a family member will typically become the estate administrator.

In both cases, the bank account is part of the estate. A will can direct where the funds should go, and if there is no will, how the money is divided will depend on state probate laws.

If there is no action taken on the account for three to five years, the funds are transferred to the state in a process called escheatment — in essence, the state considers the money an unclaimed account, holding it until a beneficiary or account holder shows up to claim it.

Dig deeper: Can you lose money in a savings account? It’s unlikely — but here’s what to watch out for

It can be tough to think about our own death. But taking action ahead of time can be a gift to your mourning family, who is left to pick up the pieces.

Here's what you can do today to avoid future complications and bypass the complications of probate.

Designate a beneficiary for each of your accounts with the bank, credit union or financial institution that manages them. If you have more than one beneficiary, the balance is split among them.

Depending on the type of account, you’ll have a POD or TOD designation. This process helps you avoid probate and can make for a smooth transfer of your account funds.

Be sure to revisit and update beneficiaries as needed, such as after divorce, marriage or other big life changes. Beneficiaries have no access to your accounts while you’re alive, only after you die, and with proper documentation like a death certificate.

If you’re worried about what happens to money in the bank when you die, adding a joint account holder can ease the process, as ownership will typically default to the person designated as sharing the account. To do that, contact your bank to get the process started.

Be aware that a joint account holder is different from a beneficiary in that they have rights to the account while you’re alive. It can make sense, if you’re married, to add your spouse. For other types of relationships, understand the implications of adding a joint account holder, such as sharing the responsibility of debts and fees.

Adding a beneficiary or a joint account holder to your bank accounts is a great way to transfer assets to your family in a clear-cut way. You avoid the hassle of probate, and your assets are distributed according to your wishes.

But that’s just the beginning. Creating a comprehensive estate plan when you’re alive and healthy ensures all your bases are covered.

“You need to get your affairs in order before you get sick, hurt or pass away. You cannot wait until something happens to create these documents, because at that point it is usually too late,” says Kelsey Simasko, elder law attorney at Simasko Law in Mount Clemens, Mich. “Generally, everyone needs a patient advocate, durable power of attorney, will and sometimes a trust.”

Joint account holders, designated beneficiaries, and will administrators or executors can claim money from a bank after an account holder’s death. If you don’t fall into one of those categories, you don’t have legal rights to the account.

To claim money from a bank account after death, you'll follow these five general steps:

  1. Contact the bank. Get in touch with the account holder’s financial institution to let them know about the death. You’ll need to provide the account holder’s full name and Social Security number. Typically, a bank puts a hold or freeze on these accounts to prevent fraud.

  2. Provide documentation. You’ll need to provide a government-issued I.D. and a certified death certificate to access funds in the account. Depending on your relationship and role, you may need to provide additional documentation, such as a marriage certificate, last will and testament, formal trust or court-issued probate letters

  3. Complete the required paperwork. The bank provides forms for you to fill out to complete the transaction and tell them where to send the funds.

  4. Receive funds. After all paperwork is submitted, the bank processes your request. Every bank and situation is different, so the amount of time it takes to receive money after someone dies varies, but it may take several weeks.

  5. Understand any tax implications. The money you get from a bank account after someone dies typically isn’t considered income on your federal tax return. But interest earned on that money in the future might be taxable, and more than 15 states tax inherited wealth through estate or inheritance taxes. The IRS provides an interactive tax assistant that can help you determine if your inheritance is taxable.

Seventeen states and Washington D.C. tax inherited wealth through estate or inheritance taxes, according to the Center on Budget and Policy Priorities:

  • Connecticut

  • Hawaii

  • Illinois

  • Iowa

  • Kentucky

  • Maine

  • Maryland

  • Massachusetts

  • Minnesota

  • Nebraska

  • New Jersey

  • New York

  • Oregon

  • Pennsylvania

  • Rhode Island

  • Vermont

  • Washington

  • Washington D.C.

Because laws can change frequently, it’s best to talk to a tax professional about whether your inherited assets are taxable.

Related reading: What happens to your mortgage after you die?

Yes, many people name their children or other younger loved ones as beneficiaries on assets like bank accounts. But note that minors under age 18 often can’t legally own large amounts of money, and so it makes sense to appoint a guardian or trust as the beneficiary instead. Talk with a legal professional to understand the implications of naming a minor as a beneficiary when deciding how to protect your money.

A spouse can claim money within a bank account if they’re a joint account holder, designated beneficiary or will administrator. Otherwise, they don’t have legal rights to the account, and it may need to go through probate.

If the person who died designated a beneficiary on the account, the bank should be able to process the release of the money on receipt of government ID and a certificate of death. It's good to ask the bank explicitly when you'll receive the asset so that you know what to expect.

If the money is part of an estate, the process of settling the estate can take up to six months or longer, depending on how many assets are within the estate.

Each state supports an unclaimed property program, though when funds or accounts are considered unclaimed depends on the state’s escheatment laws.

If you think there might be money or unclaimed property you’re due, start by searching the official site of the National Association of State Treasurers. You can search and initiate a claim through a simple form in minutes.

As with a savings account, what happens to a certificate of deposit after death depends on who owns the account. If there's a joint account holder and a designated "right of survivorship," your share passes to the surviving owner without involving probate. Without a right of survivorship, the share passes to your estate.

If you've named a beneficiary for your CD, your share passes to that beneficiary, who can either transfer cash out the CD, transfer the CD to their name or reinvest it into a different CD term.

Melanie Lockert is an L.A.-born and Brooklyn-based freelance writer with a decade of experience in personal finance. Melanie started the Dear Debt blog in 2013 and chronicled her journey out of $81,000 in student loan debt. She published a book of the same name in 2016. Her personal finance expertise has been featured on Fortune Recommends, CNN Underscored, Yahoo Finance and Business Insider, among other publications. She is also the host of the Mental Health and Wealth Show and cofounder of the Lola Retreat, a finance event for women.

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