Wills and trusts are popular estate planning tools, but they aren’t the only options for passing down assets. Items like life insurance policies, annuities, retirement accounts, and bank accounts that have beneficiaries listed can usually be sent directly to those beneficiaries when the owner of the item dies.
As an example, if a decedent had a bank account, it’s possible that they had designated beneficiaries to inherit the bank account upon their death.
These beneficiaries typically can claim the account after the decedent’s death by presenting the bank with their ID and a certified copy of the decedent’s death certificate, but if the bank account did not have a beneficiary designation, it would likely have to pass through a court-supervised process known as probate, which can not only be lengthy and expensive, but cause beneficiaries to face delays in receiving the asset.
Learn more about the beneficiary designation types, the importance of the designation of beneficiary process, and how to contest a designated beneficiary when you suspect wrongdoing. Table of Contents.
The Short Answer
Most of the time, a trust does not override a bank account beneficiary designation. In fact, it’s the opposite: bank account beneficiary designations usually take precedence over both wills and trusts. In estate planning, this is a key difference that can have big effects on how your assets are distributed after you die.
When you designate a beneficiary for your bank account, those funds will typically pass directly to that person upon your death, regardless of what your will or trust might state. This is because beneficiary designations are contractual arrangements between you and the financial institution that take precedence over other estate planning documents.
Understanding Beneficiary Designations on Bank Accounts
Beneficiary designations are a powerful tool in estate planning. Putting a beneficiary on your bank account (also known as a Payable-on-Death or POD designation) makes it possible for money to be sent directly to that person when you die.
- Bypasses the probate process
- Avoids court supervision
- Allows for immediate access to funds
- Takes precedence over wills and trusts
- Provides a simple transfer process requiring only ID and a death certificate
Keystone Law says that when someone dies, money in a bank account that has a beneficiary designation can go directly to that person. That person only needs to show ID and a certified copy of the death certificate to get the money.
The Hierarchy in Estate Planning Documents
To understand why beneficiary designations override trusts, it helps to understand the hierarchy of estate planning documents:
- Beneficiary designations (highest priority) – These contractual arrangements directly transfer assets upon death
- Joint ownership with right of survivorship – Property automatically passes to the surviving owner
- Trust assets – Distributed according to trust terms
- Will – Distributes probate assets not covered by the above methods
- Intestate succession laws (if no will exists)
As Forbes explains in the article cited by Robert J Varak’s law office, “Beneficiary designations override wills, so if you forget to change them, the person named will still receive the money, even if that was not your intent.”
When Would You Want a Trust as Beneficiary?
While individual beneficiary designations typically override trust provisions, you can actually name your trust as the beneficiary of your bank account. According to TheMoneyKnowHow, with a revocable living trust, you can either:
- Name the trust as the beneficiary of your accounts, or
- Retitle the account so that the trust is a joint account owner
This method is the best of both worlds because your family won’t have to go through probate court and you can still decide how the assets are distributed according to the terms of your trust.
Why Consider a Trust Instead of Direct Beneficiary Designations?
There are several compelling reasons to consider using a trust instead of relying solely on direct beneficiary designations:
1. More Control Over Distribution
Direct beneficiary designations simply hand all the money to one person, potentially leaving them responsible for unexpected taxes and fees. A trust allows for more specific instructions on how and when funds should be distributed.
2. Protection for Special Needs Beneficiaries
If you have a beneficiary with special needs, leaving an inheritance directly to them might disqualify them from government assistance. A special needs trust can help ensure they receive the inheritance without jeopardizing their benefits.
3. Avoiding Disputes
Trusts can help prevent disputes among beneficiaries by clearly outlining how assets should be divided.
4. Age Considerations
If your beneficiary is a minor, they won’t be able to access the funds until they reach the age of majority (18 in California and many other states). Do you really want an 18-year-old to suddenly have access to large sums of money? A trust can establish staged distributions as the beneficiary reaches certain ages or milestones.
What Happens When There’s a Conflict?
When there’s a conflict between a beneficiary designation and a trust, the outcome depends on several factors:
- Timing: When each document was created or modified
- Specific language: How each document is worded
- State laws: Different states may have different rules
In most cases, the beneficiary designation will prevail. For example, if you name your ex-spouse as the beneficiary of your bank account but state in your trust that you wish your new spouse to inherit the funds, only the ex-spouse will receive the inheritance.
Can a Beneficiary Designation Be Contested?
Yes, beneficiary designations can be contested, but only under specific circumstances. According to Keystone Law, valid grounds for contesting include:
- Fraud: Someone intentionally misled the account owner
- Improper execution: Protocols weren’t followed when designating beneficiaries
- Undue influence: Someone manipulated the account owner
- Lack of capacity: The account owner lacked mental competence
- Mistake: The account owner made an error when designating beneficiaries
It’s important to note that merely being upset about not being named a beneficiary is not sufficient grounds for a contest. You must prove some form of wrongdoing in the designation process.
