Investment Account Registration Types

Instructor: Christopher Owens

Chris has over 15 years of experience in the financial services industry. He has a Bachelors Degree in Marketing, an MBA and is a CERTIFIED FINANCIAL PLANNER professional

In this lesson, we will identity and describe the most common forms of investment account registration types, which identify the ownership structure of the account. This plays a critical role in assigning the ownership interest of the account.

Ownership of Investment Accounts

The ownership structure of an investment account is very important. It has an effect on how the account is taxed, who has the legal rights of ownership, and who can make investment decisions. It even plays a role in estate planning and the distribution of assets at the owner's death.

There are a variety of ownership types, both for individuals and legal entities. Let's take a look at them.

Individual Registration Types

Fee Simple - Sole Ownership

Sole ownership is the simplest type of account registration. The account is owned by one person and one person only. This single owner possesses all the rights to buy, sell, gift, or bequeath the account assets. The most important characteristic of sole ownership is the owner has the right to transfer ownership interest in the property during lifetime or at death by will.

Clarence opens an investment account in his name only under sole ownership and has the right to buy, sell or gift the assets in the account. Any tax liability associated with the account is Clarence's responsibility to pay as well.

Tenants in Common

Tenants in common is an account registration that has two or more, related or unrelated, people as owners. Each owner is considered to be a tenant in common. Each owner holds an undivided, but not necessarily equal, interest in the account. Owners can be spouses, siblings or completely unrelated, like colleagues or business associates. Each owner does not own a certain portion of the account; they own a certain percentage of the entire account.

Clarence takes $8,000 and opens an account using the tenants in common registration with his sister, Leona, as the other tenant. Leona contributes $2,000 and they decide Clarence will own 80% of the account and Leona will own the other 20%.

They buy $5,000 worth of stock and $5,000 worth of bonds. The account value is $10,000. Clarence and Leona own the account 80%/20%, but who owns what? Does Clarence own the $8,000 of stock and bonds, while Leona owns $2,000 of bonds? No, they own undivided shares of the entire account. So Clarence owns 80% of everything in the account and Leona owns the other 20%.

Joint Tenancy

Joint tenancy account registration is very similar to tenants in common, with the exception that each person owns an undivided and equal share of the entire account, regardless of how much they contribute to the account. This is most commonly used between married couples. At the death of one account owner, all assets in the account automatically become owned by the other surviving owners. Because of this feature, this registration type is also known as joint tenancy with rights of survivorship.

Tenants by the Entirety

Tenants by the entirety is very similar to joint tenancy, with an important exception: the account owners must be a married couple. Also, neither account owner can sever the interest of the other without their consent. The tenants by the entirety account registration must be terminated upon divorce or the death of the first spouse. This registration is the same of joint tenancy, but the owners must be married and ownership changes must be authorized by both owners.

Community Property

Community property is a lesser used account registration type. It is considered a civil law and is only recognized in nine U.S. states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). Under this civil law, married individuals own an equal, undivided interest in all property accumulated during marriage. During marriage, income from each spouse is considered to be community property and owned by each spouse. It is deemed that each spouse contributed 50% of the property held in the account.

Legal Entity Registration Types

Incorporated Organizations

Registration types for incorporated organizations are pretty simple. There are only two choices, S-Corporation or C-Corporation. The main difference is only how each organization is taxed. An S-Corporation is considered a pass-through entity, which means all investment gains or losses pass through to the individual owners of the corporation. With a C-Corporation, the entity itself is responsible for the taxes associated with the account. Incorporated organizations are legal entities that are completely separate from their owners.

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