Naming a TOD Beneficiary for Stocks and Bonds

Every state except Texas lets you name someone to inherit your stocks, bonds, or brokerage accounts without probate. It works very much like a payable-on-death bank account.

When you register your ownership, either with the stockbroker or the company itself, you make a request to take ownership in what's called beneficiary or transfer-on-death (TOD) form.

The TOD beneficiary has no rights to the stock as long as you're alive. You can sell it, give it away, name a different beneficiary, or close the account. But after your death, the beneficiary can easily claim the securities without probate.

Uniform Transfer-on-Death Securities Registration Act

The law that allows (but doesn't require) brokerages to offer transfer-on-death registration is called the Uniform Transfer-on-Death Securities Registration Act.

Benefits of beneficiary registration include:

• It's easy to create.
• It's usually free (though some brokers might charge a fee to change beneficiaries).
• It's easy for the beneficiary to claim the securities after the original owner dies.

You can register ownership of a stock or a mutual fund account in beneficiary form if any of the following is located in a state that has adopted the Act (again, every state but Texas):

• Your legal residence
• The stockbroker's principal office
• The incorporation of the issuer of the stock or the stockbroker ("registering entity")
• The office of the transfer agent (a business authorized by a corporation to transfer ownership of its stock from one person to another)
• The office making the registration

EXAMPLE: Ben lives in Texas, which hasn't passed the Act. But he maintains a brokerage account with Cascade Mutual Fund, which has its main office in the state of Washington. He can name a TOD beneficiary. Ben also owns some stock of the Olde Cudahy Cheese Works, a company incorporated in Wisconsin. Because Wisconsin has also adopted the Act, Ben can register ownership of his shares in beneficiary form.

How a TOD Beneficiary for Securities Works

It's a simple process to register ownership of your stocks in TOD form.

If you have a brokerage account, contact the broker for instructions. Most likely, the broker will send you a form on which you'll name beneficiaries to inherit your account. From then on, the account will be listed in your name, with the beneficiary's name after it, like this: "Evelyn M. Meyers, TOD Jason Meyers."

If you have the actual stock certificates or bonds in your possession (most people don't), you must get new certificates issued, showing that you now own the stock in beneficiary form. Ask your broker for help; if that doesn't work, contact the transfer agent for the stock. You can get the address from your broker or the investor relations office of the corporation. The transfer agent will probably have you send in the certificates, a form called a stock or bond power (some stock certificates have the power printed on the back), and a letter explaining what you want to do.

Joint Accounts

If you own stock or mutual fund shares with another person—your spouse, for example—you can still name a transfer-on-death beneficiary. But there's an important restriction: You and the co-owner must have "rights of survivorship" in the account. That means that when the first owner dies, the survivor automatically takes full ownership. That's how most joint accounts are set up. The transfer-on-death beneficiary inherits the stock only after both original owners have died.

EXAMPLE: Helen and Chase own a mutual fund account together. The account documents list their names this way: "Helen Whittaker, Chase Whittaker JT TEN WROS." That means that they own the account as joint tenants with the right of survivorship—the legal way of saying that they share ownership and when one of them dies, the survivor will automatically own the entire account.

When Helen and Chase decide to add their grown children, Amanda and Jeffrey, as transfer-on-death beneficiaries, the ownership documents are changed to include this odd-looking string of words: "Helen Whittaker, Chase Whittaker JT TEN WROS, TOD Amanda S. Whittaker and Jeffrey R. Whittaker."

After one joint owner dies, the other is free to change the beneficiary designation. So naming a TOD beneficiary while both joint owners are alive doesn't guarantee that that beneficiary will ultimately inherit the securities.

EXAMPLE: Jane and Henry name his son from a previous marriage as the TOD beneficiary of a jointly held stock account. After Henry dies, Jane is the sole owner, and names a different beneficiary. Henry's son won't inherit any of the stocks.

If you're concerned that after your death, the surviving co-owner of a joint account might change the beneficiary in a way you wouldn't approve of, create a separate account in your name only, and name the beneficiary.

Your Spouse's Rights to Securities

Your spouse may have rights in your securities, even if they're registered in your name.

Spouses' Rights in Community Property States

If you live in a community property state, your spouse (or registered domestic partner or civil union partner) might own a half-interest in whatever securities you own, even if you hold them in your name only. If you bought securities with money you earned while married, they are "community property," and your spouse legally owns a half-share unless you and your spouse signed a valid agreement making them your separate property.

If you have a securities account registered in your name only, and you want to name someone other than your spouse as the TOD beneficiary for it, it's a good idea to get your spouse's written consent. Otherwise, your spouse could assert a claim to half of the money in the account at your death, leaving the beneficiary you named with only half.

Spouses' Rights in Non-Community Property States

If you leave stocks to someone other than your spouse, make sure your spouse doesn't object to your overall estate plan. In most non-community property states, surviving spouses who are unhappy with what the deceased spouse left them can claim a certain percentage of the deceased spouse's property. This is called the spouse's "statutory share," and in many states it amounts to about a third of what the spouse owned. It's rare, however, for a spouse to go to court over this, because most spouses inherit more than their statutory share.

The funds in a TOD account might be subject to a spouse's claim—or they might not, depending on state law. Some states consider such accounts outside the surviving spouse's reach.

Naming Children as Beneficiaries of Securities

You can name a minor—that is, a child younger than 18 years old—as a TOD beneficiary. If you do, also consider naming an adult to manage it until the child reaches adulthood, in case the beneficiary inherits the money while still a minor. Fortunately, this isn't difficult. In most states, you can appoint someone to manage the money simply by naming the person, on the registration document, as the "custodian" of the property.

EXAMPLE: Tess wants to leave stock to her ten-year-old nephew, Sam, but wants his mother to manage it if Sam inherits it while he's still a child. On the ownership registration document, she names the TOD beneficiary as "Amelia Tompkins, as custodian for Samuel Tompkins under the Indiana Uniform Transfers to Minors Act."

Learn more about custodianship under the Uniform Transfers to Minors Act.

Naming More Than One TOD Beneficiary

If you want to name more than one beneficiary, just name all of them on the form. Each will inherit an equal share of the stocks unless you specify otherwise. You can, however, leave the beneficiaries unequal shares if the stockbroker or transfer agent's policy allows it. It's generally not a good to name multiple beneficiaries if the securities aren't easily divisible—trying to divide a single bond, for example, among three children can get very wonky.

If one of the beneficiaries dies before you do, the securities will go to the survivor(s) at your death.

EXAMPLE: Cheryl's children, Zachary and Grace, are the TOD beneficiaries of her brokerage account. Zachary dies before Cheryl does, leaving three children of his own. If Cheryl wants these grandchildren to inherit their father's share, she must change her account registration papers to include them as TOD beneficiaries. Otherwise, at her death, the account will belong solely to Grace.

Naming an Alternate Beneficiary

You can name an alternate beneficiary, if your broker's policies allow it, when you register securities in transfer-on-death form. If you do, and the primary TOD beneficiary dies before you do, the alternate will inherit.

If you don't name an alternate, the stock will probably pass under your will's "residuary clause," which names a beneficiary to inherit everything that's not specifically mentioned in the will.

Claiming the Securities

After your death, the securities will automatically belong to the TOD beneficiary. All the beneficiary needs to do to claim them is show the transfer agent or broker a certified copy of the death certificate and proof of identity. No probate court approval is required. If the account was a joint account to begin with and wasn't changed to the name of the survivor, the beneficiary will need the death certificates of all the original owners. The broker's records will show that the beneficiary is entitled to the securities.