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 in accordance with agreed-upon terms.
A trust account is a legal arrangement through which funds or assets are held by a third party (the trustee) for the benefit of another party (the beneficiary), which may be an individual or a group. The creator of the trust is known as a grantor or settlor.
So, trust account is
- An account in which a bank or trust company (acting as an authorized custodian) holds funds for specific purposes such as to pay property taxes and/or insurance premiums associated with a mortgaged property. Also called escrow account.
- A savings account established under a trust agreement whereby a trustee administers the funds for the benefit of one or more beneficiaries.
For example, a parent can open a bank account for the benefit of his or her 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.
Here are some of the main features of a trust:
- Ownership of the assets must be transferred to the trust; the trust has no power until this occurs, which is called “funding the trust.”
- The trustee must be a mentally competent adult and can be anyone the grantor trusts and who has accepted the responsibility of handling the trust account.
- Subject to the terms of an agreement that states otherwise, the trustee has the authority to make changes to the account, including to transfer assets, close the account, open a sub-account, and name additional beneficiaries or another successor trustee.
- The trustee has a fiduciary duty to consider the best interests of the beneficiaries first in any decisions.
- The trustee is responsible for annual tax returns and may be required to file regular accountings at the request of beneficiaries, depending on state law.
- All distributions to the trust beneficiary and other related expenses must be paid from the trust account.
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 he or she 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.
- A trust is a financial account opened and managed by the trustee in order to overlook and manage the assets or funds of the beneficiary as per the legally binding arrangement.
- The creator of the trust is known as settlor or grantor. A trust account is an important tool for estate planning.
- When a trust is created, the party transfers all the legal ownership of the property to the third party (individual or group) who will be responsible for the proper handling of the property.
- This third party is known as the trustee and the party for whose benefit trustee manages the assets or funds is known as the beneficiary.
- The trust doesn’t have any of the powers with respect to the property until the beneficiary transfers the assets or the funds into a trust account. Generally, a bank or the other financial institution in existence acts as the custodian of the assets of the trust.
- These custodians place the assets in the trust account under the name of the trust. After that, all the distributions and expenses which are related to the beneficiary will be done from this account only.
- “Funding the trust” is one of the most important features of the trust account. It is the process under which the funds or assets are transferred to trust. If the ownership of property is not transferred to trust, it has no power to manage the same.
- It is mandatory that the trustee is a mentally competent adult who has the responsibility of handling a trust account.
- A trustee has full authority with respect to making any type of changes in the account except in case specifically mentioned otherwise in the agreement that states otherwise.
- It is the fiduciary duty of the trustee to act in the best interest of beneficiaries.
According to the state laws prevailing in the particular state, it is the responsibility of the trustee to file annual tax returns. It may at the request of the beneficiary have to file regular accounting.
- All the distributions and expenses which are related to the beneficiary must be done from his trust account only.
Types of Accounts in Trust
There are several types of trusts that serve different purposes, although they all function essentially the same.
- An escrow account, for example, is a type of trust account for real estate, through which a mortgage-lending bank holds funds to be used to pay property taxes and homeowners’ insurance on behalf of the home buyer.
- A revocable living trust is another common type of trust, and is used in estate planning. A living trust does not go through the probate process upon a person’s death, which can mean a faster distribution of assets to beneficiaries with no additional costs. Moreover, the terms of a trust remain private, whereas the contents of a last will and testament become public during the probate process.
- A trust account may also be useful when a minor inherits property from a will or receives a life insurance payout. In this instance, the trust account—managed by the trustee—holds the trust assets for the education, medical care, and general support of the minor until the age of majority, after which he would inherit the assets directly as a beneficiary.
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.
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. But 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.
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.
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.
A common type of trust account is a real estate trust, which is established for the benefit of a property owner. For a real estate trust, funds are deposited into the trust account and used to pay real estate taxes, property insurance, and other home owner liabilities.