What Happens to Investments When Someone Dies?

Understanding what happens to investments after someone dies can be complex. The process for transferring these assets varies significantly depending on the investment type, its legal structure, and whether specific beneficiaries were named. Navigating these details is important for settling an estate and ensuring a deceased individual’s financial wishes are carried out.

How Investments Are Transferred

Investments transfer to new owners through several primary mechanisms. One common method involves beneficiary designations, such as “payable on death” (POD) for bank accounts or “transfer on death” (TOD) for investment accounts and securities. These designations allow assets to pass directly to a named individual or entity upon the owner’s death, bypassing the often lengthy probate process. Many investment accounts, including retirement accounts and life insurance policies, utilize these direct beneficiary forms.

Another mechanism is joint ownership, where an asset is held by two or more individuals. Forms like joint tenancy with right of survivorship (JTWROS) or tenancy by the entirety (TBE) are common. With JTWROS, if one owner dies, their share automatically transfers to the surviving joint owners without needing probate. Tenancy by the entirety is a specific form of joint ownership for married couples in some states, providing similar survivorship rights.

When assets lack beneficiary designations or joint ownership with survivorship rights, they typically become part of the deceased’s probate estate. Probate is a court-supervised legal process that validates the will, inventories assets, pays debts, and distributes remaining assets according to the will’s instructions. If there is no will, state intestacy laws dictate how assets are distributed to heirs. An executor, named in a will, or an administrator appointed by the court, manages this process.

Handling Specific Investment Types

Brokerage accounts holding stocks, bonds, or mutual funds can be set up with TOD designations, allowing a direct transfer to beneficiaries. If no such designation exists and the account was solely owned, these assets generally go through probate. Joint brokerage accounts with rights of survivorship transfer to the surviving account holder.

Retirement accounts like 401(k)s and IRAs are almost always transferred via beneficiary designations. Spousal and non-spousal beneficiaries have different rules, with spouses often having more options for rolling over the inherited account. Non-spousal beneficiaries typically fall under a “10-year rule,” requiring the account to be fully distributed by the end of the tenth year following the original owner’s death.

Real estate transfers depend on how the deed was titled. Property held in joint tenancy with right of survivorship or tenancy by the entirety transfers to the surviving owner(s) outside of probate. If real estate was solely owned or held as tenants in common, it generally becomes part of the probate estate. The will or state intestacy laws then direct its distribution.

Bank accounts, like checking and savings accounts, often have POD designations, allowing funds to be paid directly to a named beneficiary. Joint bank accounts with rights of survivorship transfer to the surviving account holder. If a sole bank account lacks a POD designation, funds typically become subject to the probate process before distribution according to a will or state law.

Steps to Claim and Transfer Assets

Claiming and transferring inherited assets involves several procedural steps. Initial actions include obtaining certified copies of the death certificate, as financial institutions and government agencies will require them. It is also important to locate all relevant documents, such as wills, trust agreements, account statements, and beneficiary designation forms.

Next, financial institutions holding the investments must be notified of the death. This involves contacting banks, brokerage firms, and retirement account administrators. Institutions typically require a certified death certificate, the deceased’s account number, and the beneficiary’s identification. They will then provide specific forms, such as transfer or beneficiary claim forms, that need to be completed.

The forms provided by institutions guide the beneficiary or executor through the necessary information, which often includes details about the deceased, the beneficiary, and the specific assets being transferred. Once submitted, the institution processes the request, transferring assets according to established designations or legal instructions.

For assets that must go through probate, the executor initiates the court process by filing the will and a petition to open the estate. The court appoints the executor, granting them legal authority to manage the estate. The executor then inventories assets, notifies creditors, pays outstanding debts and taxes, and distributes remaining assets to beneficiaries or heirs as directed by the will or state law. Assets are received either by opening new accounts in the beneficiary’s name, direct deposit, or by changing the title of property.

Tax Implications of Inherited Investments

Inheriting investments can have distinct tax implications, primarily concerning income and estate tax. For non-retirement assets such as stocks, bonds, or real estate, beneficiaries generally benefit from a “step-up in basis.” This rule adjusts the asset’s cost basis to its fair market value on the date of the original owner’s death. This adjustment can significantly reduce or eliminate capital gains tax for the heir if they sell the asset shortly after inheriting it, as taxes are only owed on appreciation occurring after the date of death.

Inherited retirement accounts, like IRAs and 401(k)s, do not receive a step-up in basis. Distributions from these accounts are generally subject to income tax for the beneficiary. For most non-spousal beneficiaries of accounts inherited after 2019, the “10-year rule” applies, requiring the entire account balance to be distributed by the end of the tenth year following the original owner’s death. If the original owner had already begun taking required minimum distributions (RMDs), the beneficiary may also be required to take annual RMDs during the 10-year period.

Regarding “death taxes,” there are two main types: federal estate tax and state inheritance tax. The federal estate tax is levied on the total value of a deceased person’s estate before assets are distributed, and is paid by the estate itself. For 2025, the federal estate tax exemption limit is $13.99 million per individual, meaning only estates exceeding this amount are subject to the tax. This high exemption means most estates do not owe federal estate tax.

Inheritance taxes are paid by the beneficiary on the value of the assets they receive, and only a few states impose them. The tax rate often depends on the beneficiary’s relationship to the deceased, with spouses typically exempt. Beneficiaries receiving distributions from inherited retirement accounts may receive a Form 1099-R for tax reporting purposes.