Can you add a beneficiary to a brokerage account?

Naming someone to inherit your brokerage account after you die can be a smart estate planning decision. Here’s how. Image source: Getty Images.

Stock investors know that a brokerage account is an important tool for smart investing. If you choose the wrong broker, you may be missing out on valuable tools, research, and other resources that give you an investing edge.

One thing to consider is who you want to inherit your brokerage account after you die. Many people don’t do anything special with their brokerage accounts, just letting them go to the heirs they name in their will. However, some people realize the value of adding a beneficiary to their brokerage accounts to simplify things. With some brokerage accounts, naming a beneficiary is a must – and even when it’s not absolutely necessary, it can still be a good idea.

What is a beneficiary?

A beneficiary is the person you name to receive your property after your death. Your beneficiary has no rights to your brokerage account while you are alive. This means you don’t have to clear any transactions you make with your beneficiary, and you can also usually change who your beneficiary is at any time.

The only time your beneficiary has power over the account is when you die. Most brokerage firms allow the beneficiary to claim the account assets once the beneficiary provides the broker with a death certificate. At this point, the beneficiary can keep the brokerage account with the same broker, renaming it to the beneficiary’s name. Alternatively, the beneficiary can close the account, request cash, or have the investment assets transferred in kind to another broker.

You can usually name both primary and contingent beneficiaries. The primary beneficiary is the first line to inherit your brokerage account after your death. However, if the primary beneficiary predeceases you, or if the primary beneficiary chooses not to accept the inheritance, the prospective beneficiaries step in and obtain the right to your brokerage assets.

Retirement vs non-retirement accounts

If you have a retirement account, such as an IRA or 401(k), you still need to designate a beneficiary. Each broker has beneficiary forms specifically designed for these retirement accounts, and using them will ensure that the person or persons from whom you wish to inherit your retirement assets can claim them. Without a properly completed form, your retirement account will go to your estate – and as you’ll see below, you could miss out on valuable tax breaks this way.

In contrast, beneficiaries are not as common with non-retirement accounts. Some brokers don’t even recognize the idea of ​​a beneficiary on a regular investment account. Rather than having a beneficiary form, however, many brokers allow what is called a pay-at-death or transfer-at-death provision within the account itself. For example, a brokerage account in the name “John Smith, payable on death to Mary Smith” gives John full control over the account while he is alive, but allows Mary to automatically claim the assets after John’s death.

What are the benefits of adding a beneficiary?

Having a beneficiary has several advantages:

• Your heir does not need to initiate probate proceedings in a local court for the brokerage account assets to be transferred. Instead, most brokers allow these transfers to occur immediately upon receipt of a death certificate. Avoiding probate can save thousands of dollars in court costs, attorney fees and other expenses.
• For retirement accounts, the beneficiary will generally have the right to spread withdrawals from the inherited account over their lifetime. This can significantly increase the value of the retirement account, allowing the beneficiary to pay less tax than what the estate would pay if you did not name a beneficiary.
• The heir can get quick control over the investment account. Depending on the speed of your investment strategy, this can be crucial, as having assets tied up in legal proceedings can make it difficult to manage investments effectively.

What to pay attention to when adding a beneficiary

Adding a beneficiary to an account is usually smart, but there are also some things you’ll need to keep in mind. Most importantly, once you add a beneficiary to an account, that beneficiary designation remains in place unless you change it. The designated beneficiary will receive the account upon your death, regardless of any changes you may have made to other estate planning documents, such as a will. This can cause a lot of confusion in some families, especially if the designated beneficiary is an ex-spouse or someone else who might have been a suitable person in the distant past but no longer seems to be the natural recipient of your assets. .

In addition, you will need to obtain personal information about the beneficiary you name. In addition to the full legal name, some brokers will ask for the beneficiary’s social security number or other identifying information. This is how the broker can protect itself after your death when the beneficiary comes to claim the assets, but it can make setting up the beneficiary designation a bit cumbersome while you are still alive.

Finally, remember that a beneficiary designation only applies to a particular account. If you have accounts with multiple brokers, you will need to name payees separately for all of these institutions. This gives you the flexibility to name different beneficiaries for different accounts if you wish, but it also leaves the risk of forgetting an account and not naming a beneficiary on it.

Do you need to add a beneficiary to your brokerage account?

Adding a beneficiary always makes sense when it comes to a retirement brokerage account. The tax benefits are so great that not naming a beneficiary is a huge mistake that can cost your heirs thousands of dollars over their lifetime.

With a non-retirement account, naming a beneficiary is more convenient. Many investors simply rely on their willpower to ensure their brokerage assets go where they want, and while there may be delays in doing it this way rather than naming a beneficiary, the consequences are not as important as with a Retirement Account.

Given how convenient it can be to add a beneficiary to your brokerage account – and how easy it is to do – it’s generally a smart move for most investors. As long as you’re willing to take on the responsibility of monitoring these beneficiary designations over your lifetime to make sure they don’t expire, naming a beneficiary can save your heirs a ton of hassle and money.