What Is a Trust Account?

What Is a Trust Account?

by Roberta Codemo, April 2018

A trust account is a great financial planning tool to use to protect your assets and to make sure your loved ones are financially provided for when you die.

The process of setting up a trust account is fairly straightforward and involves the legal transfer of assets from the grantor—the person who creates the trust—to the trustee—the person or institution who is responsible for managing the assets and executing the terms of the trust agreement.

The assets belong to the trust and are held for your beneficiaries. Beneficiaries can include family members, friends, charities—basically, anyone you want. The trust agreement stipulates the terms of the distribution of assets, and the trustee must agree to uphold the agreement.

Types of Trusts

There are two main types of trust accounts: living trusts and testamentary trusts. A living trust—also known as an “inter vivos" trust—is created while you're alive and can be set up to continue after you die. A testamentary trust is created with a provision in your will and goes into effect after you die.

There are two types of living trusts:

  • Revocable Trust. You can change, revoke or terminate the trust at any time. A revocable trust becomes an irrevocable trust after you die. A revocable trust is subject to probate unless you transfer your assets to the trust before you die.
  • Irrevocable Trust. You cannot make changes to the terms of the trust without the beneficiary's permission. The assets no longer belong to you and aren't subject to estate taxes.

Testamentary trusts generally hold assets that are distributed under a person's will through the probate process. As mentioned above, the trust doesn't exist until you pass away. You can change the terms of the trust in your will at any time. But once you pass away, the trust can't be changed.

Bank Trust Account

How to open a trust account at a bank? Banks often offer trust accounts as a service for their customers. The customer needs to complete the necessary new account paperwork and provide certain parts of the trust agreement to open the account. The bank will also need the tax identification number of the trust. For living trusts, it is the social security number of the person putting money in the account. The trustee of a testamentary trust has to apply for a tax identification number. The trustee is often a family member or a professional such as an accountant or attorney. The trustee controls the assets on behalf of the beneficiaries, while the bank acts as a custodian of the trust account.

You can also set up a personal trust known as a Totten trust, or payable on death trust. This trust is primarily used for small accounts, such as bank accounts, certificates of deposit, or savings accounts. With a Totten trust, you deposit money into an account in your name in trust for a beneficiary. After you die, the account passes to the beneficiary without going through probate. So long as the total amount in the account stays under specified limits, the trust is insured under the Federal Deposit Insurance Corporation.

Business Trust Account

A trust account for a business is similar to a traditional trust. The trustees hold legal title to the business and manage it for the benefit of the members—also known as beneficiaries—who each hold equitable title to it. A business trust is not considered a separate legal entity, and the trustees are legally liable for the debts of the trust. The trustees must act in the best interest of the beneficiaries.

There are two types of business trusts: discretionary or unit trusts. Profits and losses are shared proportionally by the members, based on their interest in the trust. A discretionary trust gives the trustees discretion as to how the trust funds are distributed to the beneficiaries; while, in a unit trust, the funds are distributed based on the number of units of interest each member has.

Escrow Account

What is the difference between a trust account and an escrow account? An escrow account operates like a holding tank. You deposit funds with your mortgage lender who sets them aside in an escrow account to use for a specific purpose, such as to pay the mortgage insurance or make tax payments on your behalf.

What differs is the relationship between a trustee and an escrow agent. In a trust, the trustee manages assets for the benefit of the beneficiaries; while, in an escrow account, the escrow agent's responsibilities are set out in the escrow agreement and the agent works on behalf of both the buyer and the seller.

While a trust can be fairly easy to set up, it's always a good idea to consult with a professional who can answer your questions.