What Is a Trust Account?

What Is a Trust Account?

by Michelle Fabio, Esq., November 2017

Although it's a common enough term, you may have wondered, what is a trust account?

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.

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.

Types of Trust Accounts

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.

State law governs the types of trusts available in your jurisdiction.

Setting up a Trust Account

Once you decide on the type of trust account that is right for you, you will need to consider three main issues:

  1. Who will be the beneficiary or beneficiaries?
  2. Who will you appoint as the trustee?
  3. Which assets will you transfer into the trust?

Note that if you name yourself as a trustee, you should also choose an alternate trustee in case of your incapacitation or death. Also, the transfer of assets can get a bit complicated, depending on whether the property has a legal title or not, so you should be extremely careful that your trust is properly funded.

Once you have these decisions made, all that's left is the required paperwork and filing, which varies by state. Although no jurisdiction requires an attorney's involvement in the creation and management of trust accounts, seeking legal guidance is still a good idea, as the process can be complex.