Understanding Brokerage Account TOD and Its Benefits

A brokerage account's TOD (Transfer on Death) designation allows you to leave your investments to beneficiaries without going through probate, which can be a lengthy and costly process.

This designation is particularly useful for those who want to avoid probate and ensure their assets are distributed quickly and efficiently.

The TOD designation can be made on most types of brokerage accounts, including individual and joint accounts, and can be changed at any time.

To set up a TOD account, you'll first need to check if your state allows them. Currently, TOD accounts are available in 28 states, including Alaska, Arizona, and California. You can also ask your financial institution if they offer TOD accounts and provide you with a beneficiary designation form.

If you're eligible, you'll need to fill out the form with the names of each beneficiary and the percentage of the account you'd like them to receive. Some financial institutions may require the signing of this form to be notarized.

Here's a list of states that currently allow TOD accounts:

An account is a way to store and manage assets, such as investments and cash.

A Transfer on Death (TOD) account is a type of account that allows the owner to designate beneficiaries who will receive the account assets after the owner's death.

TOD accounts are typically used for assets held in brokerage accounts, including stocks, bonds, mutual funds, and other investment assets.

Banks also offer a similar arrangement, referred to as a Payable on Death (POD) designation, that can be used for cash or certificates of deposit.

Certain types of real estate may also allow for TOD designations to easily transfer title to real estate assets at death.

It's essential to understand that a TOD designation supersedes a will, so it's crucial to ensure the TOD designations are in line with your current wishes.

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To set up a TOD account, you'll first need to check if your state allows it. Currently, TOD accounts are allowed in 28 states, including Alaska, Arizona, and California.

You can find out if your state allows TOD accounts by checking the list of states that currently allow them. If your state is on the list, you can proceed with setting up a TOD account.

To set up a TOD account, you'll need to fill out a beneficiary designation form provided by your financial institution. This form will ask for the names of each beneficiary and the percentage of the account you'd like them to receive.

You may also need to have the signing of this form notarized, depending on your financial institution's requirements. Separate TOD forms are needed for each account.

Here is a list of states that currently allow TOD accounts:

If you're an heir or beneficiary to a brokerage account, it's essential to understand the process of taking ownership of the account assets. Notify the firm in a timely manner of an account holder's death, and keep an eye out for account statements or other indications that an account exists.

As the new account owner, you'll need to understand what you own and assess the risks of each investment. This includes learning about any restrictions on when you can sell the investment (liquidity risk) and any fees or other costs associated with the investment.

You should also investigate the pros and cons of selling investments, as there may be costs and tax consequences from the sale. Selling decisions should align with your overall investment objectives.

It's also crucial to consider whether the current firm and broker are right for you. You're not required to stay with the deceased person's firm or the broker who handled the account. However, don't feel compelled to transfer your account to another firm without doing your due diligence.

Here are some states that currently allow Transfer on Death (TOD) accounts:

As a TOD account owner, you retain full control over the assets while you're alive. You can withdraw money from your TOD account at any time, and you can also change the beneficiaries at any time by signing a new TOD beneficiary form.

Assets in a TOD account are transferred to the beneficiary after the account owner's death, typically without going through probate. The process is relatively straightforward and usually involves the financial institution temporarily freezing the account until the assets are retitled in the beneficiary's name.

The financial institution will need a copy of the death certificate and possibly an affidavit of domicile to complete the transfer. This document confirms the residency of the deceased individual at the time of passing.

If there is only one beneficiary, the assets may be kept in the same account, with the name simply changed to the beneficiary's name. However, if there are multiple beneficiaries, new accounts are usually opened, and the assets are divided based on the designated percentage and transferred into the new accounts.

A new account is set up for the beneficiary, and the deceased person's securities and funds are transferred.

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TOD accounts are included in one's estate upon death, making them subject to estate taxes, depending on the total size of the deceased owner's estate and the estate tax exemption amount at their time of death.

