Do They Freeze Your Bank Account When You Die?
Many banks allow their customers to name a beneficiary or set the account as Payable on Death (POD) or Transferable on Death (TOD) to another person. If the account holder established someone as a beneficiary or POD, the bank will release the funds to the named person once it learns of the account holder’s death. After that, the financial institution typically closes the account. If the owner of the account didn’t name a beneficiary or a POD, the process can get more complicated.
The executor, or person who administers a person’s estate when he or she dies, will become responsible for using the money to repay creditors and dividing the remaining funds according to the deceased’s will. Most joint bank accounts include automatic rights of survivorship. In short, if one of the signers on the account passes away, the remaining signer (or signers) on the account retain ownership of the money in the account. That means that the surviving account owner can continue using the account and the money in it, without any interruptions. It’s worth noting that the death of an account holder can impact the insurance on an account. The Federal Deposit Insurance Corp. will continue to insure an account as if the decedent is alive for six months after his or her death. Once that time passes, the FDIC coverage stops. Joint accounts can receive up to $500,000 in protection; however, that amount will revert to the $250,000 in protection applicable to individual accounts if one of the joint account holders dies. Still, if you’re a signer on a joint account, it’s worth checking with your bank to make sure that the account has automatic rights of survivorship. Some banks will freeze joint accounts if one of the signers dies, which could be a problem if you rely on the account for regular spending. In general, the executor of the state is responsible for handling any assets the deceased owned, including money in bank accounts. If there is no will to name an executor, the state will appoint one based on local law. The executor has to use the funds in the account to pay any of the estate’s creditors and then distributes the money according to local inheritance laws. In most states, most or all of the money will go to the deceased’s spouse and children.
How do banks discover someone died?
Banks can discover the death of an account holder in a few ways.
• Family member: One of the most common ways for a bank to discover that an account holder has died is for the family to inform the bank. If a loved one has passed away, inform the deceased’s bank by bringing a copy of his or her death certificate, Social Security number, and any other documents provided by the court, such as letters testamentary (a court document giving someone legal power to act on behalf of a deceased person’s estate) provided to the executor. Informing the bank lets it begin the process of distributing the deceased’s funds and closing the account.
• Social Security: Often, funeral directors will take on the task of informing Social Security of a person’s death on behalf of the family. This saves the family the effort of telling Social Security about their loved one’s passing and makes sure that the heirs don’t have to deal with returning Social Security checks that shouldn’t have been issued. If Social Security sent a payment for a month after the deceased’s death, the payment must be returned. Social Security will contact the bank that received the payment to ask for the return of funds. If the bank didn’t already know about the account holder’s death, receiving that request will inform it that the account holder died.
How to avoid complications
The last thing that people want to think about while grieving the loss of a loved one is money. There are some proactive steps that you can take to help your loved ones avoid complications if you die. Always have a will drawn up by an estate attorney and set up beneficiary designations or TOD, but the easiest way to deal with bank accounts is to simply have an authorized signer on the account so they don’t have to wait. If you have power of attorney for a loved one who is in poor health, you can add a joint account holder or a TOD to their accounts in preparation for the future. Another important thing to do is to make sure that your family knows about all of your financial accounts. With the rise of online banking, it’s much easier for accounts to get lost in the shuffle. If you own an account in your own name, and don’t designate a payable-on-death beneficiary then the account will probably have to go through probate before the money can be transferred to the people who inherit it. If, however, the total value of your probate assets is small enough to qualify as a small estate under your state’s law, then the people who inherit from you will have simpler, less expensive options. Depending on your state’s law, they may be able to use a simplified probate procedure or simply prepare an affidavit (sworn statement) stating that they are entitled to the money, and present that to the bank. Not all states offer both options. To see what processes are available where you live, see Probate Shortcuts in Your State. Probably the simplest way to leave a bank account to someone is to name that person (or more than one) as the “payable-on-death” or POD beneficiary.
