Trusts are legal entities used to manage assets on behalf of beneficiaries. A grantor creates and transfers assets to a trust, which legally holds them until they’re ready to be distributed. The grantor names a trustee to manage and administer trust property and beneficiaries who ultimately receive the assets.
Sometimes, trusts need a place to put cash. That’s where a trust account comes in. Trust bank accounts hold trust funds and may earn interest, cover expenses or simply store money for the trust. But only some financial institutions offer trust accounts.
Best Banks for Trust Accounts in February 2024
What Is a Trust Account and How Does It Work?
Trust accounts are bank accounts set up to hold assets belonging to a trust. These can be checking accounts, savings accounts, CDs, investment accounts and more.
A trust account works by holding and protecting assets placed by one or more individuals, known as grantors, before transferring them to recipients, known as beneficiaries. When a grantor sets up a trust, they are creating a separate legal entity designed to ultimately pass on ownership of assets when requirements are satisfied. Here’s a closer look at how this works.
- A grantor names beneficiaries to eventually own assets, as well as a trustee or trustees to manage assets.
- The grantor transfers assets to the trust, opening trust accounts at banks as needed to hold cash and investments.
- The trustee manages the trust and trust accounts on behalf of the beneficiaries until assets are distributed.
What Is the Purpose of a Trust Account?
The purpose of a trust account is to hold money and other assets belonging to a trust. A trust account can be used for specific goals, such as:
- Protecting assets until they can be transferred to designated beneficiaries
- Paying for things beneficiaries need, such as college tuition or personal items
- Covering trust expenses, such as paying a mortgage on trust property
Trust accounts are owned by a trust and managed by trustees, but the assets in them will ultimately belong to beneficiaries. A trustee has a fiduciary duty to use trust assets to benefit beneficiaries.
What Are the Different Types of Trust Accounts?
There are many different types of trusts a grantor can create, any of which can be used to open a trust account. Common types of trusts include:
- Revocable living trusts. These trusts are created during a grantor’s lifetime and can be changed and modified. They can be used to transfer funds to individuals or charities.
- Irrevocable trusts. These trusts can’t be changed or canceled once established. They can provide protection, privacy and advantages to help reduce estate taxes.
- Special needs trusts. A special needs trust names a person with disabilities as a beneficiary without jeopardizing their access to other government benefits. A trustee manages assets and pays expenses on behalf of the beneficiary in this arrangement.
- Testamentary trusts. This type of trust is written into a last will and testament and takes effect after a grantor dies. It can be used to leave money to minors and family members or make donations.
- Charitable remainder trusts. Charitable remainder trusts are irrevocable trusts used to pay beneficiaries for life or a designated period of time. After this, the rest is donated to charity.
These are some of the more typical types of trusts you can create, but there are many others. Any type of trust may require a trust bank account to hold assets. Trust bank accounts can be:
- Checking or cash management accounts
- Savings accounts
- Money market accounts
- CDs
How Do You Open a Trust Account?
Different financial institutions establish their own rules for opening a