KEEPING BROKERAGE [TRANSFER OR PAYMENT ON DEATH] ACCOUNTS OUTSIDE PROBATE

A large percentage of domestic savings is currently held in brokerage accounts with underlying investments in bonds, securities, mutual funds and the like. With boomers reaching retirement age, they are concerned about control and preservation of their assets, cutting costs, and what will happen if they become incompetent or disabled. Those who have their affairs in order will benefit in many ways.

People are overjoyed when they hear that brokerage accounts and other similar investment accounts are exempt from probate. Probate is an arduous task for those who have lost a loved one because assets are often tied up in court  for months and sometime years. Once in probate, assets can be subject to the claims of an unintended heir asserting an interest in the estate or challenging the legality of the testator’s Will.

The Uniform Transfer on Death (TOD) Security Registration Act, enacted in forty-three jurisdictions, including the District of Columbia, provides for non-testamentary transfer-on-death of investment securities, stocks, bonds, mutual fund shares, and security accounts. This means that because of this Act, it does not take a probate court to transfer the deceased account holder’s interest in the asset to their beneficiaries. The TOD account certificates or title to the accounts are actually re-titled after death to the listed beneficiary. The title to TOD accounts is transferred outside of probate by operation of law as a non-testamentary asset and is not considered part of a person’s probate estate.

Under the Act, other transfers after death are considered non-testamentary including: proceeds under an insurance policy, a contract of employment, a bond, a mortgage, a promissory note, certificated and uncertificated securities, account agreements, custodian agreements, deposit agreements, compensation plans, pension plans, individual retirement plans, employee benefit plans, trusts, conveyances, deeds of gifts, marital property agreements or other written instrument of a similar nature are non-probate assets. An example of a written instrument is an assignment of a refundable retirement community entrance deposit. The discussion in this Article is, however, limited to the transfer on death accounts.

The Act was completed by the Uniform Law Commissioners in 1989, but has been adopted by the signatory jurisdictions either simultaneously or later. Individuals are not addressed by the Uniform Act; it is addressed to financial intermediaries and banks in jurisdictions where it has been adopted. These financial intermediaries include: financial institutions, mutual fund intermediaries, banks and brokerage firms maintaining securities accounts for customers, and other organizations responsible for registries showing investment ownership. Within the confines of the Act, these financial institutions and intermediaries carry out the law with their account holders through an agreement or contract. These agreements are designed to provide for an orderly transfer of title upon the account holders death while limiting the liability of the financial institutions and intermediaries. Herein lies the rub.

If the account owner makes a TOD designation on their account in jurisdictions that have adopted the TOD Law, then the account owner believes that the TOD account will be exempt from or outside of probate. While this may be true in most cases, account holders should have their legal advisor read their financial intermediaries’ TOD Agreement because it may contain language that causes the account to end up in probate under certain circumstances thereby defeating the account holder’s wishes and possibly reducing the account by unanticipated costs and fees.

In fact, there are a number of occasions in which a TOD account will end up in probate because the brokerage firms want to protect themselves from liability and responsibility to locate, identify or determine potential beneficiaries of the TOD account. The financial institutions require the beneficiary or beneficiaries to be listed on the beneficiary designation form. These financial institutions TOD agreement place the duty on the account holder to update the designation form, which can be problematic.

Control of a TOD investment, including the right to change or cancel the death beneficiary, lies solely with the account owner and may only be exercised prior to the owner’s death via use of the intermediary's standard procedures and forms. This power resides solely with the account owner. In other words, an agent acting under a general durable power of attorney can not exercise this power of TOD designation.

A major drawback of a TOD designation is that it provides no protection for the client in the event of the client's incapacity or incompetency. If an Account Holder becomes incompetent, then the bank or financial intermediary requires a Court to appoint a guardian or conservator before a TOD Agreement may be altered or revoked to allow the guardian, conservator or agent power to direct the funds on behalf of the incompetent account owner. A guardian is a person who has been appointed by a judge to take care of the account holder or owner. A conservator is appointed by a Judge to protect and manage the financial affairs of the account holder's or owner’s life as a result of physical or mental limitations. If a general durable financial power of attorney is in place, then the financial institution will need to find that it is satisfactory under their standards. Financial institutions generally will not accept power of attorneys after a period of time generally two to three years. This is why financial powers of attorney need to be redone.

In addition, if someone other than the intended beneficiary asserts a claim over the account upon the owner’s death, then the financial intermediary will not determine the rightful owner. In order to protect themselves under such circumstances, the intermediary retains the right to initiate legal action with respect to the disposition of the funds or securities under their control and require a court to determine the rightful beneficiary. Thus, the Court will determine whether the interloper (person claiming an interest) is entitled to the money or other assets but possibly after a lengthy Court proceeding.

Consider also that if the account owner moves out of a jurisdiction that has enacted the TOD Act into a jurisdiction that has not enacted it, the brokerage firms state in their TOD Agreements that they are not be responsible if the account has to go through probate as a result of the change in jurisdictions. This means that the account owner’s wishes, to avoid probate or excessive costs, would be thwarted.


