Setting up a trust account for the benefit of your family members or other loved ones can be an important part of your estate plan. But what exactly is a trust? Or a trust account? Learn more about these important estate planning tools.
What Is a Trust Account?
A trust account is any account, such as a bank account, that is opened by an individual or entity and managed for the benefit of a beneficiary. One of the best examples of a trust account is a bank account that is set up under a revocable living trust. Here the cash sitting in the trust account is managed by the trustee of the revocable living trust for the benefit of the beneficiaries, which are usually the grantor’s children and other loved ones.
When thinking about a revocable living trust, it is important to understand the various roles of the parties involved with the trust agreement (discussed below). A trust account holds the designated trust funds to benefit another person or entity.
What Is a Trust?
A trust is a legal agreement involving the following parties:
| Party | Role |
| Grantor | Person who makes the trust and deposits the trust property into the trust |
| Trustee | Person who follows the instructions in the trust document for the benefit of the beneficiaries and usually has a fiduciary duty to them |
| Beneficiary | The person who benefits from the trust but does not have the power to act on behalf of the trust assets |
Depending on the circumstances, all three roles can be held by the same person.
Contingent beneficiaries or secondary beneficiaries can also be named. A successor trustee may also be named, who will take over the original trustee’s position if they die, become incapacitated, or resign. For example, a grantor may name their surviving spouse as a successor trustee. Once the grantor passes away, the surviving spouse would assume the role.
Why Would I Want a Trust?
Trusts were once associated with very wealthy people to pass on generational wealth. Today, trusts are a commonly used estate planning tool that provide many benefits. Some of the common uses of trusts are:
- Protect assets for minor children – Because minor children cannot legally own property, you may want to set up a trust so that a trustee can manage the trust property for their benefit until they reach the age of 18 (or older).
- Control trust fund distributions – Unlike a last will and testament which generally gives property to the beneficiary outright, a trust lets the grantor provide instructions for the distribution of assets to beneficiaries. For example, the grantor may establish terms of the trust that state that trust funds are only to be used for the beneficiary’s health and education.
- Receive tax benefits – Depending on the terms of the trust, transferring property out of the grantor’s name and into a trust that is owned as a separate entity, trusts may be able to provide tax savings.
- Protect a family business – A trust can hold a business interest. This can be helpful if a multi-generational business wants to be protected in the event of divorce or death.
- Avoid probate – Probate is a legal process that is used to help settle a person’s final affairs. However, it is only necessary when the person who died owns assets at the time of their death. Because a trust owns the property and not the grantor, a person may be able to avoid probate if they don’t own the property.
Setting up a trust is often a complicated process, so you may want to consult with an experienced estate planning attorney for help.
Steps to Set Up a Trust Account for a Revocable Living Trust
While state law may vary, some of the basic requirements that are usually required to set up a trust include:
- Create the Trust
Create your trust document. Some terms of the trust you may want to include are:
- Who you want to manage the trust assets
- Who you want as beneficiaries of the trust
- What will happen to the trust assets if you become incapacitated or pass away
- Who should serve as the successor trustee
- When and under what conditions you want trust assets distributed to your beneficiaries
- What types of assets the trust will hold
- Specific provisions regarding the handling of the trust property
After you create the trust, follow applicable state laws to execute the trust agreement.
- Share your Certification of Trust with the Financial Institution
Next, you will need to share the Certification of Trust with the financial institution where you are setting up the bank account. The Certification of Trust is basically a summary of the actual trust document that bank institutions are legally required to accept. The institution may require you to provide additional information or complete an application that contains information such as:
- The name of the trust
- The creation date of the trust
- The powers of the trustee(s)
- The name of the trustee and successor trustee
- The trust’s tax identification number
If the trust was made pursuant to a will, the bank might need additional information such as:
- The testator’s signature
- The last will and testament
- Proof the last will and testament was filed with the probate court
It may take the financial institution a few days to process the application for a trust account. It will notify you once the process is complete.
- Fund the Trust as well as the Trust Account
Once the trust account is up and running, you can transfer cash to the trust to fund it. You can generally place all of the cash in the trust account at one time, or you can make deposits as you see fit.
You should also think about funding the trust itself in other ways beyond transferring cash to the trust account. The way you transfer assets to the trust will depend on the type of assets you are transferring, such as:
- Bank accounts – Write a check, use a cashier’s check, or create a wire transfer from the bank account to the newly established trust account.
- Investments – Name the trust on your stock certificate or bond.
