Customer Accounts - Classification of Accounts
The principal types of account ownership are the following:
- Fiduciary or Custodial
An individual account has one beneficial owner, who is the only person who can control investments within the account and request distributions or cash or securities from the account.
Two or more adults may act as co-owners of a joint account, with each allowed some form of control over the account. Joint accounts may be designated as Tenants in Common (TIC), Joint Tenants with Right of Survivorship (JTWROS) or Tenants by Entirety (TBE).
- When one owner in a Tenants in Common account dies, the remaining interest passes to the decedent's estate in a proportion that matches the proportion of his or her ownership while alive. The percentage of ownership is not passed to the surviving account co-owner(s).
- This is not the case with a Joint Tenants with Right of Survivorship account, in which case the remaining rights are passed in equal amounts to the surviving account co-owner(s).
- Finally, Tenants by Entirety accounts may only be established by married couples. When one spouse dies, the surviving spouse simply retains ownership of the account.
The corporate resolution will specify which officers may trade in the corporation's account. In addition, a certified copy of the corporate charter and the company's bylaws are required to open a margin account.
A partnership account differs from a corporate account in that it is the unincorporated association of two or more individuals. The partnership account agreement will specify which partners can make transactions for the account. Partnerships can open cash, margin or retirement accounts, provided all investment limitations are disclosed.
Fiduciary or Custodial Accounts
A fiduciary is a person other than the owner who is legally appointed and authorized to act in the stead of a beneficiary. In most cases, the fiduciary should provide documentation of his or her authority. The fiduciary initiates trades, manages the account, approves distributions and makes whatever other decisions may be necessary to maintain the fiduciary account. Investments are made in the owner's best interests, but the owner does not have legal control over them.
The fiduciary is bound by Prudent Man Rules (also known as Prudent Person Rules) - that is, he or she must make decisions that are compatible with the account's investment objectives and that are in the best interests of the beneficiary. The fiduciary may not use the account for his or her own benefit; he or she can charge a reasonable fee for services, but cannot share in the account's profits. In some states, fiduciaries are also bound by the legal list of investments permitted by the state.
Fiduciaries include but are not limited to people performing the following roles:
- Trustee - administers a trust
- Custodian - manages a UGMA or UTMA account (discussed below)
- Guardian - handles a minor's affairs until the minor reaches the age of majority or an incompetent person's affairs
- Executor - manages the affairs of an estate
- Administrator - liquidates the estate of a person who dies without a will
- Conservator - acts for an incompetent person
- Receiver - handles the details of bankruptcies
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