What Is an Account in Trust?

What Is an Account in Trust?

Let me explain what an account in trust really means. It's a financial account that you open, but it's managed by a designated trustee for the benefit of someone else, following the terms you've agreed upon. As the trustee, that person acts as a fiduciary, meaning they have a legal duty to handle the funds and assets in the account solely for the beneficiary's best interests.

Key Takeaways

You need to know that trust accounts are handled by a trustee for a third party. Parents frequently set them up for their minor children. These accounts can include cash, stocks, bonds, and other assets. Totten or Payable on Death (POD) trusts let beneficiaries claim assets after the account holder's death. Overall, accounts in trust usually skip probate, which makes settling them quicker and simpler.

How an Account in Trust Works

Accounts in trust, or simply trust accounts, are created to benefit a specific individual, with a trustee in charge. They often include conditions for use. For instance, if you're a parent, you can open a bank account for your minor child and set rules on when they can access the funds or any income from them.

These accounts hold various assets, such as cash, stocks, bonds, mutual funds, or even real estate. The trustee could be you, the account opener, someone else you designate, or a financial institution like a bank or brokerage.

As the trustee, you have some flexibility to make changes, like naming a successor trustee or another beneficiary. You might close the account or open a subsidiary one to transfer assets. But remember, you must follow the instructions in the establishing document.

Types of Accounts in Trust

The details of these accounts vary based on the type, any trust agreements, and state or federal laws.

Take the Uniform Gifts to Minors Act (UGMA) account. It lets minors own the assets legally, but they can't access the principal or income until they're of legal age. Parents often use this to fund higher education and gain tax protections. A custodian, appointed by the donor, manages it for the minor's benefit, investing funds and withdrawing within limits for their needs. There are no contribution limits.

Note that UGMA differs from Uniform Transfers to Minors Act (UTMA), which allows non-basic assets like life insurance and stocks.

Another type is the Payable on Death (POD) trust, or Totten Trust. These are bank accounts with named beneficiaries who take over the assets upon the grantor's death, bypassing probate. However, in community property states, a spouse might claim half, excluding pre-marriage funds. For joint accounts, benefits go to the beneficiary only after the last owner dies. POD trusts have FDIC protection like regular bank accounts.

Then there's the housing account in trust, often called an escrow account, set up by mortgage companies to pay property taxes and insurance. Funds are included in your monthly mortgage payment. Purchase escrow accounts hold funds for home buying, like earnest money and fees, managed by an agent. Refinance escrow accounts handle fees for refinancing, such as appraisals and attorney costs.

How to Set Up an Account in Trust

Before you set one up, review your options and pick what fits your needs. Think about who will manage the trust, how it should be handled during your life and after death, who the beneficiaries are, how they'll receive assets, what assets go in, and under what conditions they're disbursed.

Once decided, complete and file the paperwork per your state's rules. I recommend consulting an attorney to ensure it meets your expectations.

Benefits of an Account in Trust

People choose these accounts because they avoid probate, allowing faster asset distribution. They can offer tax benefits, like treating income as trust income for irrevocable trusts, which often means lower taxes.

They also ensure your wishes are followed during life and after death. You specify asset management, dispersal timing, and who handles them.

Example of an Account in Trust

Consider Mr. and Mrs. Q. Sample, school teachers planning to retire in 15 years. They have three adult children and two infant grandchildren. To secure assets and create college funds, they look into trust accounts.

After consulting an attorney, they set up a revocable trust with themselves as co-trustees and their eldest child as successor. Assets like real estate, stocks, and investments go in, to be distributed equally to their children upon death.

They also create education trusts for each grandchild, starting with $5,000 each and adding $2,000 yearly until majority age. Funds are for education only, or disbursed monthly from age 25 if not used for school.

Should I Set Up a Trust Account?

If you have assets and specific distribution preferences, a trust account could work for you. Talk to an estate planner, advisor, or attorney to see what's available and beneficial.

How Do I Create a Trust Account?

Decide on the type, outline conditions, draft the document per state rules, name trustees and beneficiaries, then open the account and transfer assets at a bank or institution. Seek professional advice first.

What Is the Difference Between a Revocable and Irrevocable Trust?

A revocable trust can be changed or revoked by you, the grantor. An irrevocable one can't be modified without beneficiary consent.

What's the Difference Between a Will and a Trust?

Wills and trusts differ significantly. A will is a document for final wishes effective only after death, executed by an executor. Trusts take effect when created, managed by a trustee, avoid probate, and can't be contested.

The Bottom Line

Estate planning lets you decide asset distribution, including after death. An account in trust is one way, managed by your chosen trustee. You name the assets, management, and distribution. Consult a financial professional to check if it's right for you.