What Happens to a Private Fund Investment When an Investor Passes Away?
Investing in private funds—such as hedge funds or private equity—can be complex, especially when it comes to ownership transitions after an investor passes away. Many investors hold these assets through custodians like Charles Schwab & Co., leading to questions about how the beneficiary process works and who facilitates it. This blog post breaks down what happens when an investor with a private fund investment passes away and the role of different parties in the transfer process.
Who Controls the Beneficiary Process?
A common misconception is that private fund administrators or custodians like Schwab control the beneficiary process. In reality, the transfer of assets follows legal estate procedures, fund agreements, and the investor’s account setup. Here’s who plays a role:
Estate Executors & Probate Court – If the investor had an estate plan, the executor (or trustee, if applicable) ensures assets are transferred based on the will or trust. If there is no estate plan, probate court oversees the distribution.
Fund Manager & Legal Team – Private fund investments are usually structured as Limited Partnerships (LPs) or Limited Liability Companies (LLCs). The partnership agreement and subscription documents dictate how ownership transfers.
Custodian (e.g., Schwab) – If the investment is held at Schwab, they facilitate asset transfer based on account type and legal documentation.
Beneficiary Designations & Transfer Agents – If the investor set up a Transfer on Death (TOD) designation, the assets bypass probate and go directly to the named beneficiaries.
What Happens If the Investment is Held at Charles Schwab?
If a private fund investment is custodied at Schwab, the beneficiary process depends on the type of account:
Individual Account (No Beneficiary Designation) → The investment goes through probate. Schwab requires legal documents (e.g., death certificate, court letters of administration, will, etc.) before allowing the transfer.
Individual TOD (Transfer on Death) Account → If a TOD designation exists, Schwab transfers the assets directly to the named beneficiaries without probate.
Joint Account with Rights of Survivorship → The surviving account holder automatically receives full ownership.
Trust or Business Account → The successor trustee or authorized representative assumes control based on trust or entity documents.
Upon notification of the investor’s passing, Schwab freezes the account to prevent unauthorized transactions. The estate’s executor or trustee must work with Schwab to transfer or re-register the assets.
How Do Private Fund Transfers Work?
Unlike publicly traded stocks, private fund investments require additional steps:
The Fund’s Partnership Agreement Governs Transfers – Many private funds require fund manager approval before ownership transfers.
Redemption May Be Required – Some funds do not allow direct transfers and may require the estate to redeem the investment instead.
Documentation Is Key – Executors must provide necessary documents such as a death certificate, probate orders, or trust documents for the transfer.
How Does This Compare to Other Assets?
The process of transferring private fund investments is more complex than transferring other types of assets. Here’s how it compares:
Publicly Traded Securities (Brokerage Accounts) – If held in a brokerage account with a Transfer on Death (TOD) designation, these assets bypass probate and transfer directly to beneficiaries. If there’s no TOD, the assets go through probate but are typically easier to transfer than private fund investments.
Retirement Accounts (401(k), IRAs) – These accounts have designated beneficiaries, and upon the investor’s death, assets are transferred directly to the named individuals without probate. Beneficiaries may have tax considerations depending on withdrawal rules.
Life Insurance Policies – Life insurance proceeds go directly to named beneficiaries outside of probate. This is one of the simplest asset transfers since it does not require court intervention or fund manager approval.
Real Estate – If real estate is held in a trust or joint ownership with rights of survivorship, it can transfer smoothly without probate. Otherwise, it must go through probate, which can be time-consuming.
Can a Financial Advisor Help?
Yes! A financial advisor plays a crucial role in guiding the executor or beneficiaries through the transfer process. However, they do not have direct control over the transfer. Here’s how they can help:
Explain the Process – Advisors can help beneficiaries understand what steps to take, including probate, TOD accounts, and fund transfer rules.
Coordinate with Schwab & Fund Administrators – They can liaise with Schwab’s estate team and the private fund’s administrator to ensure a smooth transition.
Help with Next Steps – Beneficiaries may need guidance on whether to retain, transfer, or liquidate the investment, and a financial advisor can provide insight based on their financial goals.
Key Takeaways
Private fund administrators do not control the beneficiary process. Transfers follow legal and estate planning rules.
Schwab facilitates the process based on the account type but does not make ownership decisions.
Financial advisors assist with guidance and coordination, but legal approval from the estate executor, trust, or probate court is required.
Private fund transfers may require fund manager approval and must follow partnership agreements.
Compared to other assets like brokerage accounts, retirement accounts, and life insurance policies, private fund transfers are often more complex and require additional steps.
Navigating the transfer of private fund investments after an investor passes away can be challenging, but proper estate planning and professional guidance can make the process much smoother. If you or a loved one holds private investments, consider reviewing estate plans, account designations, and fund agreements to ensure a seamless transition.
If you have questions about estate planning for private fund investments, consult with an estate attorney, financial advisor, or your fund administrator to ensure everything is in place before it's needed.
**The above does not constitute advice of any kind. Please consult your financial advisor or attorney on any matters relating to the above. This is for discussion purposes only.
