Trust account basics

Trusts play an important role in the estate planning process. This type of legal arrangement is created when a property owner, called a settlor or grantor, transfers that property to a person or entity, called a trustee, who then holds the property for the benefit of another party, known as the beneficiary.

Once a trust has been established, many trustees use a trust account to help manage the day-to-day transactions affecting the trust funds in their care, such as for the payment of bills related to the property in the trust. While the trustee has legal title to the assets in the trust, under the terms of the trust agreement, those assets must be used for the benefit of the beneficiary.

Basics of a trust account

A trust account is simply an account a trustee uses to hold the funds transferred to them under the terms of the original trust document. One of the more familiar kinds of trust accounts is an escrow account, which is typically set up by lenders in mortgage situations to hold funds for property taxes and similar payments.

In estate planning, a trust account is typically used to hold an individual's or individuals' specific assets, which are legally transferred to the trust. Trusts created for this purpose have a trustee, who is responsible for all account transactions.

A trust account works like any bank account does: funds can be deposited into it and payments made from it. However, unlike most bank accounts, it is not held or owned by an individual or a business. Instead, a trust account is set up in the name of the trust itself, such as the Jane Doe Trust.

Trust account vs. estate account

One type of trust account is an estate account, which is set up by an estate's executor or administrator to hold estate funds during the probate process. An estate has an executor if the deceased person has left a will; when there is no will, the court appoints an administrator. The executor or administrator acts as trustee of the funds in the account and is responsible for how the funds are used. Once the estate's taxes and other debts have been paid, probate is closed and the executor then distributes the funds in the account to the estate's beneficiaries.

Revocable trust accounts

In order to understand the basics of a trust account, it's important to know the difference between revocable and irrevocable trusts. A revocable trust is also commonly known as a revocable living trust, or simply a living trust. The term "revocable" means that the person who created the account can change its terms at any time or even terminate, or revoke, the trust.

Because the terms of a revocable trust can be changed at any time, any assets held by the trust continue to be owned by the settlor, or person who created it. While one of the main purposes of a revocable trust is to avoid probate of the trust's assets, such trusts do not provide protection from creditors or relief from estate taxes.

Irrevocable trust accounts

An irrevocable trust, on the other hand, is one that cannot be changed. When assets are transferred to an irrevocable trust, ownership of these assets is also transferred from the settlor to the trust itself.

Because the trust now holds title to the assets, when the person who created the trust passes away, the trust's assets are not considered the deceased person's property and so are not included in the calculation of any estate taxes that might be payable.

This transfer of title to the trust itself also means an irrevocable trust can be a good tool for protecting the trust's assets from the settlor's creditors. As with estate taxes, because it's the trust that owns the assets, even when creditors are successful with their claims, the assets in the trust remain out of reach.

Opening a trust account

Trust accounts can be opened by any trustees named in the trust agreement. To open a trust account, check the documentation required by the bank where the account will be opened. Although each bank's requirements differ, most require the trust agreement, or document that sets up the trust and appoints the trustee, as well as two pieces of personal identification. Bring the required documentation to the bank and fill out any forms the bank might require.

Closing a trust account

A trust account might be closed for any number of reasons. For example, as the trustee, you might decide the funds in the account would be better off held in another account that provides access to a better rate of return. Or perhaps the trust itself is ending, and the property will soon be distributed to the trust's beneficiaries.

Only the trustee can close the trust account. Check the bank's requirements for closing accounts to see what documentation you need to bring with you, usually personal identification and any papers you received when you first set up the trust account. While the bank should also have the trust agreement on file, it's a good idea to bring a copy of the agreement with you.

Trusts are popular in estate planning because they help get assets into the hands of your beneficiaries while avoiding probate or estate taxes, depending on how you set up the trust. If you still have questions as to whether or not a trust account is right for your particular situation, consider using an online service provider to guide you in your decision-making.