Brokerage Account Types: Individual, Joint, and Trust

How you title your brokerage account matters more than most investors realize. The wrong structure can trigger gift taxes, expose assets to creditors, force accounts through probate, or cost heirs hundreds of thousands in avoidable taxes. The good news: understanding five basic ownership types lets you match the right structure to your situation (Poterba, 2001).

The durable lesson: SIPC coverage is 500,000 per separate capacity - individual, joint, trust, and retirement accounts each get their own coverage. For large portfolios, using multiple account types expands your protection.

The Five Main Account Types

Individual Account

Ownership: Single owner with full control

Tax reporting: All gains, dividends, and interest reported on owners return

At death: Passes through probate to heirs (unless TOD beneficiary designated)

Creditor exposure: Fully exposed to owners creditors and judgments

SIPC coverage: 500,000 (separate from joint, trust, retirement accounts)

Best for: Single individuals, simple situations, full control needed

The TOD shortcut: Transfer on Death (TOD) designation lets you name a beneficiary who inherits directly - avoiding probate - without the cost of a trust. Free at most brokerages, revocable anytime.

Joint Tenants with Rights of Survivorship (JTWROS)

Ownership: Equal ownership (50/50 for two owners); all owners have equal rights

Survivorship: At death, surviving owner(s) automatically inherit the deceased owners share - bypasses probate

Tax reporting: Split equally between owners; primary owners SSN on account

Gift tax warning: Non-equal funding creates a taxable gift

Creditor exposure: Each owners share exposed to their own creditors

Best for: Married couples, partners wanting automatic survivorship

The gift tax trap: Parent opens JTWROS with adult child, funds 200,000. Half (100,000) is considered a gift to child. After 19,000 annual exclusion, 81,000 is a reportable gift requiring Form 709.

Tenants in Common (TIC)

Ownership: Can be unequal percentages (e.g., 70/30)

Survivorship: None - deceased owners share goes to their estate (through probate)

Tax reporting: Each owner reports their percentage of income/gains

Creditor exposure: Each owners share exposed to their creditors

Best for: Business partners, unrelated co-investors, leaving specific shares to different heirs

Community Property (9 States)

Availability: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, Wisconsin

Ownership: 50/50 between spouses regardless of who earned the money

Major tax benefit: Full step-up in basis on both halves at first spouses death

Example: 1M in community property with 500K in unrealized gains. First spouse dies. Entire 1M receives step-up - 500K in gains eliminated. In non-CP states, only deceased spouses half (250K gains) gets step-up.

Tax savings: At 20% LTCG + 3.8% NIIT, eliminating 250K extra gains saves heirs 59,500.

Best for: Married couples in CP states wanting maximum step-up benefit

Tenancy by the Entirety (TBE)

Availability: ~25 states, married couples only

Ownership: Treated as single unit, not divisible shares

Survivorship: Automatic to surviving spouse

Creditor protection: Strong - individual creditor of one spouse cannot reach the account

Consent required: Both spouses must agree to any changes or withdrawals

Best for: Married couples in TBE states seeking creditor protection

Trust Accounts

Revocable Living Trust:

• Ownership: Trust owns assets; grantor controls during lifetime
• Probate avoidance: Yes - assets pass per trust terms without court
• Tax reporting: Grantors SSN while alive; trust EIN after death
• Step-up in basis: Yes at grantors death
• Creditor protection: Minimal during lifetime (its still your assets)
• Cost to establish: 1,500-5,000 for attorney-drafted trust

Irrevocable Trust:

• Ownership: Trust owns assets; grantor gives up control
• Estate tax: Assets excluded from grantors taxable estate
• Creditor protection: Strong - assets removed from your reach
• Flexibility: Very limited - cannot easily modify or access
• Cost to establish: 3,000-10,000+ for attorney-drafted trust

The point is: Revocable trust avoids probate while you maintain control. Irrevocable trust removes assets from your estate but you lose access.

Worked Example: Married Couple in California

Situation: 2M portfolio, 800K in unrealized gains, both spouses alive

Option 1: Individual Accounts (Not Optimal)

• 1M in husband name, 1M in wife name
• SIPC coverage: 500K each = 1M total
• At first death: Only deceased spouses 1M gets step-up
• Probate: Yes, unless TOD designated

Option 2: JTWROS (Common but Not Tax-Optimal)

• 2M joint account
• SIPC coverage: 500K for joint account
• At first death: Only deceased spouses 50% (400K gains) gets step-up
• Probate: No - automatic survivorship

Option 3: Community Property (Tax-Optimal for CA)

• 2M titled as community property with right of survivorship
• SIPC coverage: 500K for joint account
• At first death: Full 100% step-up - all 800K gains eliminated
• Tax savings: 800K x 23.8% = 190,400 saved

Option 4: Trust (Estate Planning Optimal)

• 2M in revocable living trust
• SIPC coverage: 500K for trust (separate from personal accounts)
• Step-up: Yes, full step-up
• Probate: No
• Additional benefits: Privacy, control after death, can have conditions

Recommendation: For this CA couple, community property titling saves 190,400 in taxes at first death. Trust adds estate planning benefits beyond taxes.

Common Mistakes

Adding child to JTWROS to avoid probate 100,000 account = 50,000 gift to child. Use TOD designation instead - same probate avoidance, no gift.

Not using community property in CP states Losing 50% of step-up at first death. Could cost heirs 100K+ depending on gains.

Assuming revocable trust provides creditor protection Assets in revocable trust are fully exposed during your lifetime. For protection, you need irrevocable trust (and lose control).

Not funding trust after creation Assets not retitled in trust name go through probate anyway. Must retitle account as Trustee Name as Trustee of Trust Name dated Date.

Checklist

When choosing account structure:

• Determine state of residence (community property vs common law)
• Consider creditor exposure (TBE states offer protection)
• Calculate step-up implications for married couples
• Evaluate probate avoidance options (TOD vs trust)
• Check SIPC coverage across account types
• For joint accounts, understand gift tax implications of non-equal funding

References

• Poterba (2001). Estate and Gift Taxes and Incentives for Inter Vivos Giving.
• SIPC (2024). Customer Protection Overview.
• Uniform Law Commission (2024). TOD Security Registration Act.