Can Mutual Funds have Beneficiaries?

The ownership of a mutual fund account can allow for beneficiaries– in the event of the owner's death–depending on how the account was established. There are various options for designating beneficiaries with mutual funds. Investors can assign beneficiaries to their retirement plans such as a 401(k). IRAs or individual retirement accounts can also have designated beneficiaries. Mutual fund beneficiary rules allow named beneficiaries for each fund. Also, for mutual funds that have no beneficiary listed, many funds have default beneficiaries in place.

However, as of 2020, changes to the laws regarding non-spousal beneficiaries for retirement accounts went into effect. As a result, it's important that investors review their designated beneficiaries.

Key Takeaways

  • Mutual fund accounts allow owners to name beneficiaries– in the event of the owner's death.
  • Mutual fund owners can set up a transfer-on-death (TOD) provision whereby the fund's assets would transfer to the beneficiary.
  • Investors can assign beneficiaries to their retirement accounts, such as a 401(k) or individual retirement accounts (IRAs).

Understanding Mutual Fund Beneficiaries

A mutual fund can have more than one owner on the account. If there are two owners on the account and one of the owners dies, the account gets passed to the other owner or surviving owner. 

In the situation of joint ownership, the surviving member becomes the sole owner of the mutual fund without the lengthy process of probate. Probate is the legal process or administration of a deceased person's estate when there is no will in place. If there is only one owner on a mutual fund or the last owner passes away, beneficiaries can be named depending on the title on the account. 

However, it's important to note that many mutual funds have default beneficiaries built into them in case no beneficiaries are named by the owner. If the owner dies, the default beneficiary would be the owner's spouse, and if there's no living spouse, the assets would transfer to any children of the owner.

Transfer-on-Death

A mutual fund account can also be opened as an individually owned account, and the owner can name one or more beneficiaries using a transfer-on-death (TOD) designation. The owner maintains control over the account while living. The account would be titled in the owner's name along with a TOD designation to the beneficiary's name. Those named as beneficiaries inherit the account upon the death of the owner, meaning the fund's assets do not become part of the owner's estate. The transferring of assets from a TOD-designated account also avoids probate.

A 529 Savings Plan

College 529 savings plans are owned by an account holder who selects a beneficiary. The 529 plan is a tax-advantaged method to save for college if the account proceeds are used for qualified education expenses. The owner controls the account and can invest in mutual funds.

Retirement Accounts with Mutual Funds

At the time a retirement account is opened, such as a 401(k) plan, the owner can name beneficiaries for the account's assets. The application or online form has fields for both primary and secondary beneficiaries. Many 401(k) plans also allow the owner to assign a percentage of the assets' value that would transfer to each beneficiary. The beneficiaries inherit the proceeds from the account–following the death of the account holder–regardless of the investments, which could include mutual funds, company stock, or bond funds.

Special Considerations

In 2019 the U.S. Congress passed the SECURE Act, which along with other changes, removed the stretch provision for IRA and retirement account beneficiaries. Before the ruling, the beneficiary of an IRA could stretch out the required minimum distribution payments over many years. By only withdrawing the required minimum amount, beneficiaries were able to spread out the tax payments for those distributions over time. 

With the new law starting on January 1, 2020, non-spousal beneficiaries must distribute the entire retirement account balance within 10 years of the death of the owner. However, there are some exceptions to the ruling. As a result, it's important that retirement account holders consult a financial professional to review the new rulings and their designated beneficiaries.