Several years ago we had a situation where a client died unexpectedly and an investment within their account was falling rapidly (remember the Enron collapse?). As advisors, we desperately wanted to sell the investment and did so for all of our other clients. However, our hands were tied with this account as it needed to go through the estate settlement process before we had legal authority to make trades in it. This is just one example of how an account’s titling and beneficiaries can become very important when an owner passes away.
An account’s ownership and titling is established when it is opened. Individual accounts generally don’t have beneficiaries (with an exception we’ll discuss below). Joint accounts have various legal structures that come into play when an owner needs to be removed. Retirement accounts and annuities have primary and contingent beneficiaries assigned when the account is opened. Similar to a will, beneficiaries can be changed with the proper documentation.
When an owner dies, how the account was titled determines how the ownership is transferred. Most joint accounts held by married couples are set up as “joint tenants with rights of survivorship” or JTWROS. This means that the surviving joint owner takes full ownership if the other should die. No court involvement is needed to transfer ownership. The same is true of annuities and most retirement plans such as IRAs and 401(k) plans. Ownership is transferred (or divided) based upon the primary beneficiaries (or secondary beneficiaries if a primary predeceases the owner).
In the case of an individual being the sole owner of an account, the ownership generally cannot be transferred without going through a court probate process that relies on a person’s will (or state law) to determine ownership. Often, this process can be quite time consuming. One possible way to speed up the process is to add a “Transfer on Death” or TOD to the account. The TOD allows the ownership to be transferred (or divided) to beneficiaries, similar to a retirement account.
Titling accounts and naming beneficiaries can have major estate planning and tax implications for your heirs. This is especially important if you are using trusts as part of your estate plan. Therefore, it’s a good idea to consult your estate planning attorney and tax professional before making changes that might have unintended consequences to your overall estate plan.
To learn more about David Hunter view his Paladin Registry profile on the Watchdog website.