Account in Trust

What Is an Account in Trust?

An account in trust or trust account refers to any type of financial account that is opened by an individual and managed by a designated trustee for the benefit of a third party per agreed-upon terms.

For example, a parent can open a bank account for the benefit of their minor child and stipulate rules as to when the minor can access the funds or assets in the account as well as any income they generate. In most cases, the trustee who manages the funds and assets in the account acts as a fiduciary, meaning the trustee has a legal responsibility to manage the account prudently and manage assets in the best interests of the beneficiary.

How an Account in Trust Works

Accounts in trust can hold different assets, including cash, stocks, bonds, mutual funds, real estate, and other property and investments. Trustees can vary, as well. They can be the person opening the account, someone else they designate as a trustee, or a financial institution, such as a bank or brokerage firm.

Trustees have the option to make certain changes to the account in trust. These can include naming a successor trustee or another beneficiary. A trustee may even close the account in trust or open a subsidiary account, to which they can transfer some or all of the assets in the account in trust. However, the trustee is obligated to follow the instructions of the document that established the account in trust.

Types of Accounts in Trust

The specifics of accounts in trust can vary depending on the type of account, terms outlined in any trust agreements, as well as applicable state and federal laws.

Uniform Gifts to Minors Act (UGMA)

One example of an account in trust is a Uniform Gifts to Minors Act (UGMA) account. This type of account in trust created allows minors to legally own the assets held in these accounts. However, they can't have access to the account's principal and income until they reach legal age. This type of account in trust is typically opened by parents to fund their children's higher education expenses and to secure certain tax protections.

A Uniform Transfers to Minors Act (UTMA) account differs from a UGMA account in that it allows for the donation of non-basic assets, such as life insurance and stocks, and the length of maturity is extended.

UGMA accounts are managed by a custodian, who is appointed by the donor. The custodian must manage the account for the benefit of the minor. They can invest the funds, withdraw money — within limits — for the minor's care and needs. Also, contributions can be made to the account with no limits.

Payable on Death (POD)

Another type of account in trust is a Payable on Death (POD) trust also called a Totten Trust. These accounts are essentially bank accounts with named beneficiaries who can legally take possession of the trust's assets and income upon the death of the individual who opened the account. POD trusts are protected by the Federal Deposit Insurance Corporation (FDIC) as are traditional bank accounts. In addition, this type of account does not need to clear probate for assets to transfer to the rightful beneficiary upon the death of the initial owner.

There are events, however, that prevent the named beneficiary from obtaining the full value of the account upon the death of the account owner. In community property states, the spouse of the decedent may be entitled to half of the account. Although, the spouse is not entitled to funds accumulated before marriage. Also, the beneficiary does not receive a benefit from a jointly owned account if the joint owner is still living. The benefit is payable upon the death of the last surviving owner.

Housing Accounts in Trust

In the housing world, an account in trust is a type of account usually opened by a mortgage lender. The lender uses this account to pay property taxes and insurance on a homeowner's behalf. This type of account in trust is also called an escrow account, and funds to be deposited into it are usually included in the monthly mortgage payment.

The two main types of escrow accounts are the purchase escrow account and refinance escrow account. A purchase escrow account holds funds related to the purchase of a home and is managed by an escrow agent. Earnest money, presented by the buyer to the seller, and other real estate transaction fees, such as loan fees, agent commissions, and appraisal fees, are held in a purchase escrow account.

A refinance escrow account, much like a purchase escrow account, holds fees related to the transaction, which, in this case, is the refinance of a home. Such fees include appraisal and attorney fees.

How to Set Up an Account in Trust

Before setting up the account in trust, review your available options and choose the one that best suits your needs. There are several details to consider beforehand, however. For example, identify who you want to manage the trust and how you want it managed during your life and upon death. Considering death, identify who you want as your beneficiary or beneficiaries, and how you want them to receive the assets. Determine what assets the trust will hold and under what condition they can be disbursed or disposed of.

Once the details are confirmed, complete and file the appropriate paperwork, according to the rules of your state. It might be best to consult an attorney to ensure that the account in trust is established according to your preferences.

Benefits of an Account in Trust

Accounts in trust are preferred by many because they avoid probate, enabling a quicker and easier distribution of assets. These accounts also may provide favorable tax benefits, such as the IRS considering income as trust income (for irrevocable trusts), which usually results in a lower tax liability.

Accounts in Trust allow the wishes of the donor to be carried out during their lifetime and/or upon death. They can specify how they want their assets managed, how and when they will be dispersed, and who will manage them.

Example of an Account in Trust

Mr. and Mrs. Q. Sample are school teachers with a goal to retire in 15 years. They have three adult children and 2 infant grandchildren. Hoping to secure their assets and create college funds for their grandchildren, they explore accounts in trust as options.

After meeting with an attorney, they decided to protect their assets in a revocable trust, whereby they serve as co-trustees and their eldest child as a successor trustee. Their assets, including real estate, stocks, and other investments, will be managed in the trust. Upon death, all assets will be distributed equally among their children, who are named as the beneficiaries.

They also established education trust accounts for each grandchild, initially depositing $5,000 into each account. Their goal is to invest $2,000 per account each year until the grandchildren reach the age of majority. The funds can only be used for educational purposes. However, if the grandchild does not attend college or trade school, the funds will be dispersed in monthly installments beginning at age 25.

Account in Trust FAQs

Should I Setup a Trust Account?

If you have assets and specific preferences in how and to whom they are distributed, a trust account might be beneficial. Speak with an expert, such as an estate planner, advisor, or attorney to explore what trust accounts are available and which ones are advantageous for you.

How to Create a Trust Account?

After deciding which trust account to establish, outline the conditions you want to be specified within the trust. Draft the trust document, according to the rules for your state. Be sure to name the parties (trustees) to manage the trust, as well as the beneficiaries. Then, create an account for and transfer assets into the trust; this can be done with most banks and financial institutions. Before establishing a trust, it might be helpful to seek advice and guidance from a professional.

What Is the Difference Between a Revocable and Irrevocable Trust?

A revocable trust is a trust in which the terms can be modified or revoked by the grantor. In contrast, an irrevocable trust is a trust in which the terms cannot be modified or revoked without the written consent of the beneficiaries.

What Is the Difference Between a Will and a Trust?

The terms will and trust are often used interchangeably, but they are quite different. A will is a legal document outlining the final wishes of a person upon their death. It is only effective after its originator dies.

Trusts are effective upon their creation. Trusts can outline how assets are to be treated during the life of the grantor and upon death.

Whereas an executor or executrix is appointed to ensure that a will is executed according to its specifications, a trustee is appointed to ensure that the conditions of the trust are met. Unlike wills, trusts are not subject to probate and cannot be contested.