When more than one person is listed on a mutual fund account, the account passes directly to the surviving owner when one of them dies. The account is not renamed, nor does it need to go through probate. However, when the last owner dies, the mutual fund may still avoid probate if the decedent named beneficiaries prior to death. If there are no named beneficiaries, the mutual fund can avoid probate depending on how the account is titled or the dollar value of the decedent’s estate.
Transfer on Death to Named Beneficiaries
Using the transfer-on-death, or TOD, designation allows the mutual fund to pass to a beneficiary outside of probate. The asset does not have to be renamed or placed in the estate. The mutual fund account is titled with the TOD designation that names the beneficiary, such as John Smith, TOD to Jane Smith. Using the TOD designation ensures the selected beneficiaries will inherit the mutual fund without being renamed and made part of the decedent’s estate. You can name more than one TOD beneficiary and change the TOD beneficiary at any time.
Mutual Fund Default Beneficiaries
Most mutual funds have a list of default beneficiaries that takes effect if there are no named beneficiaries or if the named beneficiaries are deceased. In this case, the account is distributed based on the mutual fund’s beneficiary hierarchy. For example, the surviving spouse would be first in line to receive the mutual fund. If there is no surviving spouse, the mutual fund would be evenly divided between the decedent’s living children. This eliminates any need to rename the mutual fund and place it in an estate if there is no beneficiary.
Probating a Mutual Fund Transfer
Every state has enacted laws that determine who will inherit property if there are no living or default beneficiaries. In this case, the mutual fund must be probated and included in the decedent’s estate. You must complete the transfer form and mail in the form along with the supporting documents before the mutual fund can legally retitle the account. Once the mutual fund is transferred, the probate court will ensure the decedent’s debts are paid before distributing the proceeds per state law.
Nonprobate Mutual Fund Transfer
If state laws require you to open an estate, but the estate value is small enough to avoid formal probate, you can transfer the mutual fund directly to the beneficiaries without renaming the account. All the beneficiaries must consent to the direct transfer and sign the transfer documents. The beneficiaries can elect to open a new account or cash in the shares. You do not need to obtain a court order to transfer the mutual fund. After processing the transfer documents, the mutual fund will confirm the new account opening or transfer the sales proceeds to the beneficiaries.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.