Most of us choose people younger than ourselves to inherit our money and property, fully expecting them to outlive us. But sometimes this natural course of events is disrupted. If someone you have named as a POD beneficiary for a bank account or CD dies before you do, you should change the necessary paperwork at the bank to put a new beneficiary in place.
What Happens If a Beneficiary Dies
If you named more than one payee, and one or more of them dies before you do, the funds in the account will go to the survivor(s) at your death. (See "Choosing POD Beneficiaries for a Bank Account.")
If, however, none of the POD payees you named is alive at your death, the bank will release the funds in the account to your executor, who will be responsible for seeing that the money is distributed under the terms of your will or (if you have no will) state law. The money will probably have to go through probate, unless your estate is small enough to qualify for special, simpler procedures in your state.
If you want to name alternate beneficiaries, don't rely on a POD account. Banks generally don't allow you to name an alternate POD payee—that is, someone who would inherit the money if none of your primary beneficiaries outlived you. Your will, if you make one (and you should, for reasons like this) functions as a backup in this case, as explained below. But that doesn't avoid probate. If you want to both name a back-up beneficiary and be sure of avoiding probate, you'll probably want to use a living trust.
If the money goes to your executor, it will be distributed under the terms of your will, even though you most likely didn't even mention this account in your will. That's because most wills contain what is called a "residuary clause," which names a beneficiary to inherit everything that's not specifically mentioned in the will. The person you named to inherit this residuary property would receive this money.
EXAMPLE: Mark names his brother as the POD beneficiary of his savings account. But his brother dies, and Mark doesn't get around to changing the paperwork at the bank to name a new payee. Mark does, however, have a will that contains a residuary clause, naming his daughter Madeline as residuary beneficiary. When Mark dies, and the will is probated, the money in the account goes to her, along with everything else that Mark didn't specifically leave to another beneficiary.
How to Name a Different Beneficiary
To name a new POD beneficiary for a bank account, you must submit whatever forms your financial institution requires. The POD arrangement is an agreement between you and the bank--it's not something you can create in your will, for example. So get the right paperwork, fill it out and sign it, and get it back to the bank! If you don't, the person you want to inherit the money won't have any claim to it after your death. (For more on this, see "If You Change Your Mind About a POD Beneficiary.")