When opening a brokerage account, you will decide more than just the investments you plan to purchase. You’ll also need to determine how to classify ownership of the assets.
If you are the sole owner of your funds, the decision is simple. However, if you share the assets with one or more other owners, the decision becomes more complicated. The choice you make impacts access to the funds, taxes, and inheritance – so, you should understand your options before making such an important decision.
Individual Brokerage Account Ownership
The simplest type of brokerage account ownership is individual. As the name suggests, there is only one owner for this type of account. This owner has full access to make deposits or withdrawals and choose investments. They are also solely responsible for paying capital gains tax when investments are sold and income tax on dividends the securities earn.
Upon the account owner’s death, the account typically passes according to the terms of the owner’s will. However, there is a method for avoiding probate known as a Transfer on Death [TOD] designation. This allows the account to pass directly to one or more individuals or entities named in the TOD document.
If you are the sole owner of the funds in your brokerage account, individual ownership is generally a wise choice. It allows you to retain full control of the account throughout your life and determine who receives the assets after your death.
Joint Brokerage Account Ownership
When you want to share an account with one or more other people, the way you establish your account becomes even more critical. There are several types of joint accounts and your access to each depends on state law.
Joint Tenants with Rights of Survivorship (JTWOS)
Joint Tenants with Rights of Survivorship [JTWOS] is a type of brokerage account ownership designation that is available in most states without community property laws. It allows two or more owners to establish an account equally.
This type of account is frequently used by married couples and family members. It requires a degree of trust between owners because each can deposit, withdraw, and manage the investments in this type of account independently.
Since account assets are owned equally between the parties, tax liability is also applied equally. Each account owner is responsible for paying their proportional share of income tax on dividends and capital gains tax when an investment is sold.
When one account owner dies, the account does not pass to their beneficiaries through probate. Instead, the funds pass to the other account owners automatically – bypassing the time-consuming probate process.
Tenants By Entirety
Some states allow for a special type of joint account ownership called Tenants by Entirety. This type of ownership is only available to married couples and treats the couple as a single legal entity. Because the owners are treated as a single entity, both must consent to withdrawals.
A benefit of this type of account ownership over alternatives is that assets in a Tenants by Entirety joint account are protected from creditors. This provision only applies to credits that are in one spouse’s name, not joint debts.
Like JTWOS, a Tenants by Entirety account bypasses the probate process upon the first account owner’s passing. The surviving spouse automatically inherits these assets, no matter what the other spouse has written into their will.
Tenants In Common
Tenants in Common is another type of joint account popular with business partners, friends, and family members. It allows for an unequal split of assets where each owner can retain ownership of the funds they contributed.
Each owner of this type of account is free to withdraw their share of the account. They must also pay capital gains taxes when investments are sold and income tax on dividends according to their proportional ownership stake.
When one owner dies, their share of the assets is passed to beneficiaries according to their will. Similar to individual account ownership, an account owner can establish a TOD designation so that assets avoid probate.
Choosing The Right Type of Ownership for Your Situation
There are several factors that you will need to consider when choosing a type of brokerage account ownership. The first is how many owners the account should have. If the assets are yours alone and you do not want anyone else to access them, an individual account is an excellent option. If you share the assets with your spouse or another person, you will need to choose the type of joint account that matches your needs.
State law governs the types of joint accounts that are available to you. Once you know your account options, consider whether you need to divide the assets equally or unequally. If you need to maintain an unequal ownership share in an account, a Tenants in Common ownership designation may be right for you.
Finally, joint accounts can have gift tax consequences. If one person contributes more than their share of the funds, gift tax can apply. For example, if you open a JTWOS account with your child and contribute $100,000, half of that amount could be considered a taxable gift.
Account opening decisions should be made carefully – especially when splitting assets with other owners. An experienced financial advisor can help you weigh the tax, legal, and inheritance differences and make the choice that matches your situation.
Invest Your Savings with Meld Financial
At Meld Financial, we help clients open and utilize the type of account that best matches their ownership preferences. Our team can help you explore the different options and make a choice that matches your goals.
We offer brokerage accounts as a part of a wholistic financial planning service centered around our comprehensive wealth management program, Financial Fingerprint®. This nimble plan brings together the most important pieces of your financial life into one easy-to-understand strategy that changes with your circumstances.
To learn more and get started with Financial Fingerprint®, contact us today.
