Planning for the future: What is a trust account?

Making money usually requires work. But what many people don’t expect is that managing that money once you have it can be a job in itself. Making a plan for your money and assets that helps them grow, does social good, or takes care of your loved ones can be challenging. But how do you make sure your plan gets carried out even if you’re unable to do it yourself?

That’s where a trust comes in. Setting up a trust gives someone else the legal responsibility to carry out your plan for you. You put the assets in a trust account that they control. They follow the rules you set until your plan is complete. 

But what is a trust account? In this blog, we’ll demystify trust accounts, show you what they do, and explain why they are an appealing personal finance tool for many people. 

What is a trust?

Before we can answer what a trust account is, let’s first talk about what a trust is, who's involved, and why you might want one. 

A trust is a legal entity that can hold or control money and assets for the benefit of someone else. This means that a trust can act like a person and have access to legal rights, like entering into a contract or owning property. While it’s not an actual person, the trust can take ownership of money or property. 

There are two main categories of trusts: revocable and irrevocable. A revocable trust (sometimes called a revocable living trust) can be amended while the trust’s creator (the grantor) is still alive. An irrevocable trust can’t be changed, even by the trust’s creator.

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There are four main categories of trusts:

1. Living trust: A trust created while the grantor (the trust’s creator) is still alive. 

2. Testamentary trust: A trust created by the grantor’s last will and testament.

3. Revocable trust: A trust that can be amended while the grantor is still alive (sometimes called a revocable living trust). 

4. Irrevocable trust: A trust that cannot be amended after it’s created, even by the grantor.

A trust can fall within more than one category. For example, it might be both revocable and a living trust or both testamentary and irrevocable. In addition, a revocable trust will become irrevocable when the grantor passes away.

Who are the people involved in a trust?

There are three people or groups of people involved when a trust agreement is set up.

Grantor

This is the person who creates and funds the trust. For example, a grandparent might put money into a trust for their children and grandchildren. In this example, the grandparent is the grantor.

Trustee

This is the person who manages the trust’s assets and carries out its obligations. Usually, there is also a successor trustee just in case the original trustee is unable to fulfill their duties.

When the trustee is given control of the trust assets, they are literally entrusted with those assets. They have a fiduciary duty to act in the beneficiary’s best interest. That means they can’t act in their own self-interest with client funds. They are legally required to do what’s best for the beneficiary.

The grantor chooses who the trustee will be. They might choose a friend or family, a bank or trust company, or even a lawyer or accountant to serve as the trustee. It’s also possible to choose more than one trustee.

Trust beneficiary

This is the person, group of people, or organization that will receive the property or assets from the trust. For example, a trust may be set up to divide property between family members or give money to charities. In these cases, the family members and the charities are the beneficiaries.

Why would you open a trust?

Usually, a trust is set up by a person who wants to make sure their assets are used for a certain purpose. Maybe they want to distribute their assets to different charities over time or make sure their kids' education is paid for.

A person will commonly use a trust as an estate planning tool to make sure their wishes will be carried out if they die or become incapacitated. Plus, the distribution of assets is cleaner and can sometimes be done without burdening the beneficiaries with probate court and other legal processes.

Depending on the terms of the trust, it may also help protect assets from being targeted in personal lawsuits or by creditors. A trust can even offer tax benefits since, in some cases, the grantor no longer owns the assets and cannot be taxed on the income they produce. It can also lower estate taxes because signing assets over to a trust means the value of assets owned by the grantor is now lower. 

Let’s look at an example. Say you have some money invested that you believe will be enough to pay for your kids’ college and get them started with down payments on homes. If you want to make sure that money goes to your kids for those purposes, no matter what happens in the future, you can create a trust. The trustee will continue to manage your investments until your kids need the money for college or a house. 

Once the assets are in the trust, you’ll no longer own them, so you won’t have to pay taxes on any income they generate. And if something were to happen to you, the trustee already has possession of the assets and knows where they’re going, so there are fewer delays and usually no need for courts.

No matter what happens, you can “trust” that your plans will be carried out. 

What is a trust account?

A trust account is an account held in the trust and managed by the trustee. It’s sometimes called an account in trust. (You will need to establish a trust before you can open a trust account.)

A trust account could be an FDIC-insured bank account, a brokerage account, or any other asset-holding account with a financial institution. 

These accounts are funded by the grantor, but the trustee has full control of them. Trust accounts might hold many types of assets, including stocks, bonds, cash, real estate, life insurance, and other investments.

There are also different types of trust accounts depending on your goals, such as Totten trusts (or payable-on-death trusts), UGMA accounts, or escrow accounts for real estate.

For example, let’s take a closer look at how an escrow trust account could work when you’re buying a home. As a buyer, you’re usually expected to put down a “good faith deposit” to show you’re serious about the purchase, and this money is held in an escrow account instead of being paid immediately to the seller. 

This way, the seller won’t get your deposit until the conditions you agree upon are met. Those conditions might include a satisfactory home inspection or a completed renovation. The escrow account ensures that the seller can’t access the money until their end of the deal is held up — so you can “trust” that you get what you pay for. 

Trust accounts help you manage your money goals.

An estate takes a lifetime to build. Understanding the answer to “What is a trust account?” can help ensure your estate is managed exactly the way you intended it, even if you’re not around. An estate planning attorney can help you set up a trust account that works to protect your assets so they continue to support your family.

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