Types of Accounts
When an account is opened, it is registered in the name(s) of one or more persons. They are the account owners and the only individuals who are allowed access to and control of the investments in the account.
1. Individual Accounts
An individual account has one beneficial owner. The account holder is the only person who can:
2. Joint Accounts
- control the investments within the account
- request distributions of cash or securities from the account
In a joint account, two or more adults are named on the account as co-owners, with each allowed some form of control over the accounts.
In addition to the appropriate new account form, a joint account agreement must be signed, and the account must be designated as either joint tenants in common (JTIC) or joint tenants with right of survivorship (JTWROS).
The account forms for joint accounts require the signatures of all owners. Both types of joint account agreements provide that any or all tenants may transact business in the account. Checks must be made payable to the names in which the account is registered and must be endorsed for deposit by all tenants, although mail need be sent to only a single address. To be in good delivery form, securities sold from a joint account must be signed by all tenants.
||Joint Tenants in Common JTIC ownership provides that a deceased tenant�s fractional interest in the account is retained by that tenant�s estate and is not passed to the surviving tenant(s).
||Joint Tenants with Right of Survivorship JTWROS ownership stipulates that a deceased tenant�s interest in the account passes to the surviving tenant(s).
*Note: Transfer on Death is a relatively new type of account that allows the registered owner of the account to pass it, upon death, to a named beneficiary. This account avoids probate because the estate is bypassed.
3. Partnership Accounts
A partnership is an unincorporated association of two or more individuals. Partnerships frequently open cash, margin, retirement and other types of accounts necessary for business purposes. The partnership must provide a partnership agreement stating which of the partners can make transactions for the account. If the partnership opens a margin account, the partnership must disclose any investment limitations. An amended partnership agreement must be obtained each year, if changes have been made.
4. Corporate Accounts
A corporate account must include a corporate resolution authorizing the account and identifying which members of the corporation may trade in the account. The resolution, signed by the secretary of the corporation, identifies officers authorized to make transactions.
In addition to the documentation required for all margin accounts, a corporate margin account requires a certified copy of the corporate charter and bylaws that authorize the margin account. A certificate of incumbency, which empowers the officers to trade the account, must be obtained within 60 days of opening the account.
5. Uniform Gifts to Minors Act Accounts
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts require an adult or trustee to act as custodian for a minor (the beneficial owner). Any kind of security-cash, life insurance, annuity contracts and other forms of property-may be given to the account without limitation.
When a person makes a gift of securities to a minor under the UGMA laws, that person is the donor of the securities. A gift under UGMA conveys an indefeasible title; that is, the donor may not take back the gift, nor may the minor return the gift until she has reached the age of majority. Once the gift is donated, the donor gives up all rights to the property. When the minor reaches the specified age, the property in the account is transferred into her name.
Any securities given to a minor through an UGMA account are managed by a custodian until the minor reaches the age of majority. The custodian has full control over the minor�s account and can:
- buy or sell securities
- exercise rights or warrants
- liquidate, trade or hold securities
The custodian may also use the property in the account in any way he deems proper for the minor�s support, education, maintenance, general use or benefit. However, the account is not normally used to pay expenses associated with raising a child because the parents can incur negative tax consequences.
Registered representatives must be aware of the following rules regarding UGMA custodial accounts:
- An account may have only one custodian and one minor or beneficial owner.
- A minor can be the beneficiary of more than one account and a person may serve as custodian for more than one UGMA as long as each account benefits only one minor.
- The donor of securities can act as custodian or can appoint someone else to do so.
- Unless acting as custodians, parents have no legal control over and UGMA account or the securities in it.
A registered representative is not responsible for determining whether and appointment is valid or whether a custodian�s activities are appropriate.
Opening an UGMA Account
When opening an UGMA account, a rep must ensure that the account application contains the custodian�s name, the minor�s name and Social Security number, and the state in which the UGMA is registered.
Registration of UGMA Securities
Any securities in an UGMA account are registered in the custodian�s name for the benefit of the minor; they cannot be registered in street name. Typically, the securities are registered to �Joan R. Smith as a custodian for Brenda Lee Smith, � for example, or a variation of this form. When the minor reaches the age of majority, all of the securities in the account will be registered in her name.
The gift of securities is considered complete when this registration has been completed.
An UGMA custodian is charged with fiduciary responsibilities in managing the minor�s account. Certain restrictions have been placed on what is deemed to be proper handing of the investments in an UGMA. The most important limitation follow:
- UGMAs may be opened and managed as cash accounts only.
- A custodian may not purchase securities in an account on margin or pledge them as collateral for a loan.
- A custodian must reinvest all cash proceeds, dividends and interest within a reasonable period of time. Cash proceeds from sales or dividends may be held in a noninterest-bearing custodial account for a reasonable period, but should not remain idle for long.
- Investment decisions must take into account a minor�s age and the custodial relationship; commodities futures, naked options and other high-risk securities are examples of inappropriate investments. Options may not be bought in a custodial account because no evidence of ownership is issued to an options buyer. Covered call writing is normally allowed.
- Stock subscription rights or warrants must be either exercised or sold.
- A custodian for an UGMA may not grant trading authority to a third party.
- A custodian may loan money to an account, but may not borrow from it.
A custodian may be reimbursed for any reasonable expenses incurred in managing the account unless the custodian is also the donor.
The minor�s Social Security number appears on an UGMA account, and the minor must file an annual income tax return and pay taxes on any income exceeding $1,400 (2000) produced by the UGMA at the parent�s top marginal tax rate, regardless of the source of the gift, until the minor reaches the age of 14. Exclusions are available, and they are indexed for inflation.
When the minor reaches age 14, the account will be taxed at the minor�s tax rate.
Although the minor is the account�s beneficiary and is responsible for any and all taxes on the account, in most states it is the custodian�s responsibility to see that the taxes are paid.
Death of the Minor
If the beneficiary of an UGMA dies, the securities in the account pass to the minor�s estate, not to the parents� or custodian�s estate. In the event of the custodian�s death or resignation, either a court of law or the donor must appoint a new custodian.
*Note: The information about UGMA accounts also pertains to UTMA accounts with one exception: the transfer to the minor can be delayed up to age 25 (21 in certain states).