How Does a Transfer Upon Death Work on Investment Accounts?

You must set up a TOD registration in advance in order to pass mutual funds or securities to beneficiaries. You may specify the percentage of the account's assets to be passed to each named beneficiary. For example, if you have three children, you may specify that each child receive one-third of the assets, or if naming charities as beneficiaries you can specify that Charity A is to receive 75 percent and Charity B is to receive 25 percent. Registered accounts do not pass through probate and your executor does not have to do anything with them. You can leave money market, certificates of deposit and other financial instruments to beneficiaries through the similar payable on death provision.

You can't add a TOD provision to an account simply by picking up the phone and calling your broker. You must request a TOD agreement registration form, fill it out and return it by mail. When filling out the form, make sure the names of the beneficiaries are spelled correctly and birth dates and Social Security numbers are correct. Any errors, even minor ones -- such as writing "Ann" instead of "Anne" -- can cause a delay in transferring the accounts after your death. Your heirs will have to provide additional information proving they are the persons named in the TOD provision.

A TOD registration supersedes a will. If you name a specific account in your will as passing to one beneficiary but you have already established a TOD provision designating a different person as the beneficiary, the account passes to the name listed in the TOD provision. TODs, payable on death accounts, revocable living trusts and other devices to avoid probate simply means that such assets do not pass through the court's probate process. If your estate owes taxes, the federal or state government will collect them whether or not the assets went through probate.

Your beneficiaries must re-register the inherited accounts in their own names, whether they intend to maintain them or take distribution of the assets in them. This usually involves sending a certified copy of the death certificate and completed re-registration form to the firm's transfer agent. The estate's executor should be able to provide a copy of the death certificate, but the beneficiary can also contact the county clerk's office of the county in which the benefactor died for information on obtaining it.