Transfer-on-death option merits a look

Your Funds

Your Money

August 21, 2005|By CHARLES JAFFE

THANKS TO an esoteric law approved in New York this month, it is time for fund investors to go back to basics.

And the most basic decision an investor has when buying a fund is how to register the shares.

In the not-too-distant future, a lot of investors may not only want to change the way they have set up their fund accounts, they will find the process much easier to accomplish.

Gov. George E. Pataki of New York signed into law a bill that allows "transfer-on-death" registration of a securities account, allowing individuals to automatically pass securities accounts to designated beneficiaries upon the owner's death, without first requiring that the account go through the probate process.

While New York was the 48th state to approve transfer-on-death legislation - only North Carolina and Louisiana don't have it - the Empire State is critical in expanding the availability of the registration.

Financial firms are not required by any of the laws to offer transfer-on-death registration. Many New York-based firms heretofore have held out offering transfer-on-death to account holders nationwide, trying to avoid potential legal headaches that might have come from allowing the registration to customers who weren't eligible for it.

Likely to change

Now, with transfer-on-death available in New York effective Jan. 1, that situation is likely to change.

Even if it doesn't, however, investors would be well-advised to review precisely how they have registered their fund accounts to make sure their money goes where they want in the end.

Registration is an estate-planning issue, showing where you intend for your accounts to go after you die.

Die with your funds registered the wrong way - and the best way depends on your personal situation - and you create tax problems for your heirs.

Typically, the idea is to maximize what goes to your heirs and avoid the headaches of probate. Probate is the state judicial process that determines the value of a dead person's estate. Mutual fund holdings typically are subject to probate, though laws vary by state.

Bigger estates

For anyone with serious estate-planning needs - an estate currently must exceed $1.5 million in assets to be subject to tax, with the limit scheduled to rise to $2 million in 2006 - transfer-on-death options are no big deal.

To minimize taxes, these high net-worth individuals or couples should be hiring an adviser to set up trusts that will preserve as much of the savings as possible.

In those situations, mutual fund accounts will be registered in the name of the trust.

But for smaller savers, people whose estates aren't likely to threaten the estate tax limits, transfer-on-death rules are worth examining.

Transfer on death is self-explanatory. Name a beneficiary, and that's who gets the money, without probate.

The money still counts toward the value of the estate, which is why some advisers warn about getting carried away and handling large sums of money this way.

The account owner maintains control of the assets until he or she dies, and has the right to change the beneficiary designation at any time.

When the owner dies, the beneficiary can manage the money right away, rather than having it subject to market whims while the estate potentially is tied up in court.

"The advantage here is that you skip having to have a will and probate," says tax attorney Stephen Ziobrowski of Day, Berry and Howard in Boston. "In that way, it's a poor man's will.

"But if you have a big estate plan and you do this with any significant amount of money - and not just a few small accounts for the grandkids - you now have something that passes outside of the estate, which has the potential to create other problems for the estate."

That's the kind of stuff that scares lawyers.

For investors who want to use the transfer-on-death option, setting up your account is not always as simple as a check-off on an account form.

Many fund firms require separate beneficiary-designation forms; if you don't know to ask for them, you won't even know the option exists.

Most firms that offer transfer-on-death accounts will walk customers through the application process, or help them retitle an account.

Popularity growing

The popularity of transfer-on-death accounts appears to be growing. A spokesman for the Janus funds noted that more than one-third of new accounts being opened online take advantage of the law.

"In everything you read these days, when it talks about the best money moves you can make for retirement, transfer-on-death registration is always on the list," says Marin Gibson, counsel for state government affairs for the Securities Industry Association.

"No way of registering shares is right for everyone, but people clearly should learn about their options and pick the form that makes the most sense, rather than just checking a box and paying no attention to it."

Charles Jaffe is senior columnist for MarketWatch. He can be reached at or at Box 70, Cohasset, MA 02025-0070.

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