Investors often spend years building a portfolio of stocks, bonds, and funds. But deciding what happens to those assets after death is also an important part of financial planning.
One option offered by some brokerage firms is a transfer-on-death designation, often called a TOD registration. It allows eligible taxable brokerage assets to pass directly to named beneficiaries after the account owner's death, subject to applicable state law and account rules.
How a TOD designation works
A transfer-on-death designation names one or more beneficiaries who are intended to receive the account when the owner dies.
During the owner's lifetime, the account generally remains under the owner's control. The owner can buy and sell investments and may be able to change the beneficiary designation, subject to the brokerage firm's procedures and applicable law.
After death, the beneficiary typically must provide documentation, such as a death certificate and the firm's required forms, before the assets can be transferred.
Why investors consider it
A TOD designation may simplify the transfer of certain brokerage assets and can allow them to pass outside the probate process. This can make the administration of an estate more straightforward in some circumstances.
However, TOD arrangements are not identical in every state or at every brokerage firm. The rules for naming multiple beneficiaries, assigning percentages, and naming contingent beneficiaries should be checked carefully.
TOD is not a substitute for a complete estate plan
A TOD designation generally applies only to the account or assets covered by the registration. It does not replace a will, trust, power of attorney, or broader estate plan.
It may also create complications if the beneficiary is a minor, has special needs, is experiencing financial difficulties, or is involved in a complicated family situation.
Investors should consider whether naming an individual directly is appropriate or whether a trust or other arrangement would better reflect their intentions.
Keep beneficiary information current
Life events such as marriage, divorce, births, deaths, or changes in family relationships can make an old beneficiary designation unsuitable.
Investors should review their brokerage account registrations periodically and confirm that the names and percentages are correct. They should also coordinate beneficiary designations across retirement accounts, insurance policies, and other financial assets.
Conflicting documents or outdated designations can create delays and disputes. State law may also affect how certain transfers are treated.
Bottom line
A transfer-on-death brokerage account can be a useful estate-planning tool for some investors, but it should be coordinated with the rest of the estate plan. Investors should understand state rules, brokerage procedures, and the needs of intended beneficiaries before making or changing a designation.
Educational disclaimer: This article is for general informational purposes only and is not individualized legal, tax, or financial advice.