You can do it by filling out and submitting a form that the bank supplies. The money is not part of your probate estate (assets that can’t be transferred without the probate court’s approval), so it can be quickly and easily transferred to POD beneficiary. After your death (and not before), the beneficiary can claim the money by going to the bank with a death certificate and identification. Your beneficiary designation form will be on file at the bank, so the bank will know that it has legal authority to hand over the funds. If you own an account jointly with someone else, then after one of you dies, in most cases the surviving co-owner will automatically become the account’s sole owner. The account will not need to go through probate before it can be transferred to the survivor. Most bank accounts that are held in the names of two people carry with them what’s called the “right of survivorship.” This means that after one co-owner dies, the surviving owner automatically becomes the sole owner of all the funds. Sometimes it’s very clear that the account has the right of survivorship. If your account registration document at the bank simply lists your names, and doesn’t mention joint tenancy or the right of survivorship, it might be a joint tenancy account, but it might not. If you’re in doubt, check with the bank and make sure the right of survivorship is spelled out if that’s what you want. If you and your spouse open a joint bank account together, it’s very unlikely that anyone would argue that the two of you didn’t intend for the survivor to own the funds in the account. But if you have a solely owned account and add someone else as a co-owner, it may not be so clear what you want to happen to the funds in the account after your death. Some people add another person’s name to an account just for convenience—for example, perhaps you want your grown daughter to be able to write checks on the account, to help you out when you’re busy, traveling, or not feeling well. Or you might want to give a family member easy access to the funds in an account after your death, with the understanding that the money will be used for your funeral expenses or some other purpose you’ve identified. Legally, however, the person whose name you add to the account will become the outright owner of the funds after your death. Unless there’s something in writing, there’s no way to know or enforce the terms of any understanding the two of you reached about how the money would be used. The new owner is free to spend the money without any restrictions. If other relatives think you had something else in mind, they may be resentful or angry if the surviving owner uses the money for personal purposes instead of paying expenses or sharing the money with other family members. If you want someone to have access to your funds only so they can use them on your behalf, there are better ways to do it. Consider giving a trusted person power of attorney (this gives them authority during your life), or leave a small bank account and instructions for its use after your death. Don’t make someone a co-owner on an existing account unless you want them to inherit the money without any strings attached.
Bank Accounts Held in Trust
If you’ve set up a living trust to avoid probate proceedings after your death, you can hold a bank account in the name of the trust. After your death, when the person you chose to be your successor trustee takes over, the funds will be transferred to the beneficiary you named in your trust document. No probate will be necessary. To transfer the account to your trust, tell the bank what you want to do. It may have some forms for you to fill out. Then the bank should adjust its records, and your account statements will show that the account is held in trust. A joint bank account is an account where more than one person has access to the money held in it. While joint accounts are typically owned by spouses or relatives, neighbors or friends may also open them together. Parents often choose to set a joint account up with their child during their estate planning process. In addition to other benefits, this ensures that if the parent becomes incapacitated, the child can cover the related expenses.
Benefits of Joint Bank Accounts
• Possibly avoiding probate: If the account was just in the deceased family member’s name, it will have to go through probate for other relatives to gain access to it. But if you signed up for the account together, such as making a joint bank account with a parent who recently died, probate may not be necessary.
• Tracking spending habits: In some partnerships, one spouse may be more responsible with money than the other. Having access to joint account records can help couples stay on top of monitoring and discussing spending habits and financial goals.
• Increased trust: Opening a joint account with your child can promote trust, as you’ll be able to keep an eye on the way they’re spending their money. It also shows a willingness to be transparent and honest about financial habits.
• A simpler bill-paying process: If you and your partner split bills, having a joint account can make paying them much easier. You won’t have to wait to transfer money from one account to another before submitting payments. And the partner who is better with remembering to pay on time can simply access the account to make payments when they wish to. But a joint account isn’t always the best idea for everyone. In the event of a breakup or divorce, a joint account can complicate matters. The lack of privacy might also be a problem for some couples or relatives, and some individuals might resent the transparency that comes with this type of account.
Joint accounts are not always subject to probate. When someone dies, any joint brokerage or bank accounts with rights of survivorship can go straight to the joint owner and bypass probate. Most financial institutions just ask you to present the death certificate and fill out the required forms to begin the transfer process. This is one major benefit of opening a joint account with right of survivorship. If you’re considering opening (or already have) a joint account, ask your financial institution if they carry out rights of survivorship automatically. In some cases, you’ll have to sign an extra document to indicate right of survivorship. Doing so should ensure that the surviving owner of the joint account can continue to access the funds even if the co-owner passes away. You may encounter some tax-related consequences after inheriting a joint bank account. After the co-owner dies, you will become responsible for any income taxes earned by the account, as the sole account owner. While this may not be a huge concern with a savings account, it’s important to keep in mind with investment accounts. If you and the previous co-owner were sharing the tax bill previously, you should report the prior-earned income on your tax return accordingly. You’d also include this information on the deceased owner’s final tax return. The bank might freeze someone’s bank account after they die if none of their relatives notify the bank about the death. In some cases, the funeral home will tell the Social Security Administration about the death, terminating Social Security payments. Social Security is a monthly payment and isn’t prorated according to the time of month the recipient dies. This means that surviving relatives must return any checks that arrive in the mail to the U.S. government. The U.S. Treasury may reverse payments that have been directly deposited into the deceased person’s account. Social Security might communicate with the bank later to let them know that the person passed on and that the surviving family members must give the money back. You may hold your bank account in the name of a living trust in order to help your relatives avoid probate after you die. Once you pass on, your successor trustee can take over and pass the funds in your account to your named beneficiary without the need for probate. Let your bank know that you want to transfer your account to the trust in question. They will most likely give you some forms to fill out and sign, then adjust their records along with your account statements. If you have any questions about this process, don’t hesitate to talk with an attorney.
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