What Happens to Your Brokerage Account When You Die — And Why Many People Haven't Set It Up Right
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Investors pour money into their brokerage accounts over many decades, saving up for retirement and hoping to pass some of their fortune to their heirs. But while it’s important to focus on accumulating wealth, it’s also important to consider what happens to that brokerage account when you pass away.
Will your heirs receive the funds right away, or will there be some hiccups? Here’s how to make the process easy for your loved ones.
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What actually happens when a brokerage account owner dies
The transfer process depends on how the account is registered. An account may offer transfer-on-death (TOD) or similar documents in which you can name a beneficiary, allowing the account to go to them directly outside probate, which is the legal process of settling someone’s estate after they die. For joint accounts, the surviving owner will typically keep control of the account with survivorship benefits. If your brokerage account is in a trust, a successor trustee will take over under the trust terms.
Things can get a bit complicated if you did not identify a beneficiary for an individual account. Your account may need to go through probate. The process can take time and be costly.
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Avoid the common mistake
Not only should you assign a TOD beneficiary for your brokerage account, but you should also update those beneficiaries after a significant event like a divorce.
You may also have to verify that your TOD registration is set up correctly with your brokerage firm, since state laws and firm policies can vary. Remember that the beneficiaries you list in your brokerage account will supersede your will, so it’s important to make any changes directly to your TOD beneficiaries.
An estate planning attorney and a financial advisor can ensure you follow all of the steps properly and that your estate is set up so your heirs will quickly receive the appropriate assets.
What heirs need to know about taxes, timing and next steps
Most heirs will not have to immediately worry about taxes on a brokerage account.
“If you have a brokerage account, you’re probably familiar with the concept of cost basis (the original price you paid for an investment). But when you pass away, an investment’s cost basis changes—it, instead, assumes the investment’s value at the date of your death,” Roger Young, thought leadership director at T. Rowe Price explains on the company’s website. “This is known as a ‘step up in basis,’ and it effectively makes gains during the original owner’s lifetime tax-free for his or her heirs.”
But the rules are different for tax-deferred accounts. For example, the IRS typically requires non-spouse beneficiaries to withdraw all of the funds from the IRA within 10 years. They may also have to required minimum distributions (RMDs), depending on factors like whether the original owner had already begun taking them. Withdrawals from traditional IRAs are treated as taxable income.
To make sure all of your accounts are going to the right heirs, it’s worth reviewing beneficiary paperwork and getting in touch with your brokerage’s estate processing team. You can ask a representative what documents are required. If you have received an inheritance, you should confirm the cost basis of your assets before selling anything.