What is a joint brokerage account and should you have one? | Investment advice

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 your 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-efficient retirement accounts like your 401 (k) and your Individual Retirement Account, or IRA, can only have one owner.)

Joint brokerage accounts offer many benefits, but they also come with unique risks. Here’s what you need to know about joint brokerage accounts before opening one:

A joint brokerage account is held by two or more people. “Most often, joint accounts are used by spouses, parent and child or people with similar financial goals such as business partners,” says Kevin Dugan, senior partner at Dugan Brown, a financial planning firm at Dublin, Ohio.

In this broad definition of a joint brokerage account, there are finer details to understand. “There are different types of joint records, each with their own nuances,” says Tim Gottfredson, Certified Financial Planner and Senior Financial Planner at EP Wealth Advisors in Salt Lake City.

With co-owner accounts with rights of survivorship (JTWROS), when an owner dies, the surviving owner gets full ownership of the assets in the account. In a Common Co-Ownership Account (TIC), this is not necessarily the case. The surviving owner will not automatically inherit from the deceased owner’s account. Instead, each owner can dictate how their share is to be distributed after they pass away.

Then there are full co-owner accounts (TBEs) where, in order for any owner to make any change to the account, they must get the consent of the other owners. This arrangement is most common between married couples who own title to a property. When an owner dies, the remaining owner takes over the share of the deceased’s property.

The difference between an individual and joint brokerage account comes down to ownership: “While an individual account has an owner attached to it, a joint brokerage account is shared by two or more people,” says Dugan.

Both owners have the same rights and access to the account. Often these people are related, such as spouses or parents and children, but this is not necessary. You can open a joint brokerage account with any person of full age. Of course, that doesn’t mean you should, as the next sections will discuss.

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 hardships of the surviving spouse immediately after death,” he says. “When you have both names on the account, that money is always accessible and can be immediately used for any short-term expenses such as funeral expenses or daily living expenses.”

This can be particularly impactful given that life insurance proceeds often take a long time to receive. “Having immediate access to the joint account can provide some relief for your loved one during a time of anxiety and grief,” said Gottfredson.

Joint brokerage accounts also allow you to avoid probate, since the account can be passed directly to the surviving owner (s), explains Dugan.

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, he can manage collective funds while the other is more passive.”

However, joint brokerage accounts have drawbacks. “While the asset can easily pass to a surviving spouse who is listed as the other co-owner, the account lacks the ability to list beneficiaries,” Gottfredson said. “The death of both spouses at the same time poses a potential problem for the heirs of the account, as they would have to wait for it to be submitted for probate, which can potentially take more than a year.”

Joint brokerage accounts also require a high level of trust, Dugan points out. “Any individual owner can make changes to the assets in the account at any time, even removing the assets entirely without the consent of the other owners. (Unless the account is registered as TBE.)

“This means that in the event of a divorce or an argument with another co-owner, potentially dire situations could arise,” said Dugan.

Joint brokerage accounts also present a potentially higher risk on the part of creditors. “Because the assets are shared among the owners of a joint brokerage account, if creditors come after an individual’s assets, the entire joint account can potentially be foreclosed, exposing the other owners to additional risk.” , said Dugan.

There are also tax issues to consider. Not only are joint brokerage accounts taxable – meaning any gain made on the account must be reported to the IRS, even if you don’t withdraw the proceeds from the account – but contributions can also trigger gift taxes. . When you have a joint account with someone other than your spouse, contributions can be considered gifts, meaning that any contribution in excess of the exclusion of gift tax in a given year ($ 15,000 in 2021) could trigger taxes on donations, says Dugan. “For this reason, a tax professional should always be consulted before setting up a joint brokerage account with a child, friend or brother or sister.”

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 to the account,” says Dugan. “Pooling assets can save on fees, make it easier to track collective progress, and allow the more investment-savvy party to manage assets. “

On the other hand, joint brokerage accounts can put you at risk if you don’t choose your co-owner wisely.

“The decision to open a joint brokerage account should not be taken lightly,” says Dugan. “If there is any doubt about trusting any of the other owners of a joint brokerage account, there are probably other more stable options.”