Joint Brokerage Accounts: What You Need to Know

A joint brokerage account is a type of investment account owned by two or more people. It allows multiple individuals to contribute funds toward investments and make trading decisions together. Joint brokerage accounts are commonly opened by married couples, siblings, or business partners who want to invest together and pool their resources.

This type of account offers many benefits, such as simplifying tax reporting and the potential for higher returns through a more diversified portfolio. However, it is essential to carefully consider the potential risks and downsides before opening a joint brokerage account.

Key Takeaways

Joint brokerage accounts are legally binding, and each account holder is responsible for fees,
taxes, and penalties. Consider risks before opening one.
Investments are made jointly, but clear communication and decision-making processes are important to avoid conflicts.
Joint brokerage accounts are often opened by married couples, siblings, or business partners who want to invest together and pool their resources.

How Does a Joint Brokerage Account Work?

A joint brokerage account allows multiple people to pool their money and invest together. Usually, each account holder has equal rights to make trades, manage investments, and access account information.

To open a joint brokerage account, all account holders must provide personal information and complete the necessary paperwork. Once the account is opened, the account holders can buy and sell securities such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) using the pooled funds.

Investment decisions, including which securities to buy or sell and when to do so, are typically made jointly by all account holders with this type of account. However, it is important to establish clear communication channels and decision-making processes to avoid misunderstandings or conflicts.

It’s critical to note that joint brokerage accounts are legally binding agreements, and each account holder is responsible for any fees, taxes, or penalties that may result from transactions made in the account.

Note

Brokerage firms are financial institutions that facilitate the buying and selling of various financial products, such as stocks, bonds, mutual funds, and other investment vehicles. These firms act as intermediaries between buyers and sellers, providing access to stock exchanges and facilitating trades on behalf of their clients.

Types of Joint Brokerage Account

There are three main types of joint brokerage account: tenancy in common (TIC), joint tenancy with rights of survivorship (JTWROS), and tenancy by the entirety (TBE).

In a TIC account, each account holder owns a specific percentage of the account and is free to sell their share or pass it on to their heirs. This type of account may be preferred by investors who want more control over their share of the account.

In a JTWROS account, each account holder has an equal share in the account, and ownership automatically passes to the surviving account holder(s) in the event of a death. This type of account can simplify the transfer of assets and may be preferred by investors who want to ensure that their share of the account passes directly to their chosen beneficiary.

Tenancy by the entirety (TBE) is a type of joint brokerage account ownership that is available only to married couples. It differs from other joint account types in that it carries a right of survivorship, meaning that if one spouse passes away, the surviving spouse automatically becomes the sole owner of the account. This type of account may offer certain legal protections in some states, such as protection from creditors or lawsuits.

Some brokerage firms may offer additional types of joint account, such as community property accounts, which are available in certain states and treat all assets acquired during the marriage as joint property. This type of brokerage account is available only in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington state, and Wisconsin.

It’s important for investors to carefully consider the features and benefits of each type of joint brokerage account before opening an account.

Tips for Managing a Joint Brokerage Account

The following five tips can help you to manage a joint brokerage account:

Establish clear communication channels and decision-making processes

It’s important for all joint account holders to communicate regularly and to establish a system for making investment decisions. Regular meetings or check-ins can help ensure that all account holders are on the same page and that any disagreements can be addressed in a timely manner.

Set investment goals and risk tolerance levels together

Before opening a joint brokerage account, it is important for all account holders to agree on their investment goals and risk tolerance levels. This can help avoid conflicts down the line and ensure that everyone is working toward the same objectives.

Risk tolerance refers to an individual’s or an entity’s willingness to accept the possibility of losing money as a result of investment decisions. An investor with a high risk tolerance is more comfortable with taking on greater investment risks in pursuit of higher potential returns.

Keep accurate records of all transactions and hold regular account reviews

All joint account holders should keep detailed records of all transactions made in the account. Regularly reviewing account statements can help identify any errors or discrepancies and ensure that the account is performing as desired.

Plan for unexpected events, such as death or divorce, by consulting with an attorney

Joint brokerage accounts can be subject to legal issues in the event of a death or divorce. It is important for all account holders to consult with an attorney and to have a plan in place for how the account will be handled if an unexpected event occurs.

Choose a reputable brokerage firm, and regularly check account statements to ensure accuracy

When choosing a brokerage firm, it is important to do your research and select a reputable company with a strong track record of customer service and support.

Advantages & Disadvantages of a Joint Brokerage Account

Advantages

Increased investment power
Simplified tax reporting
Shared responsibility

Disadvantages

Possible conflict over investment decisions
Potential legal issues
Personal financial risks

Advantages of a Joint Brokerage Account, Explained

Increased investment power: Joint brokerage accounts allow individuals to pool their resources and invest together, which can lead to a more diversified portfolio and potentially higher returns.
Simplified tax reporting: Joint brokerage accounts provide one consolidated statement that includes all trades and income earned from the account, which can save time and reduce the likelihood of errors when filing taxes.
Shared responsibility: With joint brokerage accounts, each account holder has equal rights and responsibilities, which can promote shared decision making and accountability.

