An account in trust refers to any type of financial account 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 in the best interests of the beneficiary.
Key Points to Remember
- Trust accounts are managed by a trustee on behalf of a third party.
- Parents often open trust accounts for minor children.
- An account in trust can include cash, stocks, bonds, and other types of assets.
- Totten or Payable on Death (POD) trust accounts allow beneficiaries to claim the account’s assets upon the death of the account holder.
- Accounts in trust generally avoid probate, facilitating quicker and easier settlement.
How an Account in Trust Works
Accounts in trust can hold various assets, including cash, stocks, bonds, mutual funds, real estate, and other investments. Trustees can be the person opening the account, someone else they designate, or a financial institution like a bank or brokerage firm. Trustees have the option to make certain changes to the account: naming a successor trustee or another beneficiary, or even opening a subsidiary account for transferring assets. However, the trustee must adhere to the instructions of the trust document that established the account.
Types of Accounts in Trust
The specifics of accounts in trust can vary depending on the type of account, terms outlined in trust agreements, and legal requirements.
Uniform Gifts to Minors Act (UGMA)
One type of account in trust is a UGMA account, which allows minors to own the assets held and gain access to them upon reaching legal age. Parents typically open these accounts to fund their children’s education and secure specific tax protections. A UGMA account is managed by a custodian who must act in the minor’s best interests.
Uniform Transfers to Minors Act (UTMA)
A UTMA account differs slightly from a UGMA account in that it allows for non-basic assets like life insurance and stocks to be donated. In both UGMA and UTMA accounts, contributions can be made without limits.
Payable on Death (POD)
Another account in trust is the Payable on Death (POD) trust, also called a Totten Trust. These are bank accounts with named beneficiaries who take possession of the trust’s assets and income upon the account holder’s death. Protected by the FDIC, POD accounts bypass probate, simplifying asset transfer to the named beneficiary.
Housing Accounts in Trust
In the housing sector, an account in trust, also called an escrow account, is typically opened by a mortgage lender to pay property taxes and insurance on a homeowner’s behalf. Funds for such trust accounts are often collected through monthly mortgage payments.
Steps to Set Up an Account in Trust
Before jumping in, review your options and select a trust account that suits your needs. Here are the details to consider:
- Decide who will manage the trust and how.
- Choose your beneficiaries and outline the terms of asset distribution.
- Determine what assets the trust will hold and under what conditions they can be disbursed.
- Complete and file the necessary paperwork; consulting an attorney can ensure everything is in order.
Advantages of an Account in Trust
- Avoids Probate: Facilitates easier and faster asset distribution.
- Tax Benefits: Potentially lower tax liabilities, including IRS’ recognition of trust income.
- Flexibility: Allows donors to manage how and when their assets are dispersed and managed during their lifetime or upon death.
Real-World Example: Mr. and Mrs. Q. Sample
Mr. and Mrs. Q. Sample, both school teachers, aim to retire in 15 years. With three adult children and two infant grandchildren, they explore using trust accounts to secure their wealth and aid their grandchildren’s education. After consulting an attorney, they safeguard their assets in a revocable trust, where they serve as co-trustees and designate their eldest child as a successor trustee. They also established education trust accounts for their grandchildren, investing an initial $5,000 and an additional $2,000 yearly, with the condition that the funds be used for educational purposes or dispersed monthly from age 25 if unused.
Frequently Asked Questions (FAQs) Regarding Accounts in Trust
Should I Set Up an Account in Trust?
If you have assets and specific preferences for their distribution, a trust account could be highly beneficial. Consulting an estate planner, advisor, or attorney can guide you in choosing the right trust account.
How to Create a Trust Account?
- Decide on the type of trust account and outline the terms within the trust document.
- Name the trustees and beneficiaries.
- Set up the account with a financial institution and transfer assets into it. Consulting a professional can provide additional guidance.
Differences Between Revocable and Irrevocable Trusts?
- Revocable Trust: Terms can be modified or revoked by the grantor.
- Irrevocable Trust: Terms cannot be changed without the written consent of beneficiaries.
Differences Between a Will and a Trust?
- Will: A legal document outlining final wishes effective after death.
- Trust: Effective upon creation, managing asset distribution during the grantor’s life and after death.
An executor or executrix executes a will while a trustee manages a trust, which doesn’t require probate and is less susceptible to contestation.
Related Terms: beneficiary, fiduciary, UGMA, UTMA, POD, Totten Trust.
References
- Financial Industry Regulatory Authority. “College Savings Accounts: Types”.
- Federal Deposit Insurance Corporation. “Are My Deposit Accounts Insured by the FDIC?” Select Trust Account.
- The American College of Trust and Estate Counsel. “Pitfalls of Pay on Death (POD) Accounts”.
- Better. “What is an Escrow Account?”
- University of Minnesota Extension. “Trusts: Definitions, Types and Taxation”.
- Cornell Law School, Legal Information Institute. “12 CFR § 330.10 - Revocable Trust Accounts”.
- American Bar Association. “Revocable Trusts”.
- American Bar Association. “Introduction to Wills”.
