Quick Answer
When an account holder dies, the account is frozen until the representative sees proper documentation, and what happens next depends on registration: JTWROS and TBE pass automatically, TIC and individual accounts go through probate, and a TOD names beneficiaries directly. Inherited securities get a step-up in basis to fair market value at death.
Understanding account types and registration is essential because those choices directly affect what happens when a major life event occurs, particularly the death of an account holder. This section covers inheritance rules, step-up in basis, and Transfer on Death designations.
What Happens to an Account When the Owner Dies?
When an account holder dies, the account is typically frozen pending receipt of required documentation:
- Death certificate
- Letters testamentary (court document authorizing the executor to act)
- Other estate documentation as needed
How Does the Outcome Depend on Registration?
| Registration | What Happens to Assets |
|---|---|
| Joint Tenants with Right of Survivorship (JTWROS) / Tenancy by the Entirety (TBE) | Surviving owner receives assets automatically (no probate) |
| Tenants in Common (TIC) | Deceased owner's share passes to their estate (subject to probate) |
| Transfer on Death (TOD) | Named beneficiaries receive assets directly, bypassing probate |
| Individual (no TOD) | Assets pass through the owner's estate (subject to probate) |
Exam Tip: Gotchas
- JTWROS and TBE avoid probate; TIC and individual accounts do not.
- Retirement accounts have their own beneficiary designations separate from TOD.
What Should the Representative Do on Notice of Death?
On learning that a customer has died (even from an informal source such as a family member or an obituary), the representative should:
- Cancel any open orders so nothing executes after the death
- Mark the account as deceased and notify a principal
- Freeze the account: take no instructions from family members or others until proper authority is documented
- Accept instructions only from the court-authorized executor or administrator, once that person presents the required documents
How Is the Account Re-Registered After Death?
- Once documentation is received, the account is re-registered into the name of the estate (or the surviving owner) before any further activity, with principal approval
- Distributions from an estate to multiple beneficiaries require each receiving account to be properly opened and documented first
How Does Step-Up in Basis Work?
- Inherited securities generally receive a step-up in basis to fair market value on the date of death
- This reduces capital gains liability for the beneficiary
- Example: An investor bought stock at $20/share. At death, it is worth $80/share. The beneficiary's cost basis becomes $80. If they sell at $85, they only owe capital gains on $5/share (not $65)
Think of it this way: The IRS essentially "resets the clock" on inherited investments. No matter how much the original owner gained, the heir starts fresh at the death-date value. Only growth after that point is taxable.
Exam Tip: Gotchas
- Step-up in basis resets the cost basis to fair market value at death. The beneficiary does not inherit the original purchase price.
How Does Step-Up Work in Community Property States?
- In community property states (~9 states), both halves of community property may receive a step-up in basis at death, not just the deceased spouse's half
- This is a notable tax advantage compared to other joint ownership forms
Exam Tip: Gotchas
- Community property states give a full step-up on BOTH halves (not just the deceased spouse's half). Other joint ownership forms only step up the decedent's share.
What Is a Transfer on Death (TOD) Designation?
- Allows an account holder to name beneficiaries who receive account assets upon the holder's death
- Available for individual and joint accounts
- Not typically available for retirement accounts (which have their own beneficiary designations)
- Beneficiaries have no rights to the account during the owner's lifetime
Does a TOD Override a Will?
- TOD supersedes a will. If the will and TOD designation conflict, the TOD controls
- Example: A customer's will says "divide equally among three children," but the TOD names only one child. That one child gets the entire brokerage account
- The TOD designation also takes precedence over trusts, premarital agreements, and other legal documents (unless overridden by court order)
Exam Tip: Gotchas
- A TOD designation overrides a will. If the will and the TOD conflict, the TOD wins every time. The only exception is a court order.
- Beneficiaries have no rights to a TOD account while the owner is alive.
What Should You Check on Exam Day?
- On notice of death, the representative's first moves are to cancel open orders, freeze the account, and notify a principal, taking no instructions until authority is documented
- Match the registration to the death outcome: JTWROS/TBE pass automatically, TIC and individual accounts go through probate, and a TOD names beneficiaries directly
- Step-up in basis resets cost basis to fair market value at death; community property doubles it to both halves instead of just the decedent's share
- A TOD beats a will every time except by court order, and beneficiaries have no rights until the owner dies