Advertisement
investing

How Your Brokerage Account Can Bypass Probate

A transfer on death account passes directly to beneficiaries you designate but lets you keep control over the account now.

I need to designate a beneficiary for my brokerage account. Is a transfer on death account a better option than adding a joint owner to my account or including the account in my will?

Life insurance, IRAs, 401(k) plans and other retirement accounts pass directly to the beneficiaries you designate outside of your will. Brokerage accounts, on the other hand, generally pass to your beneficiaries through your will and must go through probate first, which can be time-consuming, public and expensive in some states. A transfer on death (TOD) registration is a way to designate beneficiaries for your brokerage account so the money will pass directly to them and avoid probate.

Advertisement - Article continues below

If you add a joint owner, that person will inherit the account outside of probate but can also change the investments and access the money while you’re alive. Joint accounts are also subject to the claims of both owners’ creditors. With a TOD, you maintain total control over the account and can change the beneficiary designation at any time.

A TOD makes it very clear who inherits the account, rather than the account becoming one of many assets passed through your will. “It can avoid disputes,” says Gerri Walsh, senior vice president of investor education for Finra, an independent regulator for securities firms. “If you have the account set up with a designated beneficiary, that trumps whatever is in the will.”

Advertisement
Advertisement - Article continues below

If you want to split your estate among several beneficiaries, you may want to transfer the account through your will instead. Say you have three children and want to leave them equal shares of your estate. You could make one the TOD beneficiary of your brokerage account and leave comparable amounts of money to the other children. But if the brokerage account increases or decreases in value before you die, that child could end up inheriting a very different amount than the siblings.

Advertisement - Article continues below

With a will, on the other hand, you can split up the total assets equally. If you have more complicated wishes – such as if you want your heirs to use the money for a particular purpose or not to receive the funds until a certain time – you may want to set up a trust instead, says Eleanor Blayney, a certified financial planner and consumer advocate for the CFP Board. For more information, see Putting Your Trust in Trusts.

Contact your brokerage firm if you’d like to set up a TOD designation for your account. Most states have similar TOD rules (Louisiana and Texas do not offer this option). If you move to another state, ask your brokerage firm if you need to make any changes. For more information about TOD designations and other ways to transfer your brokerage account to your beneficiaries, see Finra’s investor alert Plan for Transition: What You Should Know About the Transfer of Brokerage Account Assets on Death. For more information about estate planning options, see 8 Smart Estate Planning Steps to Die the Right Way.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for paying estimated taxes, IRA or HSA contributions, and other deadlines, there's more to do by July 15 than just filing your feder…
July 14, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
91 Top Dividend Stocks From Around the World
stocks

91 Top Dividend Stocks From Around the World

These 91 Dividend Aristocrats, from the U.S., Canada and Europe, are among the world's top dividend stocks for payout longevity and safety.
July 13, 2020

Recommended

If You're Using Cash Less Often, You're Part of a Trend
Technology

If You're Using Cash Less Often, You're Part of a Trend

The pandemic is speeding up the use of digital payments.
July 2, 2020
Exit Strategies for Charitable Remainder Trusts
estate planning

Exit Strategies for Charitable Remainder Trusts

CRTs offer tax and income-planning flexibility as life changes over the years.
July 1, 2020
For Financially Responsible Kids, Do NOT Do These 3 Things
family savings

For Financially Responsible Kids, Do NOT Do These 3 Things

The key to putting your kids on the right financial path can be boiled down into one sentence.
July 1, 2020
10 Tax Breaks for the Middle Class
tax deductions

10 Tax Breaks for the Middle Class

Tax breaks aren't just for the rich. There are plenty of them that are only available to middle- and low-income Americans.
June 30, 2020