Brokerage accounts can pass to heirs, but the process depends on how the account is registered.
Accounts with transfer-on-death (TOD) designations name a beneficiary directly, allowing funds to transfer outside of probate. Joint accounts pass to the surviving owner with survivorship benefits. Trust accounts transfer to a successor trustee under the trust’s terms.
If no beneficiary is named on an individual account, the assets may need to go through probate—a process that can be time-consuming and costly.
Avoiding a common mistake
TOD beneficiaries must be updated after major life events such as divorce. Brokerage firm policies and state laws vary, so verification with the firm is essential. Importantly, TOD designations override your will—changes must be made directly to the beneficiary form, not just to your will.
An estate planning attorney and financial advisor can help ensure the process is handled correctly.
Tax implications for heirs
When you die, an investment’s cost basis steps up to the value on the date of your death. This is known as a step-up in basis, and it means gains accumulated during the original owner’s lifetime are generally tax-free for heirs.
Tax-deferred accounts work differently. Non-spouse beneficiaries of traditional IRAs must generally withdraw all funds within 10 years and may face required minimum distributions. Those withdrawals count as taxable income.
Heirs should confirm the cost basis of inherited assets before selling anything.