When you go to the bank, there are several different ways you can open a bank account for your savings and checking. Different banks have different rules. How you own your account then have consequential effects on the rights of beneficiaries if you were to pass away with that account.
One mechanism for holding your account is known as “pay on death” or “transfer on death,” accounts, known as PODs or TODs. They will essentially mean the same thing. You create a contract with the bank, that when you pass away, your account gets transferred to another individual. One frequent use of this type of account would be to name a spouse or or an individual child. In one sense, it is very similar to a “beneficiary designation” takes place for life insurance and retirement accounts.
My general recommendation is that these accounts should not be used in this manner. This is because it will frequently be a violation of the Islamic rules of inheritance. Holding your account as a pay on death or transfer on death account does not relinquish your responsibility of distribution consistent with the Islamic rules of inheritance.
Even if the pay on death or transfer on death account resulted in a transfer that was consistent with the Islamic rules of inheritance today, is not necessarily going to be the case that distribution is going to be correct at the time you pass away. This is because more people may be born and some people may die between the time you set up your account and the date of your death.
While in general, PODs and TODs are not subject to probate, because the assets pass to others based on a contract, a probate may occur if the individual beneficiary predeceases the account holder.
Now in some situations, people may wish to hold accounts in this manner because they are actually holding the money for another individual. Say, the money actually belongs to the son but the father is holding up on his behalf for whatever reason. This is actually an even worse case for use of such an account. If the son were to predecease the father, then the father dies, the son’s beneficiaries would not typically be beneficiaries.
The best way to hold an account, is for it to be in the name of a revocable living trust. This will offer significant flexibility to distribute consistent with the Islamic Rules of Inheritance.
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