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Difficulty: Very hardCustomer Account Types and Ownership Structures

Samantha and Gregory establish a joint brokerage account designated as Tenants in Common (TIC), with Samantha holding an 80% ownership interest and Gregory holding a 20% interest. Two years later, Samantha passes away testate, leaving her entire estate to her adult daughter, Clara. Immediately following Samantha's death, Gregory submits a request to the broker-dealer to liquidate all account holdings and transfer 100% of the proceeds into his personal individual account, asserting full ownership rights as the surviving joint owner. Concurrently, Clara presents a copy of Samantha's will and demands an immediate payout of 80% of the account value. Which of the following statements correctly describes the required operational actions of the broker-dealer and the legal disposition of the account assets?

  1. The broker-dealer must freeze the account against new transactions, cancel open orders, and reject both immediate distribution requests; Samantha's 80% interest must pass to her estate according to legal probate procedures, while Gregory retains his 20% interest.Answer
  2. B
    The broker-dealer must honor Gregory's request to transfer the account assets into his individual account, because joint account ownership automatically conveys full rights of survivorship to the surviving tenant regardless of specified ownership percentages.
  3. C
    The broker-dealer must honor Clara's request and distribute 80% of the account proceeds directly to her as the named beneficiary in the will, while liquidating the remaining 20% for Gregory.
  4. D
    The broker-dealer must liquidate the entire account immediately and deposit all funds into an escrow account protected by SIPC while the court determines asset distribution between Gregory and Clara.

Answer

The broker-dealer must freeze the account against new transactions, cancel open orders, and reject both immediate distribution requests; Samantha's 80% interest must pass to her estate according to legal probate procedures, while Gregory retains his 20% interest.
In a Tenants in Common (TIC) account, each owner holds a specific fractional interest, and there are no rights of survivorship. Upon notification of a tenant's death, the broker-dealer's proper protocol is to cancel open orders and freeze the account to prevent unauthorized trading or distribution. The deceased tenant's share (80%) passes to their estate and requires formal legal documents (such as a death certificate and letters testamentary) before distribution. The surviving tenant retains their original fractional interest (20%). Direct distributions to heirs based solely on a copy of a will are impermissible without going through estate probate.

Step-by-Step Solution

1
Identify the account ownership structure and survivorship rules.
The account is held as Tenants in Common (TIC). Unlike JTWROS, TIC accounts do NOT carry rights of survivorship. The decedent's percentage interest (80%) does not transfer to the surviving tenant.
Ownership rights in a TIC account remain divided according to specified percentages upon the death of any tenant.
2
Determine broker-dealer operational requirements upon notification of an account holder's death.
The firm must freeze the account against new trades/withdrawals and cancel open orders until legal authority is established.
Freezing the account protects the assets of both the estate and the surviving owner from unauthorized trading or improper disbursements.
3
Evaluate the distribution demands from the surviving owner and the heir.
Gregory cannot claim 100% of the assets, and Clara cannot receive direct payout under a will without estate probate authorization.
Assets bequeathed in a will must be processed through the estate court under the direction of an executor or administrator with court-issued letters testamentary.

Key Concept

Tenants in Common (TIC) Ownership vs. Estate Probate and Operational Death Procedures
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Topics

Customer Account Types and Ownership Structures