Beneficiary vs. Joint Owner: Which Is Best for Your Investment Account?

Admin • September 29, 2023

An aspect of financial planning that many of us might not relish discussing is preparing for the unexpected. One of the many decisions you will face is determining the best way to pass on your investment accounts to your children when you die. 

Should your children be beneficiaries or joint owners of your investment accounts? Is it wiser to look at other options, like using a will? What is the best approach? Ultimately, we aim to help you make a practical and thoughtful decision that best serves your family’s financial future.

Beneficiary Designation vs. Joint Ownership vs. Will: What’s the Difference?

Before we look into the pros and cons of each option, it’s crucial to understand the differences between having your children as beneficiaries, or joint owners, or designating them in your will.

  • Beneficiary designation: When you name someone as a beneficiary on your investment accounts, they directly inherit those assets upon your passing, bypassing probate.
  • Joint ownership: You and your children share ownership of the investment accounts while you’re alive. In the event of your passing, ownership automatically transfers to your children, avoiding probate.
  • Will: A will outlines your wishes regarding asset distribution after your death. Assets distributed through a will typically go through probate, which can be lengthy and costly.

Now that we’ve clarified the terms let’s explore the pros and cons of having your children as beneficiaries or joint owners on your investment accounts.

Pros of Children as Beneficiaries on Investment Accounts

Not all investment accounts allow you to name beneficiaries. The ability to designate beneficiaries on an investment account depends on the type of account and the policies of the financial institution or brokerage firm that holds the account. 

Typically, retirement accounts such as IRAs and 401(k)s allow you to name beneficiaries. Brokerage accounts don’t automatically include beneficiary designations; however, you can usually designate your children as beneficiaries on your investment account through a Transfer on Death (TOD) designation. This legal arrangement allows you to select a specific individual or individuals who will automatically inherit the assets held in the account upon your death. 

The benefits of adding your children as beneficiaries to your accounts can include:

  1. Quick access to funds: One of the most significant advantages of designating your children as beneficiaries is that they can access the funds immediately upon your passing. This is crucial for covering immediate expenses like funeral costs, medical bills, or mortgage payments.
  2. Avoiding probate: Beneficiaries bypass the probate process, so your children won’t have to navigate time-consuming and potentially costly court proceedings. They can receive their inheritance swiftly.
  3. Privacy: Beneficiary designations are generally private and don’t become public records, ensuring your financial matters remain confidential.
  4. Revocable and changeable: You can typically change or revoke your beneficiaries at any time. This flexibility allows you to adapt the designation to changes in your life circumstances or financial plans.
  5. No impact on current ownership: You continue to control the account. You can continue to use, manage, and make changes to the account as you see fit.  

Beneficiaries can help ensure that your assets are distributed according to your wishes. It’s important to note that state laws govern TOD designations, and the specific rules and requirements may vary depending on where you live. It’s a good idea to consult with your legal or financial professional, who can provide personalized advice.

Cons of Children as Beneficiaries on Investment Accounts

Let’s look into some potential drawbacks of designating your children as beneficiaries. While this approach offers certain advantages, it’s essential to consider the limitations and complications that may arise. Understanding these drawbacks will help you make an informed decision that best suits your family’s financial future.

Potential drawbacks can include:

  1. Minors as beneficiaries : Generally, investment accounts cannot transfer directly to your minor children when you die. If you have not designated a trustee through your will or living trust, the courts will name a conservator until your child reaches the age of majority (18 or 21, depending on the state).
  2. Financial impact on beneficiaries : Even if your child is of legal age, they may not be mature enough to handle a large influx of money. Once you pass, your beneficiary has complete control of the asset. Even if you place instructions in your will indicating how you want the beneficiary to handle the account, your instructions don’t need to be followed. The beneficiary designation supersedes the will , and the beneficiary can do what they want.
  3. Tax implications : There could be tax implications when your beneficiary inherits the account. You’ll want to seek guidance from your financial advisor or tax professional.

If your children are responsible adults who can handle their finances wisely, designating them as beneficiaries can be a straightforward and practical choice. However, you may want to consider other options if they are minors or not financially savvy.

If you choose to name your children as a beneficiary on your account(s), keeping a few things in mind is essential. You should regularly review and update your beneficiaries. Life changes happen—for example, the birth or death of a child. Consider adding a contingent beneficiary in the event something happens to the primary beneficiary. If you have multiple investment accounts, be sure to review every account.

Pros of Children as Joint Owners of Investment Accounts

When you add your children to your investment accounts, they have equal ownership. Once you pass away, the account passes directly to the joint owner(s). Having your children as joint owners of your investment accounts has some similar advantages to naming your children as beneficiaries:

  1. Immediate access and control : Joint ownership gives your children quick access to the accounts and total control of the assets upon your death. They can manage and use the funds as needed without delay.
  2. Avoids probate : Like beneficiary designations, joint ownership bypasses the probate process, saving time and money for your heirs.
  3. Simplified management : If you become incapacitated, joint owners can assist in managing the accounts and make financial decisions on your behalf, ensuring your finances are taken care of.

Cons of Children as Joint Owners of Investment Accounts

Having your children as joint owners of your accounts can raise many complex questions, particularly if you have more than one child. Some of the drawbacks to having your children as joint owners include:

  1. Shared responsibility : Your children have equal responsibility for the accounts while you’re alive. This may create complexities if they have different financial goals or disagree on how to manage the assets. Who will claim the income or capital gains on the account? If you have multiple children, will they all be added as joint owners? There are many factors to be considered if you choose this option.
  2. Potential creditor issues : If your children face financial difficulties or legal troubles, their creditors may have claims on the jointly owned accounts, putting your assets at risk. In addition, if a married child gets divorced, the ex-spouse could also have a legal claim to a portion of the account.

While having your children as joint owners can have its merits, it brings a host of intricate issues to consider. This option typically works if you only have one child and want everything to quickly pass to your child after your death. But even then, you must consider whether the benefits outweigh the potential drawbacks.

Investment Account Beneficiary vs. Will

Choosing between designating investment account beneficiaries and relying on a will is a pivotal decision in estate planning. Each approach has its unique strengths and considerations, and understanding these can help you chart a course that aligns best with your financial vision.

When you name beneficiaries on your investment accounts, you are essentially creating a direct pathway for the transfer of assets upon your passing. This streamlined process bypasses the often lengthy and costly probate system, ensuring your beneficiaries receive their inheritance promptly. Beneficiary designations offer privacy, as they typically remain outside the public domain. 

Conversely, a will serves as a comprehensive blueprint for the distribution of your assets after your passing. It allows you to specify not only who receives what but also who will oversee the execution of your wishes as the executor. The benefit of a will is that it allows for a more nuanced estate plan, accommodating diverse family dynamics and addressing specific bequests. However, the trade-off is that wills are subject to probate and are public documents, potentially exposing your financial matters to public scrutiny. 

Therefore, the decision between beneficiary designations and a will hinges on your preferences for efficiency, privacy, flexibility, and the level of complexity you wish to impart to your estate plan.

Five Pines Wealth Can Help You Determine Your Best Path

There are many factors to consider when determining how to pass on your investment accounts to your children. The conversation is part of responsible financial planning, and the choices can significantly impact your family’s future. 

At Five Pine Wealth Management , we understand these choices can be challenging. Our estate planning and financial management expertise can provide the guidance you need to create an effective strategy that aligns with your circumstances and goals. We’d love to meet with you to see how we can help you pass on your investments to your children. Give us a call at 877.333.1015 or send us an email at info@fivepinewealth.com .

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