Many people prepare for the inevitability of death by creating wills or trusts, spelling out instructions about medical care through advance directives, and naming beneficiaries on retirement accounts. Sometimes overlooked in estate management is the transfer of securities that are in a non-retirement brokerage account, aspects of which can be planned ahead of time.
Advance planning can go a long way toward making a transition of assets easier upon death. If you have an account with a brokerage firm, these tips can help ensure a smooth transition.
1. Keep family members informed. Have frank and open discussions with family members about your brokerage account holdings and beneficiaries. If you’re the primary decision maker of a joint account, share details of the account. All account holders should know what investments are in their brokerage account and why these investments have been selected.
2. Hold onto account statements and trade confirmations. Something as basic as putting account information in a safe and logical place can help the executor of your estate and your heirs and beneficiaries quickly locate firm contact information and notify the firm about your death.
3. Work with your brokerage firm. Brokerage firms often offer services to account holders and their beneficiaries to discuss assets, last wishes and aspects of the transfer process on death, including transfer on death (TOD) plans discussed below. It’s helpful to engage your firm about such matters—and to do so sooner rather than later.
4. Designate beneficiaries with care. Your brokerage firm may provide TOD or other beneficiary documents in order to designate a beneficiary for your brokerage account. Designating a beneficiary can be very helpful, but be aware that a TOD plan or other beneficiary document supersedes your will. Ask your firm who they have recorded as a beneficiary for each of your accounts, and make any changes necessary to conform to your will or estate plan. To avoid problems, coordinate the beneficiary(ies) for your brokerage account(s) with your overall estate plan. Upon death, your beneficiary designations will go into effect and can no longer be changed, so it’s important to make sure they’re consistent with your wishes.
Tip: Should you ever transfer an account to another firm, double-check with the firm to be sure that any beneficiary designations also transfer. The account transfer process is a good opportunity to confirm your beneficiary designation is in accordance with your wishes.
Account Ownership Structure
The type of account you own at the time of death dictates how assets are transferred and the documents required in doing so. Here are some common types of brokerage accounts:
- Individual or single account. This is an account for one person. Assets transfer to one or more heirs or designated beneficiaries according to specifications in your will or in other transfer documents.
- Joint account. There are different types of joint accounts including:
- Joint Tenants With Right of Survivorship (JTWROS). Each party has equal right to the account's assets. Each party also has the right of “survivorship”—when one co-owner dies, all the assets in the account can pass to the other co-owner(s) without going through probate.
- Tenants in the Entirety. This type of joint ownership is similar to JTWROS except that it is available only to married couples in certain states.
- Tenants in Common. Accounts designated as “tenants in common” give each account holder an individual interest in the account. You may leave your portion of the account to your beneficiary. The surviving account holder doesn’t have a legal right of survivorship to your portion of the account but does have access to their portion of the account after your death. Probate is the state court review and disposition of an estate prior to the distribution of property. During that process, the surviving account owner will generally be able to access at least their share of the assets in the account.
- Trust account. A trust allows a third party (trustee) to hold assets on behalf of one or more beneficiaries. Trusts can set specific terms in which assets pass to beneficiaries (for example, passing assets to a child when they graduate from college), and trustees are required to manage the account according to the investment specifications of the trust. Assets transfer according to the terms of the trust and generally avoid probate. It’s important to provide your brokerage firm with a copy of the trust document, which can help smooth the transfer of assets.
A trusts and estates lawyer, together with your brokerage firm, can explain the options available to you in your state, as well as the differences and pros and cons of account ownership rights of survivorship. This area is governed by state law, and state laws can differ. So if you move, or if you have more than one home in multiple states, be sure to update your legal documents accordingly.
Is a TOD Plan Right for You?
A clear designation of one or more beneficiaries greatly facilitates the transfer of brokerage assets at the time of death. With a brokerage account, this is often handled through a TOD. Most states have adopted the Uniform TOD Security Registration Act, although some have modified it.
Like the payable on death (POD) mechanism available for bank accounts, TOD can be used for individual brokerage accounts and non-retirement accounts, such as mutual funds held outside a retirement plan. Your brokerage firm can tell you which accounts are eligible.
With a TOD, you keep control of the brokerage account assets during your lifetime. After you die, ownership is passed to the named beneficiaries. You can change beneficiaries or cancel your TOD throughout the life of your account, usually by filling out the documents a firm requires to make changes or revoke the TOD. Once you die, your designated beneficiaries cannot be changed.
A TOD generally allows you to avoid probate with respect to your account holdings. Probate is the state court review and disposition of an estate prior to the distribution of property to heirs. Probate can take time and cost money. In contrast, a TOD is a straightforward way to transfer individual non-retirement brokerage holdings to someone else, often without a fee. It can be useful, particularly if an account holder’s finances and estate are fairly simple.
Caution: A TOD controls who inherits your assets when you die. It supersedes a will or trust. For example, if your will states that brokerage assets are to be divided equally between two children, but your TOD designates only one child as the beneficiary—that child alone will receive the assets and is not obligated to share them. Also, the way your account is titled typically changes once you make a TOD designation. Instead of simply “Your Name,” the account will be titled “Your Name, TOD Beneficiary Name.”
While a TOD generally allows an account to avoid probate, depending on the size of your overall estate, estate taxes may apply on the assets in your account.
Are you an heir to, or beneficiary of, someone’s brokerage account? See our Investor Insights: When a Brokerage Account Holder Dies—What Comes Next?