A new California law will make brokerages track down your beneficiaries

What happens to someone's investments after they die? A lot of people assume that when someone passes, their brokerage calls whoever was named on the account. However, until recently, there were no official rules in place to make the financial institution do that. The person named on the account could wait for a call that never came, or a charity might never find out they were given a bequest. On September 27, Governor Newsom signed SB 1288 to fix this issue, at least for one kind of account. Its backers call it the Legacy Act, and they say it's the first law in the country to provide these protections to people and charities. Most of it doesn't kick in until 2027 and 2028, but it's a good excuse to take a look at how your accounts are set up.

Photo by Adam Śmigielski on Unsplash 

What the law requires

The law covers stocks, bonds, and funds held with a transfer on death (“TOD”) designation. If you ever filled out a form at your brokerage naming who gets the account when you die, that's probably the type of account we are talking about. Once the brokerage learns that every owner on the account has died, it has 60 days to make a sincere,  good faith effort to reach each beneficiary named. It might learn about the death from a death certificate, which it may receive from the executor, the trustee, or one of the people named. It might also learn from a match in the Social Security death records, or from something already in its own files. To count as a good faith effort, the brokerage has to act on the contact details it has and on what the family or the executor tells it. The first notice can't show the balance or the account history. The brokerage tells you the size of your share once it has confirmed who you are.

Then the law goes after the red tape. A brokerage can't make a beneficiary open an account with it just to get what the beneficiary was gifted, so it has to be willing to pay by check or by transfer. If there are several people named, only one of them has to send in proof of death, and the brokerage can't make them all file together or wait on each other. Once you've turned in everything it asks for, your share is due within 60 days. There are a few exceptions. A lien or a court order can hold things up, and so can a fight over who owns the account. But if paying would break another state or federal law or an industry rule, the brokerage has to tell you in writing which rule is in the way and what it needs from you.

A brokerage has 60 days after it learns an account owner has died to make a good faith effort to reach each person named on a Transfer on Death form.

When it starts

The official start dates are different depending on the type of beneficiary. For charities and other tax-exempt groups, the rules start January 1, 2027, and only when the owner dies on or after that day. For everyone else (such as your kids or your spouse), the rules start January 1, 2028. This applies only when the last owner dies on or after that day. So if an owner dies this year or next, this law won't require the brokerage to call individual beneficiaries. Charities also get a few extra protections (like limits on the personal details a brokerage can ask of the people who work there) that don't carry over to individual beneficiaries like family members..

SB 1288 covers people named on an account only when the last owner dies on or after January 1, 2028. For charities, the date is January 1, 2027.

What it doesn't cover

The law is also narrower than the headlines make it sound. It only changes the part of the Probate Code that deals with TOD stocks, bonds, and funds. It isn't written for IRAs and 401(k)s, life insurance, bank accounts (like checking and savings accounts) with a payable on death name on them, or a TOD deed on a house. Each of those types of assets has its own rules. A brokerage doesn't have to offer TOD at all, so you may find an account where you can't name anyone. And the law only kicks in once the brokerage hears about the death, which usually still means someone in the family or the executor sends in a death certificate.

What happens to the account?

You don't have to wait until 2028 for any of this to matter, because the name on a TOD form is still a valid beneficiary designation and beats your trust or will. When the owner of a TOD account dies, the account goes to the person named on the form, outside of probate, and nothing written in your will or trust can change that. The law just changes the brokerage’s requirement to find the named beneficiary.

So what happens if nobody you named is still alive? The account goes back into your estate; the brokerage doesn't get to keep it. The account gets passed on like anything else you own that doesn't have a name attached, which means under your will or under California's default inheritance rules if you don't have a will. That likely means that the account will go through probate. 

Where money really does get stuck is when nobody comes asking for it. If an account goes three years with no activity, the brokerage has to try to reach the owner, and if that doesn't work, it hands the account over to the State Controller as unclaimed property. Even then, it isn't lost for good. An heir can claim it from the state for free, and there's no deadline (although it's a lot easier if somebody knew the account was there in the first place).

A brokerage doesn’t keep an account nobody claims. After three years with no activity, it goes to the State Controller, and an heir can claim it for free. 

You can change the names on the form any time, and you don't need anyone's okay to do it. That's handy, but it also means the form is only as up to date as you've kept it. Say you redid your will after your third child was born, but an old brokerage account still names only your oldest. The will can't fix that, because the brokerage goes by the form it has on file.

It's worth setting aside an afternoon to ask each brokerage for a copy of what it has. Look at who's named, whether you named a backup in case your first choice dies before you, and whether each person's name, address, and phone number are current. The brokerage's good faith effort will mostly rely on what's in its files, so old contact details can slow things down. Whether you tell the people you named is up to you (some clients would rather keep their plans private, and that's fine). Still, someone, like your executor or successor trustee, should know the account exists and where to find it. If one of your forms doesn't match the rest of your plan, it's often a quick fix. When you're ready to go over it with someone, reach out to our team at Laurel Trust Law.