Wealth Events

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.

Inheritance

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

What Happens Depends on Registration

Exam Tip: Gotchas

• JTWROS and TBE avoid probate; TIC and individual accounts do not. This distinction is frequently tested.
• Retirement accounts have their own beneficiary designations separate from TOD.

What the Representative Does 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

Re-Registration 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

Step-Up in Basis

• 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.

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.

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

TOD Priority Rules

• 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. This is one of the most commonly tested concepts. 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.