Schwab and Fidelity Need a Death Certificate, a Court Letter, and an EIN Before an Heir Can Sell a Single Share. The Weeks In Between Belong to the Estate, Taxed at 37% Above $15,650, and a Transfer-on-Death Form Skips All of It

A hypothetical 79-year-old retired engineer died in October 2025 with $1.6 million at Charles Schwab (NYSE:SCHW | SCHW Price Prediction). About $1 million sat in a money market fund and Treasury bills. The rest was stock. His will named his son as executor and sole heir. He never filled out the account’s transfer-on-death form.

The son called Schwab the week of the funeral, and the account was frozen. Schwab’s estate checklist asked for certified Letters Testamentary or Letters of Administration from the appropriate probate court, dated within 12 months, an EIN for the estate itself, with the note “Do not use the decedent’s Social Security number”, and certified death certificates. Fidelity and other large custodians run a similar document review. The court letter arrived in the spring of 2026.

The money market kept paying the whole time. By the end of the estate’s first fiscal year it had earned $40,000, and every dollar landed on an estate income tax return.

Estates Reach the Top Bracket Almost Immediately

At death, assets held in the decedent’s sole name become a separate taxpayer: the estate. It must file Form 1041 once its gross income hits $600 or more under 26 U.S.C. § 6012(a)(3), and it gets a deduction of $600 in place of a personal exemption under § 642(b)(1).

Estates pay tax on a compressed schedule. The base-year table in 26 U.S.C. § 1(j)(2)(E) charges 37% of the excess over $12,500, and that threshold rises with inflation. For tax years beginning in 2025, which covers an estate formed by an October 2025 death that picks a fiscal year, 37% kicks in above $15,650. A single filer did not reach 37% until income passed $626,351 that year.

Section 1411(a)(2) adds a 3.8% net investment income tax on top, applied to the lesser of undistributed investment income or income above the point where the top bracket begins.

The 37% rate hits ordinary income such as interest. Stock barely matters here: under § 1014(a)(1), inherited shares take a basis equal to the fair market value of the property at the date of the decedent’s death, so a prompt sale produces little gain. The cash yield is what the estate pays on. The father owed no federal estate tax either, since the 2025 basic exclusion was $13,990,000.

Running the Numbers on $40,000 of Interest

Assume a 4% yield on $1 million held for 12 months. That produces $40,000 of interest.

• Subtract the $600 deduction: taxable income of $39,400.
• On the 2025 estate schedule, the first $15,650 carries $3,777 of tax. The remaining $23,750 is taxed at 37%.
• Federal income tax: $12,564.50.
• Net investment income tax on the $23,750 layer: $902.50.
• Total federal bill: $13,467.

A Transfer-on-Death Form Sends the Same $40,000 to the Son

Nearly every state has adopted a version of the Uniform TOD Security Registration Act, and Schwab offers TOD registration through its Designated Beneficiary Plan, under which the specified assets are directly transferred to designated beneficiaries, bypassing probate. With that form on file, the son presents a death certificate and the account is re-registered in his name. No court letter, no estate EIN, no frozen months.

He keeps the step-up, because § 1014 covers property that passed from a deceased person, with or without probate. The interest lands on his own Form 1040.

Assume he is single with $60,000 of taxable income before the windfall. Adding $40,000 brings him to $100,000, inside the 2025 22% band that runs from $48,476 to $103,350. His tax on the interest: $8,800, with no net investment income tax at his income level.

The missing form cost the family an extra $4,667 in federal tax to the IRS on one year of interest, plus probate fees and months when nobody could rebalance a stock position.

Four Moves That Keep a Brokerage Account Out of Probate

1. Log in to every taxable brokerage account and check the TOD field. IRAs carry their own beneficiary forms. Individual and joint taxable accounts need a separate TOD registration.
2. Name a contingent beneficiary. If the primary dies first and no backup is listed, the account falls back into the estate and the court process.
3. Compare each TOD form to the will. The TOD registration controls. A will that splits everything three ways leaves the whole account to the one child named on the form.
4. If you are already the executor, move fast and push income out. Apply for the estate’s EIN on Form SS-4 the day the court letter arrives. Distributions to heirs during the year earn the estate a deduction under § 661(a), capped at the distributable net income of the estate, which moves the interest onto the heirs’ lower-bracket returns. Estates also choose their own fiscal year, which controls which year’s schedule applies.

An estate attorney or CPA can confirm how your state’s TOD statute and probate timeline apply to your accounts. Most estate messes trace back to a missing form or a outdated beneficiary, and we put the full cleanup checklist in a free guide here.

One Threshold Worth Memorizing

An estate hits the 37% bracket at $15,650 of income. A single heir reaches it at $626,351, and a one-page TOD form decides which of the two pays.

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