Bypass probate for brokerage accounts

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Kimberly Lankford

Q: I need to designate a beneficiary for my brokerage account. Is a transfer-on-death account a better option than adding a joint owner to my account or including the account in my will?

A: Life insurance, IRAs, 401(k) plans and other retirement accounts pass directly to the beneficiaries you designate outside of your will.

Brokerage accounts, on the other hand, generally pass to your beneficiaries through your will and must go through probate first, which can be time-consuming, public and expensive in some states.

A transfer on death (TOD) registration is a way to designate beneficiaries for your brokerage account so the money will pass directly to them and avoid probate.

If you add a joint owner, that person will inherit the account outside of probate but can also change the investments and access the money while you’re alive. Joint accounts are also subject to the claims of both owners’ creditors.

With a TOD, you maintain total control over the account and can change the beneficiary designation at any time.

TODs trump wills

A TOD makes it very clear who inherits the account, rather than the account becoming one of many assets passed through your will. “It can avoid disputes,” said Gerri Walsh, senior vice president of investor education for Finra (Financial Industry Regulatory Authority), an independent regulator for securities firms. “If you have the account set up with a designated beneficiary, that trumps whatever is in the will.”

However, if you want to split your estate among several beneficiaries, you may want to transfer the account through your will instead.

Say you have three children and want to leave them equal shares of your estate. You could make one the TOD beneficiary of your brokerage account and leave comparable amounts of money to the other children. But if the brokerage account increases or decreases in value before you die, that child could end up inheriting a very different amount than the siblings.

With a will, on the other hand, you can split up the total assets equally.

When to use trusts

If you have more complicated wishes — such as if you want your heirs to use the money for a particular purpose or not to receive the funds until a certain time — you may want to set up a trust instead, said Eleanor Blayney, a certified financial planner and consumer advocate for the CFP Board.

Contact your brokerage firm if you’d like to set up a TOD designation for your account. Most states have similar TOD rules (Louisiana and Texas do not offer this option). If you move to another state, ask your brokerage firm if you need to make any changes.

For more information about TOD designations and other ways to transfer your brokerage account to your beneficiaries, see Finra’s investor alert Plan for “Transition: What You Should Know About the Transfer of Brokerage Account Assets on Death” at http://bit.ly/brokerage_transfer.

For more information about estate
planning options, see “8 Smart Estate Planning Steps to Die the Right Way” at http://bit.ly/estate_planning_steps.

All contents © 2015 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.