Customer Accounts - Death or Incompetence of the Account Owner
In the unfortunate event of an account owner's death or development of a condition that renders he or she incompetent, several actions must be followed. Procedures vary, depending on whether the account in question was classified as individual, joint, partnership or custodial.
If an individual account owner dies or is declared incompetent, no activity should occur until an authorized person provides evidence that he or she has the legal authority to handle the assets in the account. Any open orders should be cancelled at this time. At this point, the registered rep should obtain the necessary legal documents and aid the executor in dissolving the account. A new account is typically set up and titled "The Estate of [Decedent's Full Name]".
If securities were registered in the name of the deceased person, they will be transferred to the decedent's estate. Before this transfer occurs, certain documents, such as the death certificate, copy of the will or court appointment, affidavit of domicile, and state inheritance tax waiver, will usually be required before the transfer is made. The specific documents necessary will depend upon state law. For estate tax purposes securities will generally be valued as of the date of death.
Some individual accounts are set up as "TOD" (transferable on death) to a specified beneficiary. With this type of titling, the account passes to the named beneficiary without going through probate.
There are several types of joint accounts, and required procedures vary according to the type of joint account in question.
- Joint Tenants with Right of Survivorship: Upon death or incompetence of any or all of the account owners, the ownership passes to the survivor(s). Each account owner will have an equal and undivided interest in the assets in the account.
- Tenants in Common: Each account owner has a separate title with undivided interest in the assets in the account. Thus, when one account owner dies the decedent's proportional share of securities and cash in the account is distributed according to the instructions in the owner's will. All pending transactions and orders must be cancelled immediately.
- Tenants by Entirety: Upon death or incompetence of one of the spouses in a tenants by entirety joint account, the ownership passes directly to the surviving spouse.
Exam Tips and Tricks
You should know the differences between the various types of joint accounts. The distinctions are important when advising clients on how to title a joint account if they wish to open one. The most common form of joint title is JTWROS, although this type of joint account should not be used when issues of proportional ownership dictate the account type.
If a partner dies or is declared incompetent, all pending transactions and orders must be cancelled and the account must be frozen. The executor of the decedent's estate will instruct the rep regarding how to dispose of the account.
If the beneficiary of a custodial account dies, all securities and cash in the account are transferred to his or her estate. If the custodian dies, a new custodian must be named to manage the account.
Various types of trusts may set up a mutual fund or brokerage account. Living trusts are set up during the owner's lifetime, while testamentary trusts are established upon death. In either case, the account must receive a copy of the trust document and name both the trustee (who manages the account) and beneficiary (who receives benefits under the trust). Like the custodian in a custodial account, the trustee is a fiduciary who must adhere to prudent investor standards and avoid self-dealing. The death of a trustee has little impact on the account, since trusts typically name successor trustees for such an event.