Fidelity's Death Benefit: What You Need To Know

Losing a loved one can be one of the most difficult experiences in life. Fidelity offers a checklist of things to do after a loved one passes away, including how to deal with the loss of a loved one, how to protect your finances if you're widowed, and how to plan a funeral or memorial service. One of the first steps is to notify Fidelity of the death, which can be done without death certificates or account numbers. In terms of finances, it's important to find the will and submit it to the local probate court, locate trust documents and insurance policies, and contact financial advisors and tax advisors. Retirement accounts, such as IRAs and 401(k)s, generally transfer directly to designated beneficiaries without probate, but they may be subject to taxes. Investment accounts can also transfer outside of probate with a Transfer on Death (TOD) registration.

Transfer on Death (TOD) registration

A Transfer on Death (TOD) registration is a provision of a brokerage account that allows the account's assets to pass directly to an intended beneficiary. This is the equivalent of a beneficiary designation.

On a non-retirement account, designating a beneficiary or beneficiaries establishes a TOD registration for the account. For an individual account, a TOD registration generally allows ownership of the account to be transferred to the designated beneficiary upon your death.

If you have a joint ownership with right of survivorship or tenants by entirety account, the joint registration transfers account ownership upon the first death, usually directly to the surviving accountholder. TOD becomes effective for joint accounts if both owners pass away simultaneously.

Joint and TOD registration generally allow an account to pass outside the probate estate, enabling the surviving owner or beneficiaries to avoid the time and expense of that process for this account.

Regardless of the account type, estate taxes may be assessed on your taxable estate. Be sure to consult an attorney or tax advisor to discuss ways to minimize or eliminate estate taxes.

What to do after a death

Fidelity has provided a checklist of things to do after a loved one passes away. Here are some of the key points:

• Notify friends and family
• Choose a point of contact for travel and logistics
• Find the will and submit it to probate court
• Locate trust documents and insurance policies
• Contact the Social Security Administration
• Notify banks, brokerages, and other financial institutions
• Notify credit card companies
• Notify insurance companies
• Notify the mortgage company
• Notify credit bureaus

Non-retirement accounts

On a non-retirement account, designating a beneficiary establishes a transfer on death (TOD) registration for the account. This means that ownership of the account is generally transferred to the designated beneficiary upon your death.

If there is no TOD beneficiary named on the account, or if there is a complication with the named beneficiary (for example, if they have also passed away), the account will be subject to probate.

Joint ownership with right of survivorship or tenants by entirety accounts means that the joint registration transfers account ownership upon the first death, usually directly to the surviving accountholder. TOD becomes effective for joint accounts if both owners pass away simultaneously.

Joint and TOD registration generally allow an account to pass outside the probate estate, enabling the surviving owner or beneficiaries to avoid the time and expense of that process for this account.

Regardless of the account type, estate taxes may be assessed on your taxable estate. Be sure to consult with your attorney or tax advisor to discuss ways to minimize or eliminate estate taxes.

Joint ownership

When it comes to joint ownership, there are a few key points to keep in mind. Firstly, it is important to understand the concept of joint ownership with the right of survivorship. This is an ownership arrangement where two or more individuals own an asset equally, and upon the death of one owner, the assets pass automatically to the surviving joint owner(s). This type of joint ownership is often used by spouses, where upon the death of one spouse, the surviving spouse becomes the sole owner of the asset.

In the context of investment accounts at Fidelity, joint ownership with right of survivorship allows for a seamless transfer of account ownership upon the death of one of the owners. This means that if you and your spouse, for example, jointly own an investment account, and one of you passes away, the surviving spouse becomes the sole owner of the account without having to go through probate. This can help avoid the time and expense associated with the probate process.

It is important to note that joint ownership with right of survivorship only applies when there is more than one living owner of the account. In the case where both owners pass away simultaneously, the transfer-on-death (TOD) designation becomes effective for joint accounts. The TOD designation allows for the assets in the account to pass directly to the intended beneficiary or beneficiaries.

To ensure a smooth transition of ownership, it is crucial to keep your beneficiary designations up to date. If there are no designated beneficiaries or if there is an issue with the named beneficiary, such as their passing before the account owner, the account may be subject to probate. Therefore, it is always a good idea to review and update your estate plan periodically.

Additionally, while joint ownership with right of survivorship simplifies the transfer of ownership, there may still be tax implications. Estate taxes may be assessed on the taxable estate, so it is advisable to consult with an attorney or tax advisor to discuss ways to minimize or eliminate these taxes.

Estate taxes

For investment accounts, the presence of a designated beneficiary can facilitate a smooth transfer of assets upon the account holder's death. This is known as a Transfer on Death (TOD) registration, which allows ownership of the account to be transferred directly to the named beneficiary, bypassing the probate process. However, it is crucial to periodically review and update beneficiary designations to ensure they align with the account holder's wishes and current circumstances. If there are no designated beneficiaries or if there is an issue with the named beneficiary, the account may be subject to probate, and the distribution of assets will be determined by the will or applicable laws.

Retirement accounts, such as IRAs and 401(k)s, also generally transfer directly to designated beneficiaries without probate. However, these assets are often subject to federal and state income tax, as well as potential federal and state estate taxes. To mitigate the tax burden on beneficiaries, it is advisable to engage in careful estate planning. This includes designating beneficiaries thoughtfully, informing beneficiaries about available tax deductions, and considering strategies like irrevocable life insurance trusts (ILITs) to cover estate tax liabilities.

Additionally, it is worth noting that special provisions and considerations exist for surviving spouses in most retirement plans. These provisions can impact the distribution of assets and provide tax advantages or continued access to certain benefits. It is important to consult with legal and tax professionals to navigate the complexities of estate taxes and ensure compliance with applicable laws and regulations.

While dealing with the loss of a loved one, it is essential to take the necessary steps to protect your finances and manage any inherited assets effectively. This includes notifying financial institutions, such as Fidelity, of the death and seeking guidance on specific procedures and requirements for transferring or inheriting investment and retirement accounts.

Retirement accounts

Designating beneficiaries correctly is crucial. If there are no beneficiaries named on the account, or if the named beneficiaries have all predeceased the account holder, the account will likely be subject to probate. However, if beneficiaries are properly designated, they take precedence over any stipulations in the will, and assets will be distributed to them. It is also important to periodically review beneficiary designations, especially before the account holder is required to begin taking distributions from their retirement plan accounts.

Beneficiaries should be informed that they may be able to claim an income tax deduction for federal estate tax paid on the retirement account, which can significantly reduce the income tax owed when they withdraw the assets. Additionally, beneficiaries must be made aware of the RMD rules, which can be complex, and a tax advisor can provide valuable guidance in this regard.

For 401(k)s and similar defined-contribution plans, the plan's rules may mandate an immediate distribution to the beneficiary. However, if the beneficiary is the spouse of the deceased, they may have additional options, such as transferring the benefit to their own employer-sponsored plan or IRA. In cases where creditor protection is a concern, the use of trusts as beneficiaries may be advisable, and consulting with an attorney or tax advisor in advance can help avoid unintended consequences.

Frequently asked questions