What is a Beneficiary Account? Here’s everything you need to know

One might think of IRAs, trust funds, mutual funds and other assets, or even life insurance plans when you hear the term "beneficiary account." While you may have heard of the term, you might be unclear on what it exactly is. We’ll deep-dive into what it means to have a beneficiary account in this article.

What is a beneficiary account?

In simple words, a beneficiary bank account is a type of savings account in which the funds are transferred to somebody else after the account owner passes away. Beneficiaries are not only named for life insurance, retirement funds, or huge investments, but also for bank accounts. Your beneficiary would be a person/s who you would wish to get your money after your passing.

Establishing a beneficiary bank account will keep the funds in your bank account out of litigation when you pass away. If you do not have a beneficiary bank account, your funds may get caught up in probate, which is a legal process that settles whether a will or trust is valid, or who receives your estate if you don't leave a will. If you have a beneficiary account, the funds in that account will be transferred to the beneficiary automatically. This may assist your loved ones in covering funeral expenditures as well as ongoing needs such as rent, loans, and utility costs.

Beneficiaries do not have access to your account while you are alive. They won't be able to take money from your account until you provide them with your debit card and PIN. If your beneficiary faces charges, owes taxes, or falls into serious debt, their creditors cannot access the funds in your account.

What is a beneficiary name?

The beneficiary’s name, or the payee’s name, is crucial in banking. Banks need to confirm the beneficiary’s identity before transferring any funds to their account. When you send money online, you must enter the exact name of the person as it appears in their account. The bank’s system checks this name to ensure it matches the account owner, preventing mistakes. If there’s an error in the name or details, the transaction could get rejected or get transferred to a wrong account.

Beneficiary in banking

There are different types of beneficiaries in banking, including:

1. Individual beneficiary: This is the most common type, where an authorised person receives money or assets. For instance, family members who conduct informal transactions fall under this category.
2. Trusts as beneficiaries: Public and private trusts can also be named as beneficiaries, especially in cases like charitable donations.
3. Joint account beneficiary: In a joint account, one account holder can name the other as a beneficiary. This arrangement ensures that in case of a premature loss of one holder, the other receives the funds directly.

Benefits of adding a beneficiary

1. Accuracy in transactions: Having a clearly defined beneficiary ensures accuracy in transactions. Providing details like the beneficiary’s full name, account number, and other bank information helps minimise the chance of funds going to the wrong account.
2. Improved security: Adding a beneficiary also enhances security, as only authorised individuals can access or change beneficiary details, reducing the risk of fraud.
3. Easier fund transfers: Defining beneficiaries makes it simpler to complete fund transfers, whether they are one-time or recurring payments.
4. Flexibility to update: Beneficiary details can be updated as needed, giving account holders the flexibility to adjust information when required.
5. Less confusion: With clear beneficiary information, there is less risk of confusion or mistakes in fund transfers, making transactions more transparent.

How can I open a beneficiary account?

Customers can easily open a beneficiary account or add a beneficiary designation to a pre-existing account at most financial institutions. To open bank account online, all you need to do is go to the website of a bank and follow the steps on your screen. You could also open an account by visiting your bank branch and asking your teller to open an account for you. 

However, unlike other sorts of accounts, such as IRAs, you must ask for a beneficiary on a bank account. You are not forced to have a named beneficiary on a bank account. As a regular feature on checking, savings account, and money market accounts, most financial institutions now provide beneficiary accounts that are "payable on death," or POD accounts.

Documents required to open a beneficiary account

Opening a beneficiary account or adding a specified beneficiary to an existing one are simple processes. Request the forms from your bank to designate a beneficiary for your account. Your bank should be able to offer you papers, which are known as a Totten Trust. On the same piece of paper, you can specify a primary and contingent beneficiary. The beneficiaries do not need to be present and nor do they need to sign any paperwork.

Do I need a living trust if I have a beneficiary account?

You may wish to set up a flexible living trust if you have various accounts, investments, and valuables. A living trust entrusts all of your assets to you and gives you ultimate authority over them during your lifetime. Following your death, your "successor trustee" would operate on your behalf, transferring assets to your beneficiaries. During your lifetime, you can replace your successor trustee – or "revoke" their trusteeship.

Conclusion

Establishing a beneficiary account provides security and clarity over your finances, ensuring that your savings reach the right people with ease and without legal complications. Adding a beneficiary to your account or setting up a specific beneficiary account is generally a simple process that can be done online or at your bank branch.

At IDFC FIRST Bank, we make this process straightforward and offer competitive savings bank account interest rates, so you can feel secure about your financial legacy. Visit our account section to explore the benefits of opening a savings account today.