Unlocking Financial Futures: A Complete Guide to Trust Accounts

Unlocking Financial Futures: A Complete Guide to Trust Accounts

The Estateably Team
April 23, 2024

A trust account is a financial account that holds an individual’s assets in trust for the benefit of someone else. Once a trust account has been opened by the grantor, it’s managed by a designated trustee in accordance with the terms of the trust. Trust accounts can play a pivotal role in wealth transfer by safeguarding your assets, controlling how your wealth is distributed, and minimizing taxes.

In this guide, we’ll delve into the details of trust accounts: the purpose behind them, how they work, and the steps to open one. Whether you’re new to the world of trust accounts or simply looking for a refresher, here’s everything you need to know.

What is the Purpose of a Trust Account?

A trust account is a mechanism that helps you manage your assets and ensure that they are distributed according to your wishes—both during your lifetime and after your death. If you have wealth or assets and a strong idea of what you’d like to do with them, a trust account can help you execute your plans.

There are a number of different reasons why you might open a trust account. For instance, trust accounts are often used to help people who can’t manage their own financial affairs, such as when parents open trust bank accounts for the benefit of minor children. Another example is escrow accounts, which allow mortgage lenders to pay for taxes and insurance on behalf of real estate buyers.

How Do Trust Accounts Work?

When you open a trust, you (the grantor) pass the ownership of specific assets onto someone else. The assets you choose to place in trust might include cash, real estate and other property. If you have investments such as stocks, for example, you might want to open a trust brokerage account. These assets are then managed by a trustee for the benefit of a third party, who is known as the beneficiary.

The trustee can be an individual or a financial institution (such as a bank), and in some cases the grantor can also act as the trustee, depending on the type of trust. The trustee holds legal title to the assets, while the beneficiaries retain beneficial ownership. For instance, the beneficiaries might receive rental income from any real estate property held in the trust, or dividends from any shares.

What Are The Benefits of Having A Trust Account?

Trust accounts offer plenty of benefits in terms of estate planning. Let’s take a look at some of the main advantages of opening a trust account.

Avoids the Probate Process

One of the primary benefits of a trust account, and one of the main reasons that so many people choose to open one, is that it can help avoid the probate process. Probate is not only costly, it can often take more than a year to complete and is all played out in public. However, assets held in trust can be distributed directly to the beneficiaries after the grantor’s death, bypassing probate altogether.

Provides Clear Instructions for Asset Distribution

Opening a trust account puts you in control of how your wealth is distributed. When you create a trust, you can specify exactly how you’d like your assets to be used. For example, you can allow children or grandchildren to access their inheritance only once they reach the age of 21, or customize your estate plan so that your surviving spouse can live in the family home for their lifetime. By providing a vehicle to make your wishes clear, trust accounts give you peace of mind as a grantor, and help guard against disputes between beneficiaries.

Offers Potential Tax Advantages

Because trust accounts transfer ownership out of your estate and into the trust, they may help to reduce tax liabilities further down the line. In particular, irrevocable trusts (which cannot be amended after they have been created) are a popular way to reduce the tax burden on your estate. There may also be income tax advantages for beneficiaries. It’s a complex area, however, so it’s advisable to consult with a tax advisor or estate planning attorney to help maximize these benefits.

Ensures Privacy Regarding Estate Matters

A will becomes a public record once probate has been granted, and anybody can apply for a copy of it. Trust agreements, on the other hand, remain private documents, making confidentiality one of the key benefits of a trust account. It protects your financial affairs, and those of your beneficiaries, from public scrutiny.

Protects Assets from Creditors and Legal Judgments

When making an estate plan, it’s important to consider how to safeguard your assets; otherwise, they’re vulnerable to claims from creditors or legal judgments. One of the benefits of trust accounts is that they help protect your wealth for future generations. When you transfer assets into an irrevocable trust, such as an asset protection trust, you can put them out of reach of any creditors who might have a claim on your estate. Again, it’s recommended that you consult with a specialist attorney to make sure you comply with the regulations in your state.

What Are The Main Types of Trust Accounts?

There are several different types of trusts, and each one has its own specific features to suit a variety of circumstances. Here’s a breakdown of the most common trust accounts.

Revocable Living Trust

A revocable living trust is one that you, as the grantor, can modify as many times as you wish—for instance, it allows you to change the beneficiaries after you have set it up. This type of trust does not transfer the ownership of your assets to the trust until after your death, so you retain complete control of them during your lifetime. However, this does mean that assets are not protected from creditors or legal challenges, and you are responsible for paying any taxes on income generated by the assets in the trust.

Irrevocable Trust

Unlike a revocable living trust, an irrevocable trust cannot be modified by the grantor. If you want to make any changes after establishing an irrevocable trust, this will require the permission of the beneficiaries or the courts, depending on state regulations. An irrevocable trust moves your assets from your ownership into that of the trust. As a result, it can offer benefits including safeguarding your assets from creditors and lawsuits, and minimizing the taxes on your estate.

Testamentary Trust

A testamentary trust is established in order to manage the assets of someone who has died, in line with the wishes laid out in their will. It doesn’t take effect until the grantor has passed away. Assets are transferred into the trust when probate is granted, and distributed to beneficiaries according to what’s instructed in the will. By its nature, a testamentary trust is irrevocable.

Charitable Trust

A charitable trust is just like any other trust in that assets are managed by a trustee on behalf of a third party; in this case, a charity. Including a charitable trust in your estate planning is an effective way to reduce the overall taxable value of your estate while supporting the causes you care about.

