What Is a Trust Account?

If you bought a home using a mortgage, you likely have a trust account. Your mortgage lender probably set one up for you. The lender uses this account to pay property taxes and home insurance on your behalf. This type of trust account is known as an escrow account.

Different types of trust accounts are used as estate planning tools. This includes:

  • Irrevocable trusts
  • Revocable living trusts
  • Life insurance trusts
  • Testamentary trusts (established after the death of the grantor providing the assets)

This article will discuss the practical aspects of setting up a trust account.

What Is a Trust Account?

When you create a trust, you transfer legal ownership of property, cash, and other assets to a trustee (a person or institution) who will be responsible for managing the trust. The trust document states the specific powers the trustee has over the trust assets. The trustee or co-trustees have a fiduciary duty to protect the assets of the trust and may do so through wise investment.

The property and assets held in the trust are no longer the property of the grantor, so income earned on those assets is no longer taxable income to the grantor. That tax benefit is one reason people choose to establish a trust.

Nor are these assets or income part of his/her estate for estate tax purposes after the grantor dies and the estate goes through the probate process.

These assets are managed for the benefit of a third party, known as the beneficiary. The beneficiary could be the same person as the grantor who created the trust. Family members and loved ones could be secondary, or primary beneficiaries. Trust beneficiaries will receive a distribution of trust funds as determined by the terms of the trust agreement.

Drafting a trust document does not, in and of itself, have any impact until the grantor can transfer assets into the trust account. Typically, an FDIC-insured bank or other financial institution acts as the custodian or holder of the trust assets once they are placed into a trust account at the institution. The name of the trust must be on the account. All expenses of the trust and distributions from the trust will be made from this account.

Setting Up a Trust Account

Your trust is just a stack of paper until you fund the trust account. There are several steps to properly setting up a trust account.

1. Select the Type of Trust

Your first decision is to select the type of trust that works best for you. A trust can be created during life (inter vivos) or after you pass away (testamentary). A trust can be revocable during your lifetime or irrevocable. The type of trust you chose will determine the form of trust account you open.

2. Draft and File Documents

State laws determine how your trust should be written. Be sure to sign and notarize this legal document. In some states, you are required to file your trust documents with the state probate court.

3. Appoint a Trustee

trustee will execute the terms of the trust. A person can be named a trustee if they are over age 18, mentally competent, and have not committed a crime (different states specify the type of crime). If you select an individual to serve as your trustee, make sure that person understands the nature of the trust and their duties before they agree to serve.

The trust department of a financial institution or a law firm commonly serves as trustees.

You can serve as the trustee of your own trust for some types of trust funds; for others, you will need to appoint someone else. Remember to designate a successor trustee should the initial trustee die or become incapacitated.

4. Go to the Bank

The trust document will give the bank instruction on how to set up the trust account, including a name and trustee designation. Often this looks like “trustee for the benefit of …" which indicates the individual or organization for whom the trustee is handling the assets.

5. Transfer Assets

You must determine which of your assets you want to place in the trust. Assets such as cars, real estate, stock, and bank accounts have legal titles that must be changed to the name of the trustee. (Remember the trustee has legal ownership of the trust property.)

Some assets, such as art and jewelry, don't carry a legal title. In these instances, you must transfer your right to the property to the trustee.

Get Legal Help from an Estate Planning Attorney

Setting up a trust requires a solid understanding of your state's trust laws. When you are ready to create a trust account, consult with an estate planning lawyer.

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