Best Practices for Coordinating Trusts and Beneficiary Designations
To ensure your assets are distributed according to your wishes:
- Regularly review all beneficiary designations – At least annually and after major life events (marriage, divorce, births, deaths)
- Coordinate with your estate plan – Make sure your beneficiary designations align with your will and trust intentions
- Consider naming your trust as beneficiary – This provides more control over distribution
- Consult with an estate planning attorney – Get professional advice on the best approach for your situation
- Keep documentation organized – Maintain records of all your accounts and their beneficiary designations
The Bottom Line
In most cases, a bank account beneficiary designation will override a trust. To avoid unintended consequences, you should either:
- Make sure your beneficiary designations align with your trust provisions, or
- Name your trust as the beneficiary of your accounts
This way, you can ensure your assets are distributed according to your wishes while still avoiding probate.
Remember that estate planning is not a one-time event but an ongoing process. Life changes, and your estate plan should adapt accordingly. Regular reviews with your estate planning attorney can help ensure that all aspects of your plan work together harmoniously.
By understanding the relationship between trusts and beneficiary designations, you can create an estate plan that truly reflects your wishes and provides for your loved ones in the most effective way possible.
FAQs About Trusts and Bank Account Beneficiaries
Q: Can I name multiple beneficiaries on my bank account?
A: Yes, you can name multiple beneficiaries and specify the percentage each should receive.
Q: What happens if my named beneficiary dies before me?
A: If you don’t have contingent (backup) beneficiaries named, the funds will become part of your estate and be subject to probate.
Q: Does a will override a beneficiary on a bank account?
A: No, a beneficiary designation typically overrides what’s stated in a will.
Q: Can I name a minor as a beneficiary on my bank account?
A: Yes, but the funds may be held until they reach the age of majority, or a guardian may need to be appointed to manage the funds.
Q: How do I change the beneficiary on my bank account?
A: Contact your bank and request their beneficiary change form. This is usually a simple process that can be completed at your local branch or sometimes online.
Remember, estate planning is complex, and what works best depends on your unique circumstances. Consulting with an experienced estate planning attorney is always recommended to ensure your assets are protected and distributed according to your wishes.
What is a class designation beneficiary?
A class designation beneficiary provides the decedent the opportunity to make a general statement that covers multiple beneficiaries at once.
A common example of a class designation beneficiary is to state “all children of the marriage of Tom and Becky” instead of naming individual names. By putting it this way, any children that come from the marriage of the people listed will still be part of the assets.
A key advantage of using class designation is that it curtails the need to continuously update beneficiary designations.
Types of Beneficiary Designations
It’s crucial to understand the differences between types of designated beneficiaries. This is because the type of beneficiary can affect everything from when the beneficiary can access the asset to which sets of rules will apply.
Explore the various types of designated beneficiaries in more detail in the subsequent sections.
A designated beneficiary is anyone who was named by the original account holder as a beneficiary. Any person can be a designated beneficiary, and more than one beneficiary can be named.
While there is nothing in the law to prevent a minor from being designated as a beneficiary, it’s important to keep in mind that they usually will not be able to access the asset until they reach the age of majority, which is 18 in California. A custodian or guardian of the estate generally can be appointed to manage the minor’s inheritance until it can be released to them.
Any beneficiary named on a retirement account who isn’t an individual person counts as a non-designated beneficiary. This includes organizations and entities, such as trusts, estates and charities.
Since a non-designated beneficiary does not have a life expectancy in the same way individual beneficiaries do, there are different sets of rules that will apply to them in terms of when and how assets can be distributed.
A primary beneficiary has the highest priority of all beneficiaries. As long as they are still alive and can be found after the asset owner dies, they can have the asset transferred to them by following the issuing institution’s rules.
The contingent beneficiary, who is also called a “secondary beneficiary,” only gets an asset with a beneficiary designation if the primary beneficiary died before the asset owner, can’t be found, or refuses to receive it.
While naming backup beneficiaries may seem inconsequential, it’s extremely important, since any assets not transferred to a beneficiary become part of the decedent’s estate, which makes them subject to creditor claims and other administrative fees.
Eligible designated beneficiaries (EDBs) are a classification of beneficiaries to retirement accounts who have a unique set of rights when inheriting a retirement account by beneficiary designation. Most notably, they have more flexibility when withdrawing funds from their inherited accounts than other types of beneficiaries.
The five categories of EDBs are as follows:
- Surviving spouse
- The accountholder’s minor child (a person younger than 18 years old).
- A disabled individual
- A chronically ill Individual
- Anyone younger than the deceased by no more than 10 years
If you have questions about the unique rights afforded to EDBs, a qualified probate attorney can answer them.
A transfer-on-death beneficiary receives an asset upon the asset owner’s death without the asset having to pass through probate. With this type of beneficiary designation, beneficiaries have no control or access to the asset in question while the asset owner is alive.
Assets such as stocks, bonds and brokerage accounts typically have transfer-on-death beneficiaries, but they can also be named to pass down assets such as vehicles and real properties.
A payable-on-death beneficiary stands to inherit the balance of funds on assets such as bank accounts and life insurance policies upon the death of the asset owner. This is arguably the easiest way to collect inheritance; all the beneficiary has to do is show up to the bank with their ID and proof of the decedent’s death before they can collect the assets.