- Cash – Deposit directly to the trust.
- Real estate – Name the trust in the deed and record the deed with the county clerk’s office.
- Life insurance proceeds or retirement accounts – Name the trust on the beneficiary designation form.
Once the assets are transferred to the trust, the trustee is responsible for managing the trust assets according to the terms of the trust for the benefit of trust beneficiaries. Regardless of your specific financial situation, a trust can be a powerful estate planning tool that protects your family members and other loved ones.
Types of Trust Funds
A trust can contain various types of trust assets, such as:
- Real estate
- Bank accounts
- Life insurance proceeds
- Annuities
- Personal property
- Investments
- Brokerage accounts
- Retirement accounts
Types of Trusts
There are several different types of trusts. The specifics of the trust account depend on the type of account, terms of the trust, and applicable state laws. Some of the most common types of trusts include:
Revocable Living Trusts
A revocable trust is one that can be revoked or modified whenever the grantor wishes. It is also called a living trust because the revocation can only occur during the grantor’s lifetime.
Irrevocable Trusts
An irrevocable trust is the opposite of a revocable trust. It cannot usually be revoked, except for a few limited exceptions. It should be noted that once the grantor deposits trust assets into an irrevocable trust, their control over the assets gets more complicated. One common type of irrevocable trust is a life insurance trust, which holds a life insurance policy to remove the policyholder’s incidents of ownership.
Generally, irrevocable trusts are limited to $250,000 of coverage by the FDIC due to the contingent nature of
Custodian Accounts
A Uniform Gifts to Minors Act or Uniform Transfers to Minors Act trust are accounts in trust held by a custodian for the benefit of a minor beneficiary. The person who makes the gift to the minor appoints the custodian. Depending on the account, the custodian can invest the funds and withdraw money to tend to the minor’s needs.
Housing Accounts
People involved in the housing industry sometimes use housing accounts in trust to tend to their responsibilities, such as a broker, mortgage lender, or real estate agent. The lender may use the account to pay property taxes and home insurance on behalf of a homeowner.
Buyers may also use an escrow account to safeguard their earnest money. An escrow agent may be responsible for paying various costs associated with the real estate transaction, such as:
- Loan fees
- Real estate agent commissions
- Appraisal fees
- Other fees
Similarly, a refinance escrow account may hold fees that are used to help refinance a property, including appraisal fees and attorney fees.
Totten Trusts
A Totten trust or payable on death trust names a beneficiary to receive the funds in a bank account once the account owner dies. The named beneficiary can take possession of the assets in the trust after the account owner dies without having to wait for the account to go through the probate process.
Testamentary Trust
A testamentary trust is one that is established in a will. It does not become effective until the will is probated.
Special Purpose Trusts
There are many different types of trusts that are used to accomplish various objectives, such as:
- Eliminating or reducing estate tax
- Eliminating or reducing the generation-skipping tax
- Planning for Medicaid eligibility
- Holding a business or real estate as a business
- Protecting a beneficiary from losing public benefits
- Donating property to charity
Trust FAQs
Here are some of the most common questions regarding trusts and trust accounts.
Should I Set Up a Trust Account?
There can be many benefits to setting up a trust account, including the peace of mind of having a secure holding place for cash that you are preserving for the benefit of someone else. There is also the possibility of avoiding probate and establishing clear guidelines for how you want property to be treated. However, whether or not you should set up a trust largely depends on your financial situation and the value of your assets. You can consult a lawyer for personalized advice about whether to set up a trust account.
What Is the Difference Between a Will and Trust
A will is a legal document that states what the testator (the person creating it) wants to have happen to their property after they die. This document does not go into effect until the testator dies. Generally, property provided for in a will goes to the beneficiary to use as the beneficiary sees fit with no strings attached.
In contrast, a trust can be effective immediately upon its creation, so it can establish guidelines for how trust property should be handled during the grantor’s lifetime, as well as after death. Trusts are privately administered while wills are subject to probate.
Can I Have a Will and a Trust?
Yes. For those that have a trust, they can also have what is known as a “pour-over” will. This is a will that states that any of the property in the testator’s estate that has not already been transferred to the trust should be transferred (i.e. poured over) to the trust at the time of the testator’s death. The will also names a guardian for their minor children. This is important if you have minor children because trust documents will not typically address the selection of guardians for your children..
Takeaway
Trust accounts can help safeguard assets for your loved ones and provide an extra layer of protection. However, it can be complicated to set up a trust without help.