If the beneficiary entitled to receive the account owner’s title to the asset disclaimed their ownership by filing a disclaimer of their interest for estate planning reasons, and if there were no remaining beneficiaries listed on the beneficiary designation form, then a probate proceeding would have to be instituted to determine to whom the Court should distribute the funds or transfer title. A disclaimer is a denial or renunciation by someone of title to property.

Another key limitation of the TOD designation remaining outside probate is how the institutions handle it if the beneficiaries are not alive at the account holder’s death. In this situation, the account moneys would be subject to probate court in order to distribute the funds or change its title. Having the TOD account go through probate would thereby defeat the goals of the account holder. And while the title may eventually go to the intended beneficiaries’ heirs as a result of the probate proceeding, the account may be consumed by legal fees and other costs.

A way around the problem is for account holders to decide to add a person/child’s name on the brokerage account. Securities registered in two names with right of survivorship will result in the transfer of ownership at an account holder’s death to a survivor owner outside the probate process and without reference to any Will. Equally important, this addition of a joint account owner does accomplish the goal of the owner to transfer title "upon death" outside of probate to this co-owner.

The financial intermediaries generally will require proof of death (i.e., a death certificate) and survivorship of the co-owner to effect a change in title after the account holder’s death.

Care should be given in adding a person on the brokerage account (or anything for that matter) because, if the account balance is large enough, the transaction may trigger gift taxes unless the person added is a spouse. There is also an estate lifetime exemption amount that can be utilized before a gift tax will be assessed upon the transfer to a child or a non-spouse individual. If gift tax becomes due, the person owing the gift tax is the person who made the gift rather than the person receiving the gift.  In addition, there are jurisdictions, like Maryland that assess an inheritance tax on gifts to non-descendants or a non-spousal individuals.

Moreover, if both of the account owners pass away at the same time without another co-owner or beneficiary or if the account owners and beneficiaries pass away in a catastrophe, then it would be necessary to have a probate court determine who has the right to receive the funds or title to the account.

Another potential problem occurs if a TOD account only lists a deceased beneficiary or beneficiaries. People forget to review their beneficiaries of their accounts. Under this circumstance, a probate court would have to determine who may have a right to receive the funds under the TOD Agreement.  An alternative is to have a long list of possible alternative beneficiaries.

Furthermore, an account holder may not realize that once the joint owner’s name appears on the title, the new joint-owner owns half of the asset. This means that the TOD account can not be cashed out without the consent of both owners.  Joint ownership can cause problems if the joint-owner’s creditors or estranged spouse lay claim to the new joint-owner’s half of the money. In these situations, the financial intermediaries will require those claiming a right to the funds to let the Court decide who may receive the funds. Through the account holder’s attempt to avoid probate, their assets could suddenly be unavailable for retirement costs.

For underage beneficiaries, the TOD Agreement operating under the beneficiary designation form may distribute the moneys to a custodian under the Uniform Transfer to Minors Act. Please review the rate of interest earned on these accounts. It is de minimis. Alternatively, the financial institutions may be required to distribute the account funds in full to a child upon attainment of the age of majority (i.e. 18 year of age  in most jurisdictions) when a young adult is often not capable of managing such a large sum of money.

The TOD Agreement designation might be the best solution for your situation but it is strongly recommended that you consult your legal advisor to review the TOD Agreement and determine what is best for you.

An alternative to the TOD Agreement designation to avoid probate and its costs is to establish a revocable living trust and transfer title of the brokerage account to the trust. There is no gift tax or real estate transfer taxes on the re-titling of assets to or from a revocable living trust. Furthermore, the revocable living trust is a private agreement and does not become part of public record.

Moreover, the revocable living trust preserves assets and provides for the account owner’s care during temporary or permanent disability under the direction of a successor trustee without going through the court. The revocable living trust can allow for a private decision as to the account holder’s competency and also establish a preference against placing the account owner in a nursing home. The revocable living trust provides instructions for your loved ones as to all of your assets, not just your investment accounts. It instructs your loved ones on the administration of the trust and its assets during the account owner’s lifetime, incompetency and even upon death.  Account holder can designate specific bequests through  their revocable living trust.

A revocable living trust spendthrift clause and other mechanisms can protect the revocable living trust assets from beneficiary’s creditors while also addressing survivorship concerns. If someone disclaims their interest, the revocable living trust can have provisions stating the alternate beneficiary or direction of its assets under those circumstances.

Furthermore, a revocable living trust can distribute wealth to the account owner’s loved ones all at once, if the beneficiaries are older and responsible, or in installments over a period of time, if the owner wants to divide the principal distributions to be sure there are assets when the beneficiaries are more mature and capable of handling their finances more responsibly. While the account holder’s children are under age, the trust can provide for their health, education, maintenance and support under the direction of the successor trustee(s). The successor trustee and the guardian of any minor children can be the same person or a different person.

The revocable living trust may be terminated or amended at any time to reflect changes in the account owner’s life by the original trustee. Please note that the TOD Agreements provide for ability to change and update the beneficiary information until the death of the account owner. The revocable living trust can provide for changes even after the account holder dies through the direction provided in the original agreement and through the amendment process outside court. The revocable living trust becomes irrevocable upon the account’s owner’s death. Please note that exclusion from probate does not mean that the account is excluded from the deceased account holder’s federal and state estate taxes, but the revocable living trust can, if properly drafted, minimize estate taxes through its tax planning provisions.

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