If you share everything with someone in your life already, you might be curious how 2 people can invest in stocks together, along with other assets to build wealth.
The answer is a joint investment account, also known as a joint brokerage account.
These special investment accounts give both account holders benefits that help you pursue your shared financial goals. However, it’s important to understand the different types of joint accounts and how joint ownership works before you start investing.
How do joint brokerage accounts work?
Joint investment accounts allow two or more people to invest together. You can invest in just about anything with a partner, including stocks, bonds, exchange-traded funds (ETFs) and mutual funds; property (such as vehicles); or real estate.
Combined ownership of the assets in joint accounts is called joint tenancy. But not all joint tenancy agreements are created equal.
There are two main types of joint tenant accounts: joint tenants with rights of survivorship and joint tenants in common. The main difference is how the shares are divided should one owner pass away. Each has benefits and drawbacks, depending on your needs.
Types of joint investment accounts
|Type of joint account ||Joint tenants with rights of survivorship ||Joint tenants in common
|Ownership ||Each party has equal ownership ||Parties may have different shares of ownership
|What happens in case of owner’s death ||Interest of deceased is automatically passed on to other surviving owners ||Interest of deceased goes back to the estate or their beneficiary listed in their will
|Probate treatment ||Avoids probate||May be subject to probate
Joint tenancy with rights of survivorship
Joint tenancy with rights of survivorship (JTWROS) gives each party equal ownership interest in the assets in the account. Married couples often choose this type of joint brokerage account because rights of survivorship mean the surviving owner has rights to the deceased’s share. Upon the death of one owner, the assets automatically transfer to the other. However, the JTWROS can be broken before that if one owner decides to leave.
Typically used by:
- Spouses or couples who want to share investment assets.
- A parent investing for the benefit of a child.
Pros of JTWROS accounts
- Avoiding probate. Settling a deceased person’s last will through the probate process can be complicated and potentially drag on for months, making it difficult for the surviving spouse to access assets. Some couples strategically place assets in JTWROS to avoid probate. Like other accounts with named beneficiaries, these accounts automatically transfer ownership to the joint owner (the surviving spouse) and are typically not included in probate.
- Everything remains equitable. Both owners of a JTWROS account share the benefits of the assets and the repercussions of liabilities. This mutual self-interest can keep the account from being manipulated by one spouse if things go south in the relationship between account owners.
- Account owners can leave at will. JTWROS owners must enter into the ownership agreement at the same time. But if one owner wants to leave the investment, a JTWROS can be broken. Both owners’ assets can be sold and equally distributed, or one co-owner can sell their share to another party, changing ownership into a tenancy in common structure (described below).
Cons of JTWROS accounts
- Surviving owner has control. In the case of one co-owner’s death, full ownership automatically goes to the surviving owner. The surviving party gains full control of the asset, regardless of any contrary instruction in a will or trust.
- Shared ownership means shared responsibility. If one co-owner is in debt and a creditor comes after the joint assets or freezes the account, both owners stand to lose equally. This is an important consideration, especially when sharing a joint account with a non-spouse. It’s worth noting that in some states, married couples get the same benefits of a JTWROS through something called tenancy by the entirety, but creditors are not able to come after the shared asset.
- Special taxes may apply. Depending on who you co-own the assets with, how much your assets are worth and other factors, you may face gift or estate taxes on your account. Consult a tax professional to find out what you may be liable for in your specific situation.
Joint tenants in common
Joint tenants in common (JTIC) allows multiple people to share fractional ownership in a property instead of equal ownership. There are no automatic rights of survivorship with joint tenants in common. When one owner dies, their share of the investment automatically goes back to their estate, unless otherwise specified in a will.
Typically used by: Multiple real estate investors who want to share ownership in a single property, and keep the interest of each separate should one party pass away or leave the investment.
Pros of JTIC accounts
- Clear lines of ownership. With a JTIC, each owner can make decisions independently. Shares of ownership can easily be sold without disrupting the ownership structure, so new owners can be added to the investment at any time.
- More beneficiary control. Co-owners can specify during the estate planning process who will inherit their shares; otherwise, it will automatically go back to the estate upon the death of the owner.
Cons of JTIC accounts
- May be exposed to probate. If one owner passes away without a will, the shares will likely have to pass through probate and could impact the overall investment.
- Shared responsibility for debt. When multiple owners sign a mortgage together, all are exposed if the property is foreclosed. If one person stops paying the mortgage, the others may have to cover payments to avoid this.
- Co-owners can increase uncertainty. If you are investing with outside parties in a JTIC, those parties can choose to sell their shares at any time. If one owner wants out and you can’t agree, they can file an involuntary partition asking a court to divide up the property or sell and split the money.
Should you use a joint brokerage account?
As you can tell from the above, the question of whether to open a joint investment account with someone is a complicated one.
A joint tenancy with a spouse is an easy way to share investments, avoid probate and keep the continuity of ownership should one spouse pass away. Joint tenancy ownership with others may make sense depending on the circumstances.
Before sharing ownership of anything, however, it helps to tread carefully and make sure you understand the risks. A joint investment account with a spouse can complicate as many things as it simplifies.
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