Customers must choose a specific registration when opening an account at a financial firm. The registration depends on several factors, including account ownership, tax reporting, and beneficiary designations.
An individual account is owned and controlled by one person. This registration can also include a transfer on death (TOD) designation, which names a beneficiary. A beneficiary can be a person or an organization (for example, a charity) that will inherit the account assets when the owner dies. A key feature of TOD designations is that they allow assets to pass to the named beneficiary outside of probate.
Probate court is the part of the US court system that oversees the distribution of a deceased person’s assets to surviving family, friends, creditors, or other parties. Probate courts generally handle assets and accounts without named beneficiaries (that is, without TOD designations). Whether the decedent (the deceased person) had a will or not, the court determines the estate distribution process and who is authorized to manage it.
Probate can be complicated because it often involves legal fees and can take significant time. If someone wants their heirs to avoid probate, TOD designations direct assets to specific parties and keep those assets outside the probate court’s jurisdiction.
When transferring ownership of securities, an affidavit of domicile (a legal document establishing the deceased person’s legal residence) may be required. In many cases, a beneficiary only needs to provide a certified death certificate and an account to receive the inherited assets.
To be clear, a TOD designation and a will are two different things.
Although they can overlap in purpose, they work differently:
For example, suppose Bob Smith names his brother as the beneficiary on his brokerage account’s TOD designation, but his will names his sister as the beneficiary of that same account. The TOD designation controls, so Bob’s brother inherits the account.
Accounts without a TOD designation (or accounts left explicitly to the estate) are subject to probate. If the decedent died testate, the will names an executor. The executor is responsible for managing the estate, including paying outstanding debts and taxes and then distributing remaining assets to beneficiaries.
To gain legal authority, the nominated executor must present the will to the local probate court. If the court validates the will, it issues letters testamentary, an official document confirming the person’s authority to act as executor.
The executor then presents the letters testamentary to the firm holding custody of the decedent’s assets. Once the firm receives the letters testamentary (along with a certified death certificate and any other required documents), the executor can take control of the account assets and typically follows the will’s instructions.
If a person dies intestate, the process starts differently. There is no will, so there is no named executor. Surviving family members typically petition the probate court to appoint an estate administrator, who serves the same function as an executor (different title, same role). Once appointed, the probate court issues letters of administration, which officially confirm the person’s authority to act on behalf of the estate.
As with letters testamentary, the letters of administration are submitted to the firm holding custody of the decedent’s assets. The administrator then manages the estate according to the probate court’s instructions.
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