Customers must choose a specific registration when opening an account at a financial firm. The registration depends on factors such as 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 to receive the account assets if the owner dies. A beneficiary can be a person or an organization (for example, a charity). TOD designations allow the account to pass to the 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 heirs, creditors, and other parties. Probate courts generally handle assets and accounts that don’t have a named beneficiary (such as accounts without a TOD designation). Whether the decedent (the deceased person) had a will or not, the court determines the estate distribution process and who has authority to manage it.
Probate can be complicated because it often involves legal fees and can take significant time. If the goal is to help heirs avoid probate, a TOD designation directs assets to specific parties and keeps the account outside the probate court’s jurisdiction. In many cases, a beneficiary can claim the assets by providing a certified death certificate and an account to receive the inherited assets.
A TOD designation and a will are separate documents.
Even though 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 distributing remaining assets to beneficiaries. To gain legal authority, the executor must present the will to the local probate court. If the court validates the will, it issues letters testamentary.
The executor then provides 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 carry out 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. The administrator performs the same function as an executor (different title, same role). The probate court then issues letters of administration, which officially confirm the administrator’s authority. The administrator submits these letters to the firm holding custody of the decedent’s assets and then manages the estate according to the probate court’s instructions.
In some cases, an individual account can be opened as a numbered account. Instead of displaying the customer’s name or other identifying information, the account is labeled with a string of numbers (for example, Customer #45295923). This can provide a level of anonymity. Numbered accounts have been used by celebrities, politicians, and other well-known individuals to limit how widely their identities are visible to representatives.
Even so, the anonymity is limited. FINRA rules require the customer to provide a written attestation of ownership (essentially a letter stating that they are the account owner). The firm keeps this document on file for the life of the account. Employees with access to the document can determine the owner’s identity, which matters if government authorities (for example, the IRS or law enforcement) request account information.
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