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

Sharing is caring, as they say, and it can even be fun, but sharing your finances with just anyone isn’t always a good idea.

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-advantaged retirement accounts like your 401(k) and 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:

— What is a joint brokerage account?

— An individual brokerage account versus a joint brokerage account.

— Advantages of a joint brokerage account.

— Disadvantages of a joint brokerage account.

— Should you open a joint brokerage account?

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What is a joint brokerage account?

A joint brokerage account is owned by two or more people. “Most commonly, joint accounts are used by spouses, a 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. in Dublin, Ohio.

Within this 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, certified financial planner and senior financial planner at EP Wealth Advisors in Salt Lake City.

[READ: Brokerage Account vs. IRA & Which Should You Invest In?]

With Joint Ownership with Rights of Survivorship (JTWROS) accounts, when an owner dies, the surviving owner obtains full ownership of the assets in the account. In a co-owners in common (TIC) account, this is not necessarily the case. The surviving owner will not 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 full co-ownership (TBE) accounts where in order for an owner to make a change to the account, they must obtain the consent of the other owners. This arrangement is most common between married couples who own the title deed. When an owner dies, the remaining owner takes over the deceased’s share of the property.

The difference between an individual and joint brokerage account

The difference between an individual and joint brokerage account is ownership: “While an individual account is associated with one owner, a joint brokerage account is shared by two or more people,” Dugan explains.

Both owners have equal rights and access to the account. Often these people are related, such as spouses or parents and children, but it doesn’t have to be. You can open a joint brokerage account with any adult. Of course, that doesn’t mean you should, as the next sections will discuss that.

Benefits of a Joint Brokerage Account

Joint brokerage accounts can offer many advantages. The first benefit that comes to Gottfredson’s mind is access, both when all owners are alive and after they die.

“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 living expenses.”

[READ: The 5 Largest Brokerage Firms in 2021.]

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

Joint brokerage accounts also allow you to avoid probate, since the account can pass directly to the surviving owner or owners, says Dugan.

Another benefit of joint brokerage accounts is the ability to pool resources, adds Dugan, allowing you to work toward a common goal. “If one person is more savvy about investing, they can manage the collective funds while the other remains more passive.”

Disadvantages of a Joint Brokerage Account

However, joint brokerage accounts have drawbacks. “While assets can easily be passed to a surviving spouse who is listed as the other co-owner, the account does not have the ability to list beneficiaries,” Gottfredson explains. “Both spouses dying at the same time poses a potential problem for heirs to the account as they would have to wait for it to go through probate, which can potentially take over a year.”

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

[Read: How to Open Your First Brokerage Account.]

“That means that in the event of a divorce or a falling out with another co-owner, some potentially disastrous situations could arise,” Dugan says.

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

There are also tax issues to consider. Not only are joint brokerage accounts taxable – meaning any gains 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 tax liability on donations. When you have a joint account with someone other than your spouse, contributions may be considered gifts, which means that any contribution above the exclusion of gift tax 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 opening a joint brokerage account with a child, friend or sibling.”

Bottom Line: Should You Open a Joint Brokerage Account?

Now that you know the pros and cons of joint brokerage accounts, the question is: should you open 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 put a similar amount of money into the account,” says Dugan. “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 put you at risk if you don’t choose your co-owner wisely.

“The decision to open a joint brokerage account shouldn’t be taken lightly,” says Dugan. “If there are doubts about the confidence of any of the other owners in a joint brokerage account, there are probably 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