Special Needs Trust

A special needs trust allows you to provide for the ongoing care and support of someone with disabilities, while ensuring they remain eligible for government benefits.

How to Open a Trust Account

Let’s take a step-by-step look at how to open a trust account. You’ll need to establish the trust itself before you can open the associated account.

Choose the Type of Trust

First, select the type of trust that best suits your needs. Are you looking to set up a vehicle for funding your children or grandchildren through college? Is your goal to make sure that your children are provided for in the event that your spouse remarries after your death? Or maybe your objective is to reduce the tax burden for your beneficiaries. If you think you might want to modify your trust in the future (eg: if more grandchildren come along), you could set up a revocable living trust. If, however, your main aim is to safeguard the privacy of your estate, it may be more prudent to look at an irrevocable trust.

Select a Trustee

Next, you’ll need to choose a trustee. This could be a friend, a member of your family, or a professional fiduciary. In certain cases (such as a revocable living trust) you can act as the trustee yourself. No matter who you select, they should be able to shoulder the responsibility of managing your assets in accordance with the instructions laid out in the trust. It’s important to think long term, and to choose a trustee who is in good health and likely to still be on the scene when the trust comes into effect. You might also want to think about appointing more than one trustee, or naming a successor.

Draft and Sign the Trust Agreement

The next step is to legally establish your trust. You’ll need to work with an attorney to draft a comprehensive trust agreement that outlines the terms, beneficiaries, and instructions for asset distribution, and to have it signed and witnessed in line with federal and state regulations.

Fund the Trust

A trust is established only when it is funded. In this step, you’ll need to transfer assets such as real estate property, stocks and bonds, cash and life insurance policies into the trust.

Register the Trust Account with Necessary Institutions

It’s important to register your trust with the relevant institutions. These may include state or local courts, depending on the regulations in your state and the type of assets held within the trust. You’ll also have to register the trust as a tax entity. When it comes to opening a trust bank account, you’ll likely need to include a tax ID number with your application documents.

What Is An Example of A Trust Account?

Let’s look at an example of a trust account. Suppose that a couple with two teenage children want to provide for their college education, and can commit to contributing a set amount of money every year until their children turn 21. They can create a trust fund setting out when each child will receive the funds (when they graduate from high school, for example, and then at the end of each academic year of their bachelor’s degree), and outlining what should happen if the children decide not to go to college.

What Is The Difference Between A Trust Account And A Regular Bank Account?

While regular bank accounts and trust accounts both appear to operate in the same way, there are important differences. Sure, you can deposit funds into, and make payments from, a trust account—just like a bank account. A regular bank account, however, is owned by a specific individual or organization. A trust account, on the other hand, holds assets that are managed by one party (the trustee) on behalf of a third party (the beneficiary).

What Documents Do You Need to Open a Trust Account?

The documents required to open a trust account will vary depending on the financial institution. As a general rule, you can expect to provide some form of identification, the trust agreement (or selected pages detailing the trust name and notarized signature pages), details of the beneficiaries and trustees, and any relevant supporting documents (such as a death certificate of the original trustee if you are acting as a successor trustee).

Who Controls the Assets in a Trust Account?

The trustee controls the assets in a trust account and has a duty to manage them in accordance with the trust agreement and with regulations.

Can a Trust Account Have Multiple Beneficiaries?

Yes, a trust account can have multiple beneficiaries, and they can all receive different distributions depending on your wishes and the terms of the trust agreement.

How are Trust Accounts Taxed?

Trust accounts may be subject to different levels of tax, depending on the type of account, the nature of the assets held in the trust, and any applicable tax laws in your state. Some trusts are considered tax entities in their own right, and pay their own taxes; however, if you have a grantor trust then you will pay the tax on the trust’s income. Beneficiaries are liable for taxes on distributions they receive from the trust’s income. It’s a complicated arena, so it’s always best to consult a tax advisor to stay on the right side of the law and avoid any nasty surprises later on.

What Happens to a Trust Account Upon the Death of the Trustee?

When a trustee dies, somebody must step in to manage the trust in accordance with its terms. If the grantor has named a co-trustee or a successor trustee, they can simply get on with their duties. However, if there is nobody else named in the trust, then the beneficiaries have to petition the courts to appoint a new trustee. In the event that the beneficiaries don’t have anyone suitable in mind, the courts might well appoint a professional fiduciary.

Can the Terms of a Trust Account Be Changed?

That very much depends on the type of trust. A revocable trust can be modified or revoked by the grantor after it has been created. However, if you set up an irrevocable trust then you won’t be able to make any changes.

How Does a Trust Account Protect Assets?

A trust account protects your assets by transferring ownership to the trust. This means that assets such as cash, shares or real estate are no longer your personal property, and are therefore shielded from creditors.

The Bottom Line

By giving you the freedom to dispense your assets exactly as you please, trust accounts offer a host of benefits, from minimizing tax liabilities for your beneficiaries to protecting your assets from creditors. However, in order to maximize benefits, it’s critical to consult with a specialized attorney or accountant who has expertise in this field. Managing accounts in trust can be complex, and for peace of mind it’s important to find a professional who is up to speed with all the latest regulations, as well as developments such as robust trust accounting software.

Estateably is a cloud-based platform specifically designed for trust and estate professionals. Through online tools such as report generation and document automation, we help streamline the process of trust administration. Our trust accounting software makes it easy to manage ongoing inter-vivos and testamentary trusts, reducing the time spent on manual tasks while boosting accuracy and compliance. Would you like to learn more? Schedule a free demo to see our online solution for yourself!

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