One of the reasons we like Charles Schwab as a custodian is that they strive to follow all the rules. Generally speaking, they don’t cut corners. The flip side of this benefit is that Charles Schwab can sometimes be very difficult during a non-standard case.

This can be seen in the multitude of steps required to divide an inherited Roth IRA amongst trust beneficiaries and in Schwab’s rules surrounding durable power of attorneys (DPOAs). It can also be seen in the inheritance rules for joint accounts.

To understand this complexity, you have to put yourself in the mind of Charles Schwab.

On any joint account application, there are multiple account holder sections for signers to list their personal information. This simple conveyance of information also carries with it a complexity that most signers don’t notice: The first signer is listed as the primary account holder.

This subtle fact is often never noticed. However, the primary account holder is the individual whose social security number is used in default cases for basic tax reporting. This is a fact that doesn’t really matter to account holders but which matters to Charles Schwab.

Fast forward to the death of one of the account holders. Under inheritance rules, there are two joint account types which should be straightforward to inherit: Tenants by the Entirety and Joint Tenants with Rights of Survivorship.

A tenants by the entirety account is considered legally owned 100% by both account holders, so the survivor should effectively already own all the assets and be able to inherit into an individual account without any trouble.

Under joint tenants with rights of survivorship (sometimes abbreviated JTWROS), the surviving account holders have survivorship rights and again should inherit all the joint assets into an individual account without trouble.

Schwab’s Processing Practices

Charles Schwab agrees with the definition of these account types and inheritance processing, except for the “without trouble” part. The reason is because Schwab needs to use the social security number of a living person for basic tax reporting.

If the surviving account holder is the primary account holder, then Charles Schwab makes the processing easy. The account is already set up under the survivor’s social security number, so all Schwab requires is a LOA or “Letter of Authorization” to remove the decedent. This is as simple as:

[Name] died on [Date]. Attached you will find the death certificate. Please remove them from the joint account [ACCOUNT NUMBER] and convert the account to an individual account owned solely by me.

Then, sign it, date it, and done.

But what if the surviving account holder is not the primary account holder?

In that case, Schwab needs the survivor to become the primary account holder. However for reasons Schwab will not explain to me, this is a task too complicated for a standard letter of authorization to handle in their internal systems. Instead, Schwab requires the survivor to sign a new account application to open a brand new individual account and a Journal Request to move the assets from the old joint account to the new individual account.

And before you say, “Oh, that doesn’t sound too hard,” you simply haven’t thought of the complexity.

A new account number means that all of the existing checks, debit cards, direct deposits, automatic bill payments, and any other financial system you had in place are immediately lost and must be recreated for the new account. And furthermore, this complete recreation of your financial life is done while you are grieving the death of your spouse.

It is unnecessarily complicated. It is made worse if the survivor is in stages of mental decline with an increased difficulty handling paperwork.

Potential Work Arounds

While there is no solution to the recreation of your financial processes, there is a solution to the paperwork problem. When you are opening joint accounts for your marriage, open two. One where you are the primary account holder and one where your spouse is the primary account holder.

This way, regardless of who dies first, there is always an account where the survivor is the primary account holder, and the survivor is guaranteed to have the option of easy paperwork to settle the estate.

The survivor may still need to waste time rerouting direct deposits or re-establishing automatic bill pay, but at least he or she can be back online with a functioning account without a hold-up.

Photo by Gustavo Fring on Pexels. Image has been cropped.