Can mutual funds have beneficiaries?
Ownership of a mutual fund account may allow beneficiaries, in the event of the owner’s death, depending on how the account was established. There are several options for designating recipients with mutual funds. Investors can assign beneficiaries to their retirement plans, such as a 401 (k). IRAs or individual retirement accounts can also have designated beneficiaries. The mutual fund beneficiary rules allow designated beneficiaries for each fund. Also, for mutual funds that do not have any beneficiaries listed, many funds have default beneficiaries.
However, beginning in 2020, changes to the laws on non-spousal beneficiaries for retirement accounts went into effect. As a result, it is important for investors to review their designated beneficiaries.
- Mutual fund accounts allow owners to name beneficiaries in the event of the owner’s death.
- Mutual fund owners can establish a death transfer arrangement (TOD) whereby the fund’s assets would be transferred to the beneficiary.
- Investors can assign beneficiaries to their retirement accounts, such as a 401 (k) or individual retirement accounts (IRA).
Understanding Mutual Fund Beneficiaries
A mutual fund can have more than one owner on the account. If there are two owners on the account and one of the owners dies, the account is transferred to the other owner or the surviving owner.
In the joint ownership situation, the surviving member becomes the sole owner of the mutual fund without the lengthy succession process. Succession is the legal process or administration of the estate of a deceased person when there is no will. If there is only one owner in a mutual fund or the last owner passes away, the beneficiaries can be named based on the account title.
However, it is important to note that many mutual funds have built-in default beneficiaries in case the owner does not name a beneficiary. If the owner dies, the default beneficiary would be the owner’s spouse, and if there is no living spouse, the assets would be transferred to the owner’s children.
A mutual fund account can also be opened as an individually owned account, and the owner can name one or more beneficiaries using a death transfer (TOD) designation. The owner maintains control of the account for as long as he or she lives. The account would be titled in the owner’s name along with a TOD designation in the beneficiary’s name. Those named as beneficiaries inherit the account upon the death of the owner, which means that the fund’s assets do not become part of the owner’s estate. Transferring assets from a designated TOD account also prevents succession.
A 529 savings plan
College 529 savings plans are owned by an account holder who selects a beneficiary. The 529 plan is a tax-advantaged method of saving for college if the income from the account is used for qualified education expenses. The owner controls the account and can invest in mutual funds.
Retirement accounts with mutual funds
The moment a retirement account is opened, such as a 401 (k) plan, the owner can name beneficiaries for the assets in the account. The online application or form has fields for primary and secondary beneficiaries. Many 401 (k) plans also allow the owner to assign a percentage of the asset value that would transfer to each beneficiary. Beneficiaries inherit account earnings, upon the death of the account owner, regardless of investments, which could include mutual funds, company stocks, or bond funds.
In 2019, the U.S. Congress passed the SAFE law, which along with other changes, removed the extension provision for retirement account and IRA beneficiaries. Before the ruling, an IRA beneficiary could extend the required minimum distribution payments over many years. By simply withdrawing the minimum amount required, beneficiaries were able to spread the tax payments for those distributions over time.
With the new law beginning January 1, 2020, non-spousal beneficiaries must distribute the full retirement account balance within 10 years of the owner’s death. However, there are some exceptions to the ruling. As a result, it is important that retirement account holders consult with a financial professional to review the new resolutions and their designated beneficiaries.