Disadvantages of a Joint Brokerage Account, Explained

Possible conflict over investment decisions: Differences in investment goals or risk tolerance can lead to disagreements between account holders about investment decisions, which can cause tension and conflict.
Potential legal issues: Joint brokerage accounts can be subject to legal issues in the event of a death or divorce, particularly if there is no clear plan in place for how the account will be handled.
Personal financial risks: Joint brokerage accounts may expose account holders to personal financial risks, such as liabilities resulting from securities trading or account fraud, resulting from transactions made by any of the joint account holders.

Tax Implications with a Joint Account

As with any account, as income, dividends, and gains accrue to the account, taxable events occur. The tax implications for joint accounts will differ depending on whether the account owners are married spouses or unmarried co-owners.

Should the joint owners be married spouses, the tax treatment of gains and assets that move in and out of the account are more straightforward. However, not all joint accounts are held by married couples who share tax treatments. Should you have a joint account with a non-spouse, moving assets in and out of the account can have tax implications for other account owners, such as gift tax, capital gains tax, and so on.

For married spouses with a joint account:

The account is treated as jointly owned with no special tax considerations. Any interest, dividends, or capital gains are reported under each spouse’s individual tax ID and go on their personal tax returns.
Even if only one spouse generates all the investment income, it is split and reported equally on both spouses’ tax returns.
Transferring assets between spouses does not trigger any taxable events.

For unmarried co-owners of a joint account:

Each co-owner reports investment income proportionate to their ownership share of the account on their individual tax return.
If the account ownership split is uneven, the tax burden on investment income is allocated according to ownership percentage.
Transferring assets between unmarried co-owners may be considered a taxable gift if done disproportionately.
Contributions from co-owners are not considered gifts unless one co-owner contributes more than their share to the account.

In summary, joint account taxation follows the individual owners for unmarried co-owners, while spouses enjoy benefits like equal income splitting regardless of contribution sources. Consultation with a tax advisor is recommended when establishing joint non-spousal accounts.

Special Considerations

In a standard joint brokerage account, each co-owner is jointly and severally liable for any investing activities within the account. This means each co-owner may be responsible for covering the full amount of any losses or liabilities incurred, even if they did not make the trades themselves.

For example, if one co-owner sells uncovered options contracts that end up with obligations beyond the account balance, the broker can seek payment from either account holder via a margin call. Or if one co-owner activates a margin loan and cannot cover it, the other co-owner shares responsibility.

These risks are especially problematic when one co-owner is “silent” and less engaged in investment decisions. They may be shocked to find they are on the hook for substantial losses from their partner’s speculative investing or use of leverage. Even conservative investors can unwittingly take on additional liability that implicates their spouse or other co-owner.

Setting aligned goals for risk tolerance provides some protection. But ultimately, the joint structure leaves each party somewhat vulnerable to the other’s choices. Those considering a shared brokerage account should have a candid discussion on investment philosophy or utilize an investment advisor to mitigate blind spots. The risks of joint brokerage accounts extend well beyond routine market volatility.

What Happens to a Joint Brokerage Account When One Holder Dies?

When one holder in a joint brokerage account passes away, the ownership of the account typically transfers to the surviving account holder(s). The surviving account holder(s) will then have full ownership and control over the assets held within the account. It’s important to note that the transfer of ownership can vary depending on the specific terms of the joint brokerage account agreement and local laws. In some cases, it may be necessary to provide a death certificate and other legal documents to transfer ownership of the account.

Is a Joint Brokerage Account a Good Idea?

Joint brokerage accounts can offer couples or groups of investors several advantages: a single investment manager for the account, if desired; combined resources for a larger pool of investment funds; and likely simplified tax and estate planning. However, anyone thinking about opening a joint brokerage account should also consider the need to set up clear communication and decision making to avoid misunderstandings or conflicts. Legal and tax issues also should be discussed before the account is opened.

Who Pays Taxes on a Joint Brokerage Account?

All owners of a joint account potentially pay taxes on it, up to the amount owed.

How Can Setting Up an LLC to Hold a Joint Account Be Helpful?

Forming a limited liability company (LLC) for a joint investment account offers several advantages over holding the account personally in both owners’ names, by essentially creating a legal shield around the brokerage account, limiting liability for potential losses and debts to the capital invested in the LLC itself. Your personal assets outside the LLC remain insulated and protected. This applies to both account co-owners, preventing exposure from each other’s investing choices.

An LLC also provides more flexibility to customize the account’s operational structure. As co-owners, you can establish clear rules for voting control, profit sharing, and succession planning instead of relying on the default joint account setup. Opening the account under an LLC tax ID gives you a formal business entity with pass-through tax treatment, rather than mingling investment activities with your personal taxes. And for more advanced trading strategies, the LLC structure accommodates options, leverage, and short selling more seamlessly than in a plain joint account.

The only real downside is the legal paperwork and filing fees to establish the LLC, which take some time and money upfront. But if you’re investing substantial capital jointly or employing sophisticated strategies, then the liability and flexibility benefits of using an LLC are often well worth it.

The Bottom Line

Joint brokerage accounts offer advantages such as increased investment power, simplified tax reporting, and shared responsibility.

However, potential disadvantages to consider include conflict over investment decisions, legal issues in the event of a death or divorce, and personal financial risks that may arise from transactions made by any of the joint account holders.

It’s essential to weigh these pros and cons carefully before deciding to open a joint brokerage account with others.