You may be accustomed to having a joint credit card or checking account with others, but is it wise to do so with a brokerage account for investing?
When you’re filling out the paperwork to open a brokerage account, you will see a question about whether you’d like to include additional people on your account. It is very common for a joint account to be with a spouse or partner, but it can also be with an adult child or other immediate family member, a business partner or even a close friend with mutual financial goals.
As long as the brokerage account is not for a qualified retirement plan, it is permissible to have more than one owner. Qualified retirement plans, such as a 401(k) or an IRA, can only have one owner.
[Sign up for stock news with our Invested newsletter.]
Before two (or more) people sign on the dotted line, they should understand the types of joint ownership available, as well as the advantages and disadvantages of adding another person. Joint brokerage accounts offer many advantages, but they also come with unique risks.
Here are four questions that will help you decide whether joint ownership of a brokerage account is the right path for you:
— What are the ownership options on a joint brokerage account?
— What is the difference between an individual and a joint brokerage account?
— What are the advantages of a joint brokerage account?
— What are the disadvantages of a joint brokerage account?
What Are the Ownership Options on a Joint Brokerage Account?
A joint brokerage account is owned by two or more individuals. While this is the broad definition, it is the ownership options that define how the account is treated.
— Joint tenants with rights of survivorship (JTWROS). In this arrangement, both owners have equal rights to the account, even if they contributed different amounts. One owner is able to make changes to the account without consent by the other owner(s). Additionally, if one of the owners passes away, the surviving owner will automatically be the beneficiary of the decedent’s share. In the event of multiple surviving owners, they will also share the account proceeds equally.
— Tenants in common (TIC). In this arrangement, ownership is according to the amount that each owner contributes to the account, which is known as pro rata. For example, if one owner were to contribute 75% of the assets, then they would own 75% of the account. It is possible to craft the account so that ownership is equal. If one of the owners dies, the beneficiary will be the decedent’s estate and will follow the decedent’s will. If there is no will, the assets will pass according to the laws of intestacy in the state where the account was held. There are no rights of survivorship for the other account holder(s).
— Community property. This ownership arrangement is basically the same as with joint tenants with rights of survivorship, but it is uniquely available to married couples who live in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin. The assets are owned equally by the marital pair. In the event of death, the decedent’s share will go to their estate.
— Tenancy by entirety (TBE). An arrangement that is also reserved for married couples, tenancy by entirety differs in that all owners must consent before any changes can be made to the account. This arrangement is most common for couples who own the title to property. When one spouse dies, the surviving spouse will receive the entire asset.
What Is the Difference Between an Individual and a Joint Brokerage Account?
An individual brokerage account is owned by one person, while a joint brokerage account is shared between two or more adults of legal age. The age limit varies by state, but is typically between ages 18 and 24. Minor children can have an individual brokerage account, known as a custodial account, that is opened with their parent or guardian. However, minors cannot own a joint brokerage account.
The most important difference, however, comes in ownership designation.
An individual account automatically gives the owner all rights to make decisions on the account. Upon that person’s death, the assets will flow to the owner’s heirs according to the beneficiary designation.
A joint account depends fully on how the account is titled, according to the ownership designation. The ownership will determine the rights each owner has to the assets and dictate how they will flow after the owner’s death.
What Are the Advantages of a Joint Brokerage Account?
A March 2023 study conducted by the Kelley School of Business at Indiana University and published in the Journal of Consumer Research found a causal relationship between marriage partners and their romantic happiness. Their data show that couples who have combined their finances enjoy better relationships, fewer financial arguments and more contentment with their overall household finances. Most notably, the couples that were studied felt that they had better alignment with all their financial goals, which can be a key factor in the success of any long-term investment plan.
Additional benefits of merging assets in a joint brokerage account include:
— Being able to delegate one party to being responsible for all the transactions in the account, especially if that party has a greater interest in handling financial affairs. This is very common among married couples or committed partners.