The federal estate tax exemption, as of 2024, is $13.61 million per individual and $27.22 million per couple.

Assets held in a TOD account usually get a step-up in basis, meaning the cost basis of those assets "steps-up" to equal the fair market value on the day of death of the deceased account owner.

To reduce the chance of having documents rejected, follow your firm's instructions closely, as firms may reject documents due to incorrect signing capacity, completion, or outdated information.

Here are some required documents that brokerage firms may request:

Tax implications of accounts can be complex, but understanding the basics can help you make informed decisions. A transfer on death designation, for instance, can help avoid the probate process, but the assets are still subject to applicable estate taxes.

Estate taxes can be a concern, especially if you have a sizable estate. The federal estate tax exemption is currently set at $13.61 million per individual and $27.22 million per couple, as of 2024. This means that if your estate exceeds these amounts, you may be subject to estate taxes.

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Assets held in a TOD account can get a step-up in basis, which means the cost basis of those assets "steps-up" to equal the fair market value on the day of death of the deceased account owner. This can be beneficial for minimizing taxes for beneficiaries.

It's also worth noting that state estate taxes can apply, depending on the state of residence at death. This is another factor to consider when planning your estate.

In general, it's a good idea to consider estate tax planning strategies that take advantage of annual gifting or certain types of trusts to reduce or eliminate estate taxes.

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Documentation is a crucial part of the process after someone passes away. The brokerage firm will request a variety of documents, which may include a death certificate, court letter of appointment naming the executor, stock power, state tax inheritance waiver, affidavit of domicile, and trustee certification or letter of authorization.

A death certificate is typically required, and it's essential to ensure it's current and has a visible or original court seal. The firm may also request a stock power, which is a special type of power of attorney that allows for the transfer of ownership of stock.

The type of account the deceased had at the time of their death will determine the specific documents required. For example, different documents are needed for single versus joint accounts, and for trusts versus non-trusts.

Here are some examples of documents that may be required:

It's essential to follow the firm's instructions closely to avoid having documents rejected. This can happen if the documents are not signed in the correct capacity, or if information has been altered or the documents are outdated.

A TOD account can be a great way to avoid probate and ensure a smooth transfer of assets to your loved ones. This is because TOD assets don't have to go through lengthy probate proceedings, keeping the transfer process private.

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TOD accounts are also relatively easy to set up, requiring only a simple beneficiary designation form that's usually provided by the financial institution. And, in most cases, all that's needed to transfer the assets is a copy of the death certificate.

The process of retitling the assets to the TOD beneficiary is straightforward, and some financial institutions may also require an affidavit of domicile to confirm the residency of the deceased individual.

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Having a TOD account offers several advantages, with the main benefits being that it avoids probate, is easy and cost-effective to set up, and generally transfers assets to beneficiaries very quickly.

One of the greatest benefits is that the assets do not have to go through lengthy probate proceedings, keeping the transfer private.

TOD accounts are simple to establish with a beneficiary designation form that's usually provided by the financial institution, which typically needs to be notarized when signed.

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The process of retitling the assets to the TOD beneficiary after the account owner's death is relatively straightforward, requiring only a copy of the death certificate and sometimes an affidavit of domicile.

With these documents in hand, the financial institution can quickly change the name on the account to the designated beneficiary or set up new accounts if there are multiple beneficiaries.

A TOD account can be a great addition to a solid estate plan, but it's essential to consider it in light of your overall estate planning and financial goals.

TOD accounts avoid probate, which means the assets don't have to go through lengthy probate proceedings. This can be a significant benefit, especially for those who want to maintain privacy.

The federal estate tax exemption, as of 2024, is $13.61 million per individual and $27.22 million per couple. This means that clients with sizable estates may need to consider estate tax planning strategies to reduce or eliminate estate taxes.

Assets held in a TOD account usually get a step-up in basis, which can help clients minimize capital gains taxes for their beneficiaries.

TOD accounts are simple to establish with a beneficiary designation form that's usually provided by the financial institution.

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