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Important Considerations for Brokerage Accounts and Estate Planning

When creating your estate plan you should understand how brokerage accounts transfer to your beneficiaries to avoid going through probate.

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What Is a Brokerage Account?

A brokerage account is an investment account you can set up to buy and sell stocks, bonds, mutual funds, real estate investment trusts (REITs), exchange-traded funds (ETFs), and other securities and investment products. There are a variety of brokerage accounts, including standard accounts, retirement plan accounts, and managed accounts. Their purposes vary from retirement savings, college savings, and savings for big purchases. You can access your accounts and funds at any time.

The Financial Industry Regulatory Authority (FINRA) regulates brokers and broker dealers. The Securities Investor Protection Corporation (SIPC) ensures brokerage accounts, so if the brokerage fails or goes bankrupt, the SIPC will replace or refund up to $500,000 per account holder. See our Responsibilities of Investors and Brokers site for more information about these responsibilities.

You can set up your investment account as an individual, joint, or trust account. The type of account you choose is an important consideration in estate planning, as it will affect how the account transfers to your beneficiaries upon your death.

Individual Brokerage Account

An individual brokerage account is in your name only. Upon your death, this account passes according to the terms of your will. If you do not have a will, it passes by your state’s intestacy laws. Either way, it would likely include a probate action in probate court, which is time-consuming and costly for your loved ones and family members.

Another option is to create a transfer-on-death designation (TOD) to the individual account, with a beneficiary designation who will receive the account assets upon your death. A transfer-on-death account is a relatively uncomplicated way to make sure that this account transfers to your named beneficiaries without going through probate. Note that a TOD designation controls over a will designation, and the asset passes outside of the will. The only exception is if the beneficiary does not survive the decedent account holder and there are no backup designated beneficiaries. In that case, the asset goes into the probate estate. And within the probate proceeding, the asset passes following the terms of the will. If there is no will, then the probate court will rely on the state’s intestacy laws to determine beneficiaries.

The transfer-on-death account for your brokerage is similar to a pay-on-death bank account. However, you may not be able to designate a backup beneficiary on a bank account. Check with your bank if you can name backup beneficiaries. With a transfer-on-death designation for securities, you can name multiple beneficiaries on your transfer-on-death brokerage account, and upon your death, the surviving beneficiaries receive the asset. You can also have an alternate beneficiary designated to receive the asset if the primary beneficiary does not survive you.

Joint Brokerage Account

A brokerage account can be held jointly, as in joint tenancy with right of survivorship, tenants in common, or tenants in the entirety. These accounts are subject to changes by joint owners and may not be an effective way to hold an account if you want complete control while you are alive. Each of these types of accounts provide for the transfer of ownership upon your death:

  • Joint tenancy with right of survivorship provides that all joint tenants own equal share. When one joint tenant dies, their ownership share of the joint tenancy automatically passes to the surviving joint tenant.
  • Tenants in common provide that the account holders can hold different percentages or shares of the account, and each account holder can use a transfer on death designation to provide who gets that person’s share upon death.
  • Tenants in the Entirety accounts are used in some states for married couples where the surviving spouse receives the asset upon the death of the first spouse.

Brokerage Account in a Trust

A living trust is a legal document you create to hold your assets. You manage the trust during your lifetime, add and remove assets, amend the trust, or revoke the trust any time before your death. Your trust can own your brokerage account, and when you die, the securities will go to the beneficiaries nominated in your trust.

Taxes and a Brokerage Account

Brokerage accounts are generally taxable, depending on the type of account. This disadvantage is offset by the flexibility and fewer restrictions than retirement accounts such as IRAs and 401(k)s. Concerns about any estate taxes relating to the brokerage account, income tax, or any other taxes should be addressed with a tax advisor. We have helpful information at our Tax Implications for Joint Tenancy Brokerage Account site concerning taxes and joint tenancy.

Claiming Brokerage Accounts

If you are a beneficiary of a brokerage account through a transfer-on-death designation, and the account owner has died, you can easily start transferring ownership. The brokerage firm will provide you with their specific requirements to transfer. Their requirements usually include a death certificate and proof of identity and survivorship. Direct any financial planning questions or tax planning concerning withdrawals to your tax or financial advisor.

Start Your Estate Plan

If you are ready to create your own estate plan, our state-specific Estate Planning Documents are here to help you create a Last Will and TestamentHealth Care Directive and Living Will, and Financial Power of Attorney.

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Written by:

FindLaw Staff

Contributing Author

Reviewed by:

Catherine Hodder, Esq.

Senior Legal Writer