Tenants in Common (TIC) Accounts: Understanding Ownership and Implications

6.1.2.2 Tenants in Common (TIC)

In the realm of investment and client account management, understanding the various types of joint accounts is crucial for both financial professionals and investors. Among these, the Tenants in Common (TIC) account stands out for its unique characteristics and implications, especially concerning ownership distribution and inheritance. This section will delve into the specifics of TIC accounts, providing you with a comprehensive understanding necessary for the Series 6 Exam and practical application in the securities industry.

What is a Tenants in Common (TIC) Account?

A Tenants in Common (TIC) account is a form of joint ownership where two or more individuals hold undivided interests in an asset, such as a brokerage account. Each owner, known as a tenant in common, possesses a specific percentage of the account, which can be equal or unequal. This ownership structure is distinct from other joint accounts, such as Joint Tenants with Rights of Survivorship (JTWROS), due to its implications for inheritance and estate planning.

Key Characteristics of TIC Accounts

1. Specified Ownership Percentages: In a TIC account, each owner has a defined percentage of ownership. This percentage can reflect the amount of capital each party has contributed to the account, making it an ideal choice for business partners or investors with varying levels of investment.

2. Separate Ownership Interests: Unlike JTWROS accounts, where the entire account passes to the surviving owner(s) upon the death of one owner, TIC accounts maintain separate ownership interests. This means that each owner’s share becomes part of their estate upon death.

3. Transferability: Each tenant in common can sell or transfer their ownership interest independently of the other owners. This flexibility can be advantageous for investors who may want to adjust their holdings without affecting the other tenants.

4. Estate Implications: Upon the death of a tenant, their share of the account does not automatically transfer to the surviving account holders. Instead, it is distributed according to the decedent’s will or state intestacy laws, potentially involving probate.

Suitability and Use Cases for TIC Accounts

TIC accounts are particularly suitable for certain types of investors and situations:

• Business Partners: TIC accounts allow business partners to reflect their varying contributions to a joint investment, ensuring that each partner’s share is proportionate to their investment.

• Family Members with Separate Estates: Family members who wish to maintain separate estates while jointly investing can benefit from a TIC account, as it allows them to pass their share to their heirs.

• Investors with Different Financial Goals: Individuals with differing investment strategies or financial goals can use TIC accounts to manage their respective portions independently.

Legal and Inheritance Implications

Understanding the legal implications of TIC accounts is essential for effective estate planning and compliance with securities regulations.

Inheritance and Estate Planning

The primary legal distinction of a TIC account lies in its treatment upon the death of an owner. Unlike JTWROS accounts, where ownership automatically transfers to the surviving tenant(s), a TIC account requires the decedent’s share to be handled through their estate. This process can involve:

• Probate: The decedent’s share may need to go through probate, a court-supervised process for distributing the deceased’s assets. This can delay the transfer of assets and incur additional costs.

• Estate Taxes: The value of the decedent’s share may be subject to estate taxes, depending on the size of the estate and applicable state and federal laws.

• Will and Intestacy: If the decedent has a will, their share will be distributed according to its terms. In the absence of a will, state intestacy laws will determine the distribution.

Regulatory Considerations

Financial professionals must ensure compliance with regulatory requirements when managing TIC accounts:

• Disclosure Requirements: It is crucial to disclose the nature of TIC accounts to clients, emphasizing the implications for inheritance and the potential need for probate.

• Documentation: Proper documentation of each owner’s percentage and the terms of the account is necessary to avoid disputes and ensure smooth administration upon an owner’s death.

• Advisory Role: Advisors should guide clients in understanding the benefits and limitations of TIC accounts, helping them align their account structure with their financial and estate planning goals.

Practical Examples and Scenarios

To illustrate the practical application of TIC accounts, consider the following scenarios:

Example 1: Business Partners

Two business partners, Alex and Jordan, decide to open a TIC account to manage their joint investment in a startup. Alex contributes 60% of the capital, while Jordan contributes 40%. In the TIC account, Alex holds a 60% ownership interest, and Jordan holds 40%. Upon Alex’s death, their share is distributed according to their will, ensuring that their heirs receive the intended portion of the investment.

Example 2: Family Investment

Three siblings, each with different financial goals, open a TIC account to invest in a diversified portfolio. Each sibling contributes an equal amount, holding a one-third interest in the account. The TIC structure allows each sibling to manage their share independently, aligning with their unique investment strategies. Upon the death of one sibling, their share is passed to their designated beneficiaries, preserving their estate planning intentions.

Challenges and Considerations

While TIC accounts offer flexibility and individualized ownership, they also present challenges:

• Complexity in Estate Planning: The need for probate and potential estate taxes can complicate estate planning, requiring careful consideration and legal guidance.

• Potential for Disputes: Disagreements among tenants regarding the management or sale of the account can arise, necessitating clear communication and documented agreements.

• Regulatory Compliance: Ensuring compliance with securities regulations and proper documentation is essential to avoid legal issues and protect client interests.

Best Practices for Managing TIC Accounts

To effectively manage TIC accounts and address potential challenges, consider the following best practices:

1. Clear Documentation: Maintain detailed records of each owner’s percentage and any agreements regarding the management and distribution of the account.

2. Regular Reviews: Conduct regular reviews of the account structure and ownership percentages to ensure alignment with the owners’ financial goals and estate plans.

3. Effective Communication: Foster open communication among tenants to address any concerns or disputes promptly and collaboratively.

4. Professional Guidance: Seek legal and financial advice to navigate the complexities of estate planning and regulatory compliance associated with TIC accounts.

Conclusion

Tenants in Common (TIC) accounts offer a unique joint ownership structure that caters to investors with specific needs for ownership distribution and estate planning. By understanding the characteristics, suitability, and legal implications of TIC accounts, financial professionals and investors can make informed decisions that align with their investment strategies and estate planning goals. As you prepare for the Series 6 Exam, mastering the intricacies of TIC accounts will enhance your ability to advise clients effectively and navigate the complexities of joint ownership in the securities industry.

For further reading and resources on investment account types and their implications for inheritance, refer to the SEC’s Top Tips for Selecting a Financial Professional.

Series 6 Exam Practice Questions: Tenants in Common (TIC)