What Happens to Mutual Funds at the Death of Owner?
When someone dies, the estate of that person becomes its own entity, with a person to manage it who's called the executor. Part of the executor's job is to settle any debts the estate has, including final medical bills, by using the deceased person's assets. Assets that might be used include real estate, bank accounts, and in many cases, mutual fund accounts. A mutual fund account's inclusion as part of the estate depends on what type of account it is, as well as the ownership type of the account.
Part of the Estate
With an individual mutual fund account held outside of a retirement account, the value of the fund becomes part of the owner's estate. The mutual funds come under the control of the executor, and they may be liquidated and used to settle debts of the estate. Once all of the debts of the estate have been settled and any applicable taxes have been paid, the remaining assets are divided among the heirs according to the will, or by the courts if the owner of the fund did not have a will.
If the mutual funds are held in a joint account, deciding what happens to them upon the death of one of the owners is more complicated. Without any other provisions in the ownership, the disposition of the mutual fund might be decided based on who funded the account If one of the joint owners funded the account completely, the deceased owner's estate may take possession of the account as part of that person's estate, particularly if the joint owners were not married to each other. If both owners funded the account, the funds may be split up proportionately to each person's contributions.
Payable on Death
If the mutual fund account ownership is set up as a payable-on-death account, ownership might pass directly to the person listed as the co-owner, outside of probate or the primary owner's estate. A payable-on-death account may also name multiple people as beneficiaries, as well as contingent beneficiaries in case the primary beneficiary dies.
IRA and 401(k)
If the mutual fund is part of a retirement account such as a 401(k) or IRA, a beneficiary was named as part of the setup process. IRAs and 401(k)s pass on to the beneficiary outside of the estate of the original owner. If the beneficiary is a spouse, he can generally treat the account as his own, and he can take the withdrawals as required for his own account. If the beneficiary is someone other than a spouse, he can choose to completely liquidate the account within five years. Or he can begin taking withdrawals based on his own life expectancy, creating a lifelong source of income. The beneficiary must pay applicable taxes on these withdrawals, but he isn't charged penalties for early withdrawals.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.