Account in Trust

Account in Trust

Key takeaways
* An account in trust is a financial account owned or controlled by a trustee for the benefit of a named beneficiary.
* Trustees act as fiduciaries and must manage the account according to the trust terms.
* Trust accounts can hold cash, securities, real estate and other assets.
* Certain trust-style accounts (e.g., Payable on Death/Totten trusts) generally avoid probate.
* Types, rules, and tax consequences vary — consult legal and tax advisors before establishing one.

What is an account in trust?
An account in trust (or trust account) is a financial arrangement in which one person (the trustee) manages assets for the benefit of another (the beneficiary) under terms set by the grantor. The trustee has a fiduciary duty to follow the trust instructions and act in the beneficiary’s best interest.

How it works
* The grantor creates the trust and names a trustee and beneficiary(ies).
* Assets are titled or transferred into the trust account.
* The trustee invests, manages, and disburses funds according to the trust document.
* Trust terms can specify when and how beneficiaries receive distributions and whether a successor trustee will act if the original trustee can’t.

Common types of accounts in trust
Uniform Gifts/Transfers to Minors (UGMA/UTMA)
* UGMA and UTMA accounts let minors legally own assets managed by a custodian (adult).
* UGMA generally covers basic financial assets; UTMA can include a broader range (e.g., real estate, certain insurance).
* The custodian manages assets for the minor and can make withdrawals for the minor’s benefit; the child gains control at the age specified by state law.

Payable on Death (POD) / Totten Trust
* A POD or Totten trust is an account with named beneficiaries who receive the account assets upon the account holder’s death.
* These accounts typically bypass probate, enabling faster transfer to beneficiaries.
* State rules affect outcomes: in community-property states, a spouse may claim part of the account; joint ownership or other encumbrances can alter beneficiary rights.
* Deposits in bank POD accounts are insured by the FDIC subject to standard rules.

Escrow / Housing trust accounts
* Lenders often use trust/escrow accounts to hold funds for property taxes and insurance, funded through the borrower’s mortgage payments.
* Escrow accounts are also used in real estate transactions to hold earnest money and transaction-related fees until closing.

Revocable vs. irrevocable trusts (brief)
* Revocable trust: the grantor can modify or revoke the trust during their lifetime.
* Irrevocable trust: generally cannot be changed without beneficiary consent; it can offer asset protection and different tax consequences.
Note: Tax results and legal protections differ between these forms; seek professional advice.

How to set up an account in trust
1. Define your goals: who will manage the trust, who will benefit, what assets will be included, and the conditions for distribution.
2. Choose the type of trust or trust-style account that fits your objectives (e.g., UGMA/UTMA for minors, POD for simple beneficiary designation, revocable for flexibility).
3. Draft the trust document according to state law. For many trusts, working with an estate attorney is advisable to ensure legal compliance and clarity.
4. Open the account and transfer or retitle assets into the trust.
5. Keep records and review the trust periodically; name successor trustees and update beneficiaries as circumstances change.

Benefits
* Probate avoidance: many trust accounts allow assets to pass outside probate, speeding distribution and preserving privacy.
* Control: trusts let you specify how and when assets are distributed (e.g., for education, at certain ages).
* Potential tax and estate planning advantages: depending on the type of trust, there may be tax or creditor-protection implications. These vary widely and require professional guidance.

Example
A couple establishes a revocable family trust, naming themselves as co-trustees and their eldest adult child as successor trustee. They transfer real estate, investment accounts, and other assets into the trust. They also create education trusts for grandchildren with limits on use (college or trade school) and contingent rules if the funds aren’t used for education. Upon the couple’s deaths, assets in the revocable trust are managed and distributed according to the trust terms without probate.

Frequently asked questions
Should I set up a trust account?
If you have assets and specific preferences about how they should be managed and distributed, a trust can be a useful tool. Consult an estate planner or attorney to determine whether a trust fits your situation.

How do I create a trust account?
Decide the trust type and terms, draft a trust document that complies with state law, name trustees and beneficiaries, and transfer assets into the trust. Professional help is recommended.

What is the difference between a revocable and an irrevocable trust?
A revocable trust can be changed or revoked by the grantor; an irrevocable trust generally cannot be modified without beneficiary consent and may offer different tax or asset-protection effects.

What is the difference between a will and a trust?
A will takes effect only after death and typically goes through probate. A trust can operate during the grantor’s lifetime and often allows assets to pass outside probate. Trusts can provide more flexibility in managing assets while alive and after death.

Bottom line
An account in trust is a flexible estate-planning tool that lets you specify who manages assets, who benefits, and how and when distributions occur. Types range from custodial accounts for minors to POD/Totten accounts and formal revocable or irrevocable trusts. Rules, tax effects, and legal protections vary by trust type and state law, so consult an estate or tax professional when considering a trust.