Houston Estate Planning and Elder Law Attorney Blog
Certain assets, including life insurance, IRAs, 401(k) plans and other retirement accounts pass directly to beneficiaries outside of your will. Typically, brokerage accounts pass only through your will, and then only after probate. But there is a way to ensure that brokerage accounts transfer at death to your beneficiaries.
A recent item in Kiplinger's, "How Your Brokerage Account Can Bypass Probate" explains how to use a transfer on death (TOD) registration to have your brokerage accounts transferred directly to your beneficiaries upon your death. This is a special kind of investment account that is recognized under state law and it may solve the challenges posed by having your estate pass through probate, which can be an expensive and time-consuming process. In some states, a "TOD" can also be used to allow real estate to be transferred. An experienced estate attorney is needed to understand where this works best, and what it can and cannot accomplish.
A TOD lets you keep control over the account, and you are able to change the beneficiary designation any time you'd like.
Another nice thing about a TOD, according to the Kiplinger article, is that it's very explicit as to who inherits the account. It's not lumped in with all of the other assets passed through your will. A TOD can help eliminate disputes among family members—one of the critical rationales for estate planning in the first place—so you'll have peace of mind knowing that your assets will go to the intended individuals.
A TOD account permits the assets remaining in the investment account when the account owner dies to pass directly to the beneficiaries named by the account owner. This occurs outside of probate, so there are no court filings or long delays. Typically, the beneficiaries of the TOD account need only show the holder of the investment account (usually a brokerage firm) an original death certificate of the owner. That's all they have to do to gain control of the account.
If you want to divide your estate among more than one beneficiary—like, give a third to each of your three daughters—it may be a good idea to transfer the brokerage account through your will. The issue with using a TOD in this situation is that you could designate one TOD beneficiary of your brokerage account (Sarah), and leave an equal amount of money to the other girls, Kate and Laura. However, if your brokerage account loses money or goes way up in value before you pass away, Sarah could end up inheriting an amount of money very different than the other girls. If you do this through your will, you can divide the total assets in exactly equal portions.
Talk with an experienced estate planning lawyer to find out how to best use a TOD and whether there are other strategies that will work well for your specific situation.
Reference: Kiplinger.com (July 12, 2015) "How Your Brokerage Account Can Bypass Probate."