Sharing is caring, as they say, and it can even be fun — but sharing your finances with just anyone isn’t always wise.
There may come a time in your life when you want to combine finances with another person, be it a spouse, business partner, friend or child. People often have joint credit card accounts or joint checking accounts with more than one owner. You can also have joint brokerage accounts for your non-retirement investments. (Tax-advantaged retirement accounts like your 401(k) and individual retirement account, or IRA, can have only one owner.)
Joint brokerage accounts offer many advantages, but they also come with unique risks. Here’s what you should know about joint brokerage accounts before opening one:
— What is a joint brokerage account?
— An individual versus a joint brokerage account.
— Benefits of a joint brokerage account.
— Drawbacks of a joint brokerage account.
— Should you get a joint brokerage account?
What Is a Joint Brokerage Account?
A joint brokerage account is owned by two or more individuals. “Most commonly, joint accounts are used by spouses, a parent and child or individuals with similar financial goals such as business partners,” says Kevin Dugan, senior partner at Dugan Brown, a financial planning firm in Dublin, Ohio.
Within that broad definition of a joint brokerage account there are finer details to understand. “There are different types of joint registrations, each with their own nuances,” says Tim Gottfredson, a certified financial planner and senior financial planner at EP Wealth Advisors in Salt Lake City.
With joint tenants with rights of survivorship (JTWROS) accounts, when one owner dies, the surviving owner gets full ownership of the assets in the account. In a joint tenants in common (TIC) account, this isn’t necessarily the case. The surviving owner won’t automatically inherit the deceased owner’s share of the account. Instead, each owner can dictate how their share should be distributed after their death.
Then there are joint tenants by entirety (TBE) accounts in which for any owner to make a change to the account, they must get consent from the other owners. This arrangement is most common between married couples who own the title to a property. When one owner passes away, the remaining owner takes over the deceased’s share of the assets.
The Difference Between an Individual vs. Joint Brokerage Account
The difference between an individual and joint brokerage account comes down to ownership: “While an individual account has one owner attached to it, a joint brokerage account is shared by two or more individuals,” Dugan says.
Both owners have equal rights and access to the account. Often these individuals are related, such as spouses or parents and children, but they needn’t be. You can open a joint brokerage account with anyone who is of legal age. Of course, that doesn’t mean you should, as the next sections will discuss.
Benefits of a Joint Brokerage Account
Joint brokerage accounts can offer many benefits. The first benefit that comes to mind for Gottfredson is access, both when all owners are alive and after death.
“Consider the difficulties of the surviving spouse immediately after passing,” he says. “When you have both names on the account, that money is still accessible and can immediately be used for any short-term expenses such as funeral costs or daily living expenses.”
This can be particularly impactful given life insurance proceeds often take time to receive. “Having immediate access to the joint account can provide a certain level of relief to your significant other during a time of anxiety and grief,” Gottfredson says.
Joint brokerage accounts also allow you to avoid probate, since the account can be passed directly to the surviving owner or owners, Dugan says.
Another benefit of joint brokerage accounts is the ability to pool resources, Dugan adds, allowing you to work toward a common goal. “If one individual is more investment savvy, they can manage the collective funds while the other remains more hands-off.”
Drawbacks of a Joint Brokerage Account
However, there are drawbacks to joint brokerage accounts. “Although the asset can easily pass to a surviving spouse who is listed as the other joint owner, the account doesn’t have the option of listing beneficiaries,” Gottfredson says. “Both spouses passing away at the same time poses a potential problem for the inheritors of the account as they would have to wait for it to go through probate, which can potentially take more than a year to complete.”
Joint brokerage accounts also require a high level of trust, Dugan points out. “Any of the individual owners can make changes to the assets within the account at any time, even withdrawing the assets entirely without the consent of the other owners.” (Unless, that is, the account is registered as a TBE.)
“This means in the case of a divorce or falling out with another joint owner, there are some potentially disastrous situations that could arise,” Dugan says.
Joint brokerage accounts also pose potentially greater risk from creditors. “Because the assets are shared among the owners of a joint brokerage account, if creditors come after the assets of one individual, the entire joint account may potentially be seized, exposing the other owners to additional risk,” Dugan says.
There are also tax issues to consider. Not only are joint brokerage accounts taxable — meaning any gains incurred in the account must be reported to the IRS, even if you don’t take the proceeds out of the account — but contributions can also trigger gift tax liabilities. When you have a joint account with anyone other than your spouse, contributions could be viewed as gifts, meaning any contribution over the gift-tax exclusion in a given year ($15,000 in 2021) could trigger gift taxes, Dugan says. “For this reason, a tax professional should always be consulted before starting a joint brokerage account with a child, friend or sibling.”
The Bottom Line: Should You Get a Joint Brokerage Account?
Now that you know the pros and cons of joint brokerage accounts, the question is: Should you get a joint brokerage account? The answer depends on your financial goals, resources and accessibility needs.
“Joint brokerage accounts work best when someone very close to you shares similar financial goals and can contribute a similar amount of money to the account,” Dugan says. “Pooling assets can save on fees, make it easier to track collective progress and allow the most investment savvy party to manage the assets.”
On the other hand, joint brokerage accounts can open you to risk if you don’t choose your joint owner wisely.
“The decision to open a joint brokerage account should not be taken lightly,” Dugan says. “If there are any doubts of trusting one of the other owners within a joint brokerage account, then there are likely some other more stable options available.”
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What Is a Joint Brokerage Account and Should You Have One? originally appeared on usnews.com