Investing with your spouse can be a difficult transition as you get married. Some people decide to keep their investments separate and others decide to combine finances when they get married. There is no right or wrong answer, but there are some things to understand about your investments and income when you get married. There are four types of joint ownership accounts in Texas – Community Property, Tenants in Common (TIC), Joint Tenants with Right of Survivorship (JTWROS), and Tenancy by the Entirety (TBE). Let’s dive in to why you would use each of these accounts.
First, I want to discuss asset ownership as defined by community and separate property in the state of Texas. Community property means spouses own (and owe) everything equally. Before you get married, everything you own, whether a car, a home, or your investments, is considered separate property. This means there is no divided ownership and if you were to pass away, the assets would be distributed to the stated beneficiaries as directed in your will. When you get married, this changes. Unless you follow the necessary steps to keep your assets as separate property, some of them may become community property. Individual retirement accounts (IRA’s) are always considered separate property, but an individual brokerage account could become community property once you “tie the knot”. All income received while married, whether earned income or passive income, is considered community property. Community property joint brokerage accounts can only be opened by a married couple. The assets are held equally between spouses. If one owner dies, the decedent’s portion of the account will pass on to their estate. If each spouse is the beneficiary for the other spouse, then the surviving spouse takes on full ownership of the assets.
Now that you have a better understanding on how Texas views the ownership of certain assets, we can now discuss the various types of joint brokerage accounts. The most common type of joint account is Tenants in Common (TIC). This is an account where two or more people share ownership of an asset. The ownership is not always equal, depending on the TIC agreement when opening the account. For example, one owner could have a 60% ownership interest and the other a 40% ownership interest. When a tenant passes away, their share of the ownership is passed to their estate, not to directly to the other tenants. This means a TIC account has no rights of survivorship. If the TIC account is owned by a married couple and they have designated each other as primary beneficiaries, the surviving spouse receives full ownership of the assets as stipulated by the decedent’s estate. This type of account also allows an owner to pass money to heirs instead of a spouse if they desire.
The next type of joint brokerage account is Joint Tenants with Right of Survivorship (JTWROS). This account has two distinct features in the name – joint tenants and right of survivorship. This is a joint account, just like community property and TIC accounts. The right of survivorship is where this account is different. This stipulates that when one of the owners dies, the surviving owner receives the decedents share of ownership. A JTWROS account avoids probate (when the court reviews the decedents will) by automatically transferring the assets to the surviving owner. Because of this automatic transfer of assets, it may be more difficult to pass money to your heirs. No matter how this account is funded, there is always equal ownership.
The last type of joint account to understand is Tenancy by the Entirety (TBE). This type of account can only be opened by a married couple, just like a Community Property account. Like a JTWROS account, a TBE account passes assets upon death to the surviving spouse. The most important distinction between a Tenancy by the Entirety account and TIC or JTWROS is the consent of the other tenant is required before any asset can be sold or gifted. A Tenancy by the Entirety is mostly used in the ownership of real assets, such as real estate.
Every account has its place for estate planning reasons. Your plans on how to pass on your wealth when you die, estate taxes, personal goals and other things all go into the decision-making process for opening a joint account. There is no one right answer because each couple views their finances differently. Understanding how assets are owned and what happens to them upon your death is an important part of solid financial planning. Consult your estate and financial planning professionals for advice on asset ownership.
*The information presented here is not specific to any individual’s personal circumstances. FMP Wealth Advisers is not providing investment, tax, legal, or retirement advice or recommendations in this article.
**To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
***These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
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