Naming someone who will inherit your brokerage account after you pass away can be a smart estate-planning move. Here's how to do it.Image source: Getty Images.
Stock investors know that abrokerage accountis an important tool for smart investing. If you don't pickthe right broker, then you can end up missing out on valuable tools, research, and other resources that give you an investing edge.
One thing to consider is who you want to inherit your brokerage account after you pass away. Many people don't do anything special with their brokerage accounts, simply letting them go to whichever heirs they name in their wills. However, some people are realizing the value of adding a beneficiary to their brokerage accounts in order to make things simpler. With some brokerage accounts, naming a beneficiary is a must -- and even when it's not absolutely necessary, it can still be a smart idea.
What is a beneficiary?
A beneficiary is the person you name to receive your assets after you pass away. Your beneficiary doesn't have any rights to your brokerage account during your lifetime. That means that you don't have to clear any transactions you make with your beneficiary, and you can also typically change who your beneficiary is any time you want.
The only time your beneficiary has any power over the account is upon your death. Most brokerage companies allow the beneficiary to claim the assets of the account once the beneficiary provides the broker with a death certificate. At that point, the beneficiary can keep the brokerage account at the same broker, retitling it in the beneficiary's own name. Alternatively, the beneficiary can close out the account, requesting cash or having the investment assets transferred in kind to a different broker.
You can typically name both primary beneficiaries and contingent beneficiaries. The primary beneficiary is first in line to inherit your brokerage account after your death. However, if the primary beneficiary passes away before you do, or if the primary beneficiary chooses not to accept the inheritance, then the contingent beneficiaries step up and get the right to your brokerage assets.
Retirement vs. non-retirement accounts
If you have a retirement account, such as an IRA or 401(k), then you should always name a beneficiary. Every broker has beneficiary forms that are specifically designed for these retirement accounts, and using them will make sure that the person or persons you want to inherit your retirement assets will be able to claim them. Without a properly completed form, your retirement account will go to your estate -- and as you'll see below, you'll risk missing out on some valuable tax breaks that way.
By contrast, beneficiaries aren't as common with non-retirement accounts. Some brokers don't even recognize the idea of a beneficiary on a regular investment account. Rather than having a beneficiary form, though, many brokers allow what's called a pay-on-death or transfer-on-death provision in the account itself. For example, a brokerage account in the name of "John Smith, payable on death to Mary Smith" gives John complete control over the account during his lifetime but allows Mary to claim the assets automatically after John's death.
What are the benefits of adding a beneficiary?
Having a beneficiary has several advantages:
- Your heir doesn't have to open a probate proceeding in a local court in order to have the brokerage account assets transferred. Instead, most brokers allow such transfers to happen immediately upon receipt of a death certificate. Avoiding probate can save thousands in court costs, attorney fees, and other expenses.
- For retirement accounts, the beneficiary will typically have the right to spread out withdrawals from the inherited account throughout the course of the beneficiary's lifetime. This can dramatically enhance the value of the retirement account, allowing the beneficiary to pay less in taxes than what the estate would pay if you failed to name a beneficiary.
- The heir can get quick control over the investment account. Depending on how time-sensitive your investing strategy is, that can be crucial, as having assets tied up in a court proceeding can make it difficult to manage investments efficiently.
What to watch for when adding a beneficiary
Adding a beneficiary to an account is generally smart, but there are also some things that you'll need to keep in mind. The most important is that once you add a beneficiary to an account, that beneficiary designation remains in place unless you change it. The named beneficiary will receive the account on your death no matter what changes you might have made to other estate planning documents, such as a will. That can lead to a lot of confusion in some families, especially if the named beneficiary is an ex-spouse or someone else who might have been an appropriate person in the distant past but who no longer seems like the natural recipient of your assets.
In addition, you'll need to get personal information about the beneficiary you name. In addition to the full legal name, some brokers will ask for the beneficiary's Social Security number or other identifying information. That's so the broker can protect itself after your death when the beneficiary comes in to claim the assets, but it can make setting up the beneficiary designation a bit awkward during your lifetime.
Finally, bear in mind that a beneficiary designation only applies to a given account. If you have accounts with multiple brokers, then you'll have to name beneficiaries separately for all of those institutions. That gives you the flexibility of naming different beneficiaries for different accounts if you so choose, but it also leaves open the risk that you'll forget about an account and fail to name a beneficiary on that one.
Should you add a beneficiary to your brokerage account?
Adding a beneficiary always makes sense when you're dealing with a retirement brokerage account. The tax benefits are so large that failing to name a beneficiary is a huge mistake that can cost your heirs thousands of dollars over the course of their lifetimes.
With a non-retirement account, naming a beneficiary is more of a convenience. Plenty of investors simply rely on their wills to make sure that their brokerage assets go where they want, and although there can be delays involved doing it that way rather than naming a beneficiary, the consequences aren't as great as they are with a retirement account.
Given how convenient adding a beneficiary to your brokerage account can be -- and how easy it is to do -- it's generally a smart move for most investors. As long as you're willing to take on the responsibility of monitoring those beneficiary designations over the course of your lifetime to make sure they don't get out of date, naming a beneficiary can save your heirs a ton of hassle and money.
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