Designating a beneficiary is not a mandatory step of setting up a bank account for everyone. Still, when required, designating a beneficiary is a critical step to ensure the account’s funds are directly transferred to the account holder’s intended recipient upon the account holder’s death. Understanding when a beneficiary designation is required helps avoid delays or wrongful distributions of funds upon the account holder’s death.
What is a Bank Account Beneficiary?
By definition, a “beneficiary” is the individual designated to be paid by the bank upon the account holder’s death. (Com. Code § 11103.)
Notably, not every bank account requires a beneficiary designation. Traditional individual or joint bank accounts do not have a right of survivorship, and thus, do not require a beneficiary designation. (Higgins v. Higgins (2017) 11 Cal.App.5th 648, 694-695.)
In comparison, bank accounts with a right of survivorship require a beneficiary designation. When a beneficiary is required, the account holder must designate the beneficiary by following the institution’s specific procedures; procedures which may vary depending on the type of account created. Generally, designation requires the account holder to complete the required forms, naming at least one person as the account’s beneficiary.
Ultimately, designating a beneficiary allows account holders to ensure the remaining funds are transferred directly to the beneficiary upon their death, avoiding the need for a lengthy distribution process through probate court.
Payable on Death Accounts
The California Probate Code governs multiple-party bank accounts, such as joint accounts and Totten Trust accounts. (Prob. Code §§ 5100, 5132.) A bank account beneficiary’s rights may vary depending on the type of bank account holding the funds. As such, the Probate Code outlines specific rules for determining the rights of beneficiaries according to the type of bank account created. (Id.)
A payable on death (“P.O.D”) account is a bank account which allows account holders to designate one or multiple beneficiaries to receive the remaining funds in the account upon the account holder’s death. (Prob. Code § 5302(b).) P.O.D. accounts are commonly known as “Totten Trust Accounts.” Despite its name, a Totten Trust is not actually a trust at all. (Prob. Code § 80.) Instead, a Totten Trust is “tentative trust,” formed when the account holder creates an account “in trust” for another person, but retains the power to withdraw funds themselves, during their lifetime. (Id.; Estate of Collins (1978) 198 Cal.App.3d 928, 932.)
Because the account holder retains the power to withdraw funds for themselves during their lifetime, a Totten Trust Account may be revoked. Additionally, P.O.D. accounts cannot be altered by will. Instead, the account’s beneficiary designation, right of survivorship, and the account holder’s ability to alter the account’s set up, are governed by the express terms of the account. (Prob. Code § 5303.) For example, the account holder may have to close the account entirely and open a new account under different terms to change beneficiaries. (Araiza v. Younkin (2010) 188 Cal.App.4th 1120, 1125.) Other institutions may require all parties to sign a modification agreement acknowledging the account’s withdrawal rights. (Id.) Ultimately, the account holder’s ability to modify the account and change beneficiaries vary between institutions and agreements.
Notably, a beneficiary has no rights to the account’s funds during the account holder’s lifetime, unless contrary intent is proven by clear and convincing evidence. (Prob. Code § 5301, subd. (e).) Thus, the beneficiary is not guaranteed to receive funds upon the account holder’s death. If, however, the account holder does not revoke the account before their death, the balance left in the account is payable to the beneficiary upon proving the beneficiary’s identity. (Higgins v. Higgins (2017) 11 Cal.App.5th 648, 650 citing Estate of Fisher (1978) 84 Cal.App.3d 418, 424.)
Moreover, although P.O.D accounts may have multiple beneficiaries, P.O.D. accounts do not have a right of survivorship amongst beneficiaries. (Prob. Code § 5302.) Bank account beneficiaries must be alive at the time of the account holder’s death to claim their share of the remaining funds. Thus, if multiple beneficiaries are alive at the time of the account holder’s death, each receives an equal share of the remaining funds, unless the account holder expressly designated unequal distributions. (Id.)
What happens to Unclaimed Funds?
Without a beneficiary, the accounts funds become part of the account holder’s estate and must be distributed through the probate process. (see Placencia v. Strazicich (2019) 42 Cal.App.5th 730.)
If the funds remaining in the deceased’s account go unclaimed for an extended period of time, the funds escheat to the state. When funds or property “escheat,” the decedent’s ownership interest transfers to the state. (CCP § 1300.)
In California, when a decedent’s funds held in trust by the county treasurer go unclaimed for at least 15 years, the funds are classified as permanently escheated to the State of California. (CCP § 1444.5). Once funds have permanently escheated, the state deposits the funds into the School Land Fund, where funds are allocated to public schools across California. (Id.)
What is an Example?
“Shawn” and “Julie” are lifelong friends. Five years ago, Shawn and Julie agreed to purchase a rental property as co-owners with Nancy. As part of the agreement, Shawn and Julie agreed to split all profits and expenses equally. Nancy was responsible for the property’s financial accounts. Unfortunately, Nancy passed away. After Nancy’s death. Julie recently discovered that both Shawn and Julie are the bank account’s beneficiaries.
The account holds the rental property’s rent payments and emergency repair and expenses funds. Shawn claims all account funds belong to him because he is responsible for the property’s day to day management. Julie argues that she is entitled to a portion of the funds because she is a co-owner and named beneficiary.
Unable to agree, Julie files a lawsuit to partition the property and resolve her dispute with Shawn over the funds. To prevail, Shawn must prove that Nancy intended him to take all the account’s funds by clear and convincing evidence.
Conclusion
Disputes over bank accounts can easily evolve into larger disputes over property, real or personal. In some cases, disputes between beneficiaries may require additional legal remedies depending on the circumstances of each dispute. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.
