Investors put money into their trading accounts for years, saving for retirement and hoping to pass some of their money on to their heirs. But while it’s important to focus on accumulating wealth, it’s also important to consider what happens to that merchant account when you pass away.
Will your heirs receive the money quickly, or will there be some delay? Here’s how to make the process easier for your loved ones.
What actually happens when the owner of the brokerage account dies
The transfer process depends on how the account was registered. The account may provide a transfer on death (TOD) or similar documents where you can name a beneficiary, allowing the account to go directly to them without probate, which is the legal process for settling someone’s estate after their death. In joint accounts, the surviving owner will retain control of the account with survivorship benefits. If your retail account is in a trust, the successor trustee will take over under the terms of the trust.
Things can get complicated if you haven’t identified a beneficiary on each account. Your account may require verification. The process can be time consuming and expensive.
Avoid a common mistake
Not only should you assign a TOD beneficiary to your retail account, but you should also review those beneficiaries after a significant event such as a divorce.
You may also need to ensure that your TOD registration is set up correctly with your brokerage firm, as state laws and strict policies may vary. Remember that the beneficiaries you list in your brokerage account will replace your estate, so it’s important to make any changes directly to your TOD beneficiaries.
An estate planning attorney and financial advisor can ensure that you follow all the steps correctly and that your estate is settled so that your heirs quickly receive the appropriate assets.
What heirs need to know about taxes, timing and next steps
Most heirs will not immediately have to worry about taxes on a brokerage account.
“If you have a brokerage account, you’re probably familiar with the concept of cost basis (the initial amount you paid for an investment). But when you pass away, the cost basis of the investment changes—but, instead, it takes the value of the investment on the day you die,” Roger Young, director of thought leadership at T. Rowe Price explains on the company’s website. “This is known as a ‘step-up,’ and effectively benefits the original owner’s lifetime tax-free to their heirs.”
But the rules are different for tax-deferred accounts. For example, the IRS generally requires non-spouse beneficiaries to withdraw all funds from an IRA within 10 years. Minimum distributions (RMDs) may also be required, depending on things like whether the original owner has already started taking them. Withdrawals from traditional IRAs are considered taxable income.
To make sure all your accounts go to the right heirs, it’s worth reviewing the heirs’ paperwork and contacting your estate planning team. You can ask the representative what documents are required. If you received an inheritance, you must verify the cost basis of your property before selling anything.