— This type of account can simplify estate concerns upon the death of one of the owners. With JTWROS or TBE accounts, the surviving account owner automatically has full ownership of the account immediately upon the death of the other owner. This can provide important liquidity to deal with immediate needs, such as funeral costs or outstanding debts, bridging the gap until any life insurance proceeds can be claimed and received. This account can also be invaluable if there are arguments over the will, delaying the distribution of property and other assets.
—
— An aging parent may take comfort in having a trusted family member take responsibility for their financial matters when they can no longer do so safely and effectively themselves. Children can ensure that the bills are paid in a timely manner and spot potentially fraudulent activity. The joint account must be established while the senior still has “legal capacity” to enter into a contract, meaning that they understand and appreciate the consequences of their decisions and actions.
— Joint brokerage accounts can also bypass probate as long as there is either an ownership arrangement that includes rights of survivorship or a designated beneficiary.
What Are the Disadvantages of a Joint Brokerage Account?
Unfortunately, there are many circumstances when a joint brokerage account may be a drawback. These include:
— These accounts require a high degree of trust with the other owner(s). With some ownership arrangements, one owner is able to make changes to the account without the other owner’s explicit consent, including emptying the account.
— Creditors of one owner can seize all the assets, even if the other owner is not part of the debt. This may occur due to divorce, bankruptcy or even an accident where one owner is liable. This can also occur among business owners if the business fails or there is a falling out of the founders.
—
— Clients who wish to pass these assets to someone other than the other account owners must establish a TIC ownership arrangement.
— If all owners pass away simultaneously, the account may end up in probate, delaying account access.
— If a joint brokerage account is between non-spouses, contributions that exceed the current gift tax exclusion can be viewed as gifts, which could trigger gift tax liability. This tax liability may be imposed at the time of contribution or withdrawal, depending upon your state. The gift tax exclusion amount in 2023 is $17,000 ($34,000 per married couple). It is wise to seek tax counsel before entering into a joint account with one’s child, a friend or a sibling.
An aging parent that establishes a joint account with an adult child faces many unique challenges:
— The aging parent may unwittingly disinherit other children if the account has rights of survivorship as all the funds will flow only to the child(ren) on the account.
— If the adult child adds money to the account, it may affect their own children’s ability to qualify for student financial aid, since the entire account value will be counted by the educational institution as available assets.
— The aging parent may also have their eligibility for government benefits, such as Medicaid, impacted since the government will also count all the money in the account, no matter how much each party has contributed.
— Finally, it is possible for the adult child to empty the account and leave their parent high and dry at a fragile time. This can be devastating to the family dynamics, not only between the parent and child, but with other siblings. Unfortunately, this is a more common occurrence than many realize.
The Bottom Line: Should You Get a Joint Brokerage Account?
Joint brokerage accounts can be an wonderful solution for two (or more people) who have similar incomes and are making roughly equal contributions. This is especially effective when the parties have common investment goals, but only one party expresses interest in actively making decisions on the account.
Conversely, the level of trust that is needed for these accounts is high. If one has any misgivings about the other owner(s), this is not the best arrangement for your investments.
Parents who enter into joint accounts with their adult children must have a complete understanding of how well their child handles finances, as well as how stable their romantic entanglements may be. Mismanagement of either may introduce unacceptable risks in the form of creditors. It is possible to achieve similar results through trust accounts, durable powers of attorney and other legal arrangements. It is especially advisable to seek the assistance of a competent estate or elder law attorney in these situations.
Your personal circumstances and the degree of transparency and trust you share with a potential co-owner will dictate the best course of action. It is certainly not a decision that can be taken lightly.
More from U.S. News
How to Open a Brokerage Account for Your Kids
Brokerage Account vs. IRA: Which Should You Invest In?
8 Best Quantum Computing Stocks to Buy in 2023
What Is a Joint Brokerage Account, and Should You Have One? originally appeared on usnews.com
Update 08/14/23: This story was published at an earlier date and has been updated with new information.
