What happens to a brokerage account upon death? (2024)

What happens to a brokerage account upon death?

Once the necessary documents are received, a new account is typically set up for the beneficiary or estate, at which time securities registered in the name of the deceased person will be transferred.

You designate a beneficiary. That beneficiary will inherit automatically, and the brokerage account won't need to pass through the probate process. If you have a TOD account, it's important to realize whoever you have as the beneficiary on file with your broker is the one who gets the money.

Individual Brokerage Account

Upon your death, this account passes according to the terms of your will. If you do not have a will, it passes by your state's intestacy laws. Either way, it would likely include a probate action in probate court, which is time-consuming and costly for your loved ones and family members.

If your stockbroker goes bankrupt, your stocks and securities would typically be held in a separate account and remain under your ownership.

Most states have adopted the Uniform Transfer-on-Death Security Registration Act, which allows investors to designate a TOD beneficiary for any stocks they own. This enables the beneficiary to receive those stocks automatically once the holder passes away.

Cost basis and capital gains tax

In general, when you inherit property or assets, you get a step-up in cost basis. A step-up cost basis is usually going to be the fair market value (FMV) on the date of your loved one's death.

Once ownership of the brokerage account is transferred over to your child—typically when he or she is 18 or 21, depending on the state—your child will typically be taxed at normal capital gains tax rates for withdrawals, based on his or her income bracket.

Joint ownership

When you own property jointly with another person, the surviving owner automatically inherits your share of the property when you die. This process, known as the 'right of survivorship', allows the account — whether it's a savings account or a brokerage account — to bypass probate entirely.

When you inherit investments, you don't inherit them at their cost basis (what the original investor paid for them). Their value on the day they transfer to you is (for income tax purposes) your cost. In most cases, that “cost” is higher than the original purchase price. It's stepped up.

If the deceased has no spouse, then the plan assets may just become part of that person's estate. Brokerage accounts without any designated beneficiaries are also poised to become part of the estate of the decedent. The next stop for these assets could be probate.

Is it safe to keep more than $500000 in a brokerage account?

They must also have a certain amount of liquidity on hand, thus allowing them to cover funds in these cases. What this means is that even if you have more than $500,000 in one brokerage account, chances are high that you won't lose any of your money even if the broker is forced into liquidation.

After providing a death certificate, proof of identity, probate court order, and others, the heir can either transfer the shares into their account or sell the shares for the proceeds.

Spreading your assets across different brokerage accounts can help protect you against potential fraud or unauthorized access, Roller says. If one broker has a breach, then you can still trade with another investment firm. The safety of your funds is also a concern.

For example, if your father paid $50 for a share of stock and it was worth $250 on the day he died, your basis would be $250. If you sell the stock immediately, you won't owe any taxes; if you hold on to it, you'll only owe taxes (or be eligible to claim a loss) on the difference between $250 and the sale price.

Inherited stock doesn't incur capital gains on any growth prior to your inheritance, but any change in value thereafter will likely trigger capital gains taxes when sold.

To transfer ownership of securities, they must be registered as transferable on death with the financial intermediary from whom they were purchased. For example, if the securities were purchased from a brokerage house, they must be registered as transferable on death with the same brokerage house.

You can hold the stock (any value increases after you inherit it will result in capital gains) or sell it at the stepped-up value without owing capital gains taxes. It's important to note that stock held in a retirement account doesn't receive a step-up valuation.

And here's something you should know about taxes. Gifts of stock that you receive during your parents' lifetime will carry over the original basis. That means when you sell it, you may owe capital gains tax on the difference between the price it was originally bought for and what it's worth now.

Fees to transfer a brokerage account

Many brokers charge a fee when you transfer brokerage account assets. The typical fee ranges from about $50 to $100, but not every broker has an account transfer fee. The only way to know how much your old broker charges is to check its list of fees or contact customer service.

Is transferring a brokerage account taxable?

If you're transferring a standard taxable brokerage account (as opposed to a retirement account like an IRA) and you sell off your assets, you'll pay taxes on any profits you've earned. Your brokerages may charge you trading fees for shuffling investments around.

Giving stocks to family members involves several steps. First, you need to consider the number of shares you want to give. Next, contact your brokerage firm to begin the transfer, which likely requires filling out a gift transfer form and providing the recipient's brokerage account information.

Protect your assets - update your estate plan today

Luckily, there are solutions. First and foremost, there are a number of asset types that typically do not pass through probate. This includes life insurance policies, bank accounts, and investment or retirement accounts that require you to name a beneficiary.

Property that is jointly owned with a survivorship right will avoid probate. If one owner dies, title passes automatically to the remaining owner. There are three types of joint ownership with survivorship rights: Joint tenancy with rights of survivorship.

To avoid probate on brokerage accounts, you must create a trust or fill out a TOD (transfer on death) form to transfer the money directly to your beneficiaries. It is generally better to retitle your investment accounts to your trust during your lifetime rather than rely on a TOD to transfer your accounts at death.