Losing a loved one is stressful enough. That’s why establishing beneficiaries before you die will ensure that your loved ones aren’t left worrying about money in your absence as well.
Brokerage account beneficiary designations ensure that your investment and retirement assets will go directly to your loved ones. With investment accounts, retirement accounts and life insurance policies, your will is not the place to name the beneficiaries.
Instead, you’ll want to name at least one, if not several, beneficiaries for each individual brokerage account or investment account. This will remove the hassle of inheriting a brokerage account.
However, adding an account beneficiary is not without risks. Keep reading to learn why you need to name beneficiaries and how you can minimize risks along the way.
What is a beneficiary?
A beneficiary is a person who receives your account after you die. This beneficiary will not have access to the brokerage account during your lifetime. Most brokerage companies give beneficiaries access to an account only after they provide the account owner’s death certificate.
It’s common to designate a beneficiary to your brokerage account. A transfer on death account or other beneficiary documents supersedes a will. Brokerage account beneficiary designations allow the account to pass directly to the beneficiary without going through probate.
The beneficiary can then make quick financial decisions, which is especially important if you have a time-sensitive investment strategy. It also leads to significant tax savings for the beneficiaries and a higher lifetime value of the retirement account.
Retirement vs. nonretirement accounts
Beneficiaries are most important in retirement accounts like an individual retirement account (IRA) or 401(k). Naming a beneficiary is often a requirement for retirement accounts. They’re less common for brokerage accounts but can be equally beneficial.
For retirement accounts, one major advantage of designating a beneficiary is it allows the beneficiary to spread out withdrawals over their lifetime. With this strategy, the beneficiary should be able to pay less in taxes than the estate would pay without a named beneficiary.
What happens to a brokerage account when someone dies?
When someone dies, ideally, the brokerage account goes to a beneficiary. If there is no named beneficiary, the brokerage account will enter probate along with the rest of the estate.
This can take months or even years to settle. The accounts will be subject to applicable taxes. The named heirs in your will won’t receive access to the brokerage account until the probate process is complete.
Here’s an example: Elsa has a brokerage account worth $500,000. She also has an IRA worth $400,000. She lives in a house worth $600,000 and has $30,000 between a checking account and a savings account.
If Elsa doesn’t name beneficiaries on her brokerage account or IRA, the full value of her estate — $1,530,000 — will enter probate court. Debts, taxes and legal fees will be paid from this value before the heirs designated in her will receive the residual amount.
If instead, Elsa named her two children, Carlos and Ana, as the beneficiaries of her brokerage account and IRA, they would receive control of the assets in those accounts right away. The remainder of the estate — $630,000 — will enter probate court from which taxes and legal fees will be paid.
In addition to accessing funds in her investment accounts as needed, Carlos and Ana can choose to withdraw funds over their lifetimes, saving significantly on taxes while allowing those accounts to continue to grow.
Benefits of having an account beneficiary on your brokerage account
The benefits of having a brokerage account beneficiary designation far outweigh any possible disadvantages. Here are the major advantages:
You can choose your beneficiary, and they will have immediate (or quick) access to the account. This allows you to set up authorization in your lifetime and mitigates the uncertainty over when the beneficiary will receive the assets or control of the brokerage accounts. You’ll have significantly less control over your account if it goes to your estate.
Save on court fees
After losing a loved one, the last thing someone wants to face is hiring lawyers or going to court to gain control of assets. By naming a beneficiary on your brokerage accounts, your next of kin will not have to go to court or hire lawyers to gain access to your account.
Ease of transfer
Your beneficiary will gain control over the account faster, which can be crucial for managing investments. If you have a time-sensitive investment strategy, quick access can make the difference between maintaining those assets and losing significant wealth.
How to add an account beneficiary to your brokerage account
Most brokerage firms make it easy to make brokerage account beneficiary designations. To do this, you’ll need to go through your brokerage or custodian. It is simpler for them and you.
Make sure to think thoroughly about who you want to designate as the beneficiary. You generally want to make the heir or heirs that will receive the majority of your estate the beneficiaries.
Because a beneficiary designation supersedes a will, there can be additional implications. If you have more than one child, most people would choose to name all children as beneficiaries on all accounts, rather than leaving different accounts that may have significantly different values to each heir.
These days, many brokerage firms allow you to update beneficiaries online. You may click on your profile or other settings and find the option to update or modify beneficiaries. Contact your financial institution for specific instructions for each of your accounts.
What to know about brokerage account beneficiary designations
While there are major advantages to brokerage accounts, it’s important to understand how they work, including beneficiary designations and multiple beneficiaries.
Beneficiary designations remain in place
Beneficiaries remain in place and are considered over a will. Make sure to update beneficiaries in case someone has left your life, like an ex-spouse. Keep in mind that after setting up your will with specifications about distributions of your assets, beneficiaries can dramatically change that.
For example, if you name a niece as a beneficiary on your brokerage account worth $500,000, but have only planned to give her $40,000 in your will, the designated recipients of the remaining $460,000 in the brokerage account will not receive the intended inheritance.
Multiple brokers mean multiple beneficiaries
A beneficiary designation only applies to a given account. If you have accounts with multiple brokers, then you’ll have to name brokerage account beneficiary designations separately for all of those institutions. It’s worth contacting each institution to ensure that a beneficiary or beneficiaries are designated.
You can set contingency beneficiaries
If you choose one primary beneficiary, you can also select contingency beneficiaries. If the primary beneficiary dies or chooses not to accept the inheritance for any reason, the brokerage account will pass to the contingency beneficiaries.
This is a useful setup for families. For example, if Ben has a 401(k) retirement account, he may name his wife, Emily, as the primary beneficiary and their children Kate and Kara as the contingency beneficiaries.
In that case, if Emily dies before Ben, or both Ben and Emily are killed in a tragic accident, the brokerage account beneficiary designation will immediately pass to their children.
Final thoughts on brokerage account beneficiary designations
With even a few minutes of your time, adding brokerage account beneficiaries can make inheriting a brokerage account relatively simple for your loved ones. You’ll be able to preserve wealth and ensure that your work of saving and building wealth is passed on.
Can you designate beneficiaries on brokerage accounts?
Yes, you can designate beneficiaries on brokerage accounts. It’s worthwhile to do this to protect your assets for your heirs.
Who are the designated beneficiaries?
Designated beneficiaries are named on financial accounts or life insurance policies to receive ownership of these assets in case of death. Designated beneficiaries are always living people.
How should I designate beneficiaries?
You should contact your financial institution or brokerage institution to designate a beneficiary. You will usually be asked for the person’s full legal name and their relationship to you. You may also need to provide a mailing address, phone number, Social Security number and date of birth.