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Resources > Education Center > Can a Minor Be a Beneficiary on a Bank Account? A Guide to Appointing a Beneficiary

Can a Minor Be a Beneficiary on a Bank Account? A Guide to Appointing a Beneficiary

Most people don’t like thinking about their end-of-life arrangements, but doing so in a timely manner is a sign of responsible planning. Naming your child a bank account beneficiary is a crucial step toward their financial stability when you’re no longer around.

As you start planning for the future, one of the first questions you may ask is—“Can a minor be a beneficiary on a bank account?”

The short answer is “yes,” but there’s more to naming your minor child a beneficiary than you might think. This guide will discuss all the important considerations to help you prepare for such an important step. We will start with the basics before moving on to the more sophisticated details.

What Is a Bank Account Beneficiary?

A beneficiary is a person or organization the account holder appoints to receive the account ownership and funds upon their death. A beneficiary can be:

  • Family member
  • Friend
  • Any neutral person
  • Organization (e.g., charity)

A beneficiary designation is legally binding and overrides your will or other estate planning documents if you have them. If you don’t have such documents and don’t name a beneficiary, your assets will be distributed in court through a probate process, which can be a long and complicated procedure.

There are two types of beneficiaries you can name:

  1. Primary
  2. Secondary/contingent

Primary beneficiaries are first in line to receive the funds in your account.

Contingent beneficiaries receive your assets if:

  • The primary beneficiary has died
  • The primary beneficiary disclaims the inheritance
  • You’ve directed the primary beneficiary to provide for the secondary beneficiary

You can name your child a primary or secondary beneficiary depending on your situation and wishes.

How Old Must a Child Be To Be a Beneficiary of a Bank Account?

There are no minimum age requirements for beneficiaries, so you can legally name a minor for the role. They’ll receive ownership of the account upon your death but won’t have direct access to the funds before reaching legal age.

An adult must manage your child’s account until they come of age, so you’ll need to appoint a custodian or trustee who’ll act on their behalf. You don’t need to set up a formal trust to transfer your assets to a minor, but you must have someone who’ll manage the assets on behalf of the minor until they become an adult.

You still can set up a trust, and many parents decide to do it for a simple reason—to prevent reckless spending. Instead of giving your child full control of your bank account, you can decide on a specific amount of money your child will receive through the fund over time and the requirements that must be satisfied to receive the funds. 

How To Name a Child as a Beneficiary of a Bank Account

Banks have a special and easy way to name a child as a beneficiary for a bank account by adding a POD (payable-on-death) addendum to your account. Naming your child a beneficiary for your bank accounts is as simple as filling out a POD form, and you can have different beneficiaries for each of your accounts. Contact your bank, and they’ll provide you with all the necessary information and steps. 

Note that a POD account only handles bank funds. If you have other assets like stocks or bonds, you’ll need to add a TOD (transfer-on-death) addendum to your brokerage account.

Even though the process is straightforward, adding a child as a beneficiary is an important decision that requires careful planning. The main considerations you must make beforehand include:

  1. Deciding whether you want a single beneficiary or multiple beneficiaries
  2. Considering tax implications
  3. Making a custodian choice 

What Happens When You Add Multiple Beneficiaries to Your Bank Account?

If you have more than one child, you can add them all as beneficiaries. By default, your funds will be allocated among your children equally, but you can define a custom percentage for each child if you believe their financial needs will vary.

You can also name one child the primary beneficiary and make others contingent. This option is suitable if one of your children is significantly older than the others, in which case you can direct them to provide for their siblings. Any instructions you make are legally binding, so the primary beneficiary must follow them.

Note that the initial arrangement you make isn’t set in stone. If you change your mind about the account beneficiary or any details, you can amend the terms at any time.

Do Beneficiaries Pay Taxes on the Inherited Funds?

While your estate, including any bank accounts you leave to your children, is taxable, the estate tax exemption for 2023 is almost $13 million, so only the largest estates and accounts are subject to estate tax.

The IRS typically doesn’t consider an inheritance taxable because the recipient hasn’t obtained it through an income-producing activity. Inherited bank accounts are typically exempt from income tax for the beneficiary, so your children won’t have to pay tax on the funds they receive.

The IRS offers an interactive tax assistant that can help you determine whether the funds your child will receive are taxable. Follow the steps of the questionnaire and provide the necessary details, and you’ll find tax implications for your specific planning scenario.

Choose the Custodian and Outline Their Responsibilities

A custodian will serve an important role when your child inherits the account, so make sure to choose someone trustworthy. Even though they’ll be legally obligated to follow your instructions, find someone who has your child’s best interest in mind, even without the legal framework.

You can specify how the custodian should manage your child’s money and how much to allocate to different aspects of your child’s life, for example splitting the funds between education, healthcare, living arrangements, and other needs.

If you don’t feel confident enough to make these decisions independently, consult a financial advisor or estate planner. They can help you define how the custodian should manage the funds so that you leave nothing to chance.

Source: Karolina Grabowska

Want To Safeguard Your Child’s Financial Future? Help Them Build a Credit Profile

Adding a child as a beneficiary of your bank account is an excellent step toward your children’s financial security after you’re gone, but it’s not the only one you should take. Helping your children establish a strong credit profile can save them money (and avoid headaches) throughout life.

Building credit for minors and young adults can be challenging because credit bureaus don’t accept independent credit tradeline reporting for minors. The CARD Act of 2009 has also made it exceptionally hard for anyone under 21 to own credit cards, so parents started adding children to theirs as authorized users to help them build a credit history.

While this may seem like a decent solution, it’s not particularly effective. Adding a child as an authorized user of your card means your credit scores are connected, so poor spending habits on anyone’s end can damage both scores. Additionally, your child is piggybacking on your credit, not building their own, so when you eventually remove your child as an authorized user, all of your credit history will be deleted from their credit profile.

If you want to give your child a financial head start and help them enjoy a more stable future, look into FreeKick.

FreeKick— Parent-Sponsored Credit Building for Minors and Young Adults

FreeKick—created by Austin Capital Bank—combines a Federal Deposit Insurance Corporation-insured (FDIC-insured) deposit account with additional services to build and protect your child’s credit profile.

FreeKick knows the last thing any parent wants is another monthly subscription, so FreeKick offers a FREE account with a one-time deposit of $2,500 or two other options with lower required deposit amounts and a small annual fee:

FDIC-Insured DepositPlan Fee

The process is simple and focused on ensuring you don’t need to actively participate in building your child’s credit. All you have to do is:

  1. Make a Deposit—Sign up at FreeKick.bank and choose your plan
  2. Set It and Forget It—Once you open the account, FreeKick will help your child build 12 months of credit history without further action needed on your part
  3. Keep Growing—After 12 months, you can renew it for another 12 months to keep building your child’s credit and financial future, or cancel it and have 100% of your deposit back

With FreeKick, your children aged 14 to 25 years can build credit regardless of them being minors. The service will build their payment and credit history, which will be reported to the three nationwide consumer credit bureaus once they become a legal adult. If your child is already of legal age (18 in most states), reporting will start after their account is opened.

You can cancel the account at any point without penalties. Note that credit bureaus don’t accept reporting for minors, so if you close the account before your child becomes an adult, no credit can ever be reported for the account.

To secure your child’s financial future, sign up for FreeKick.

Featured image source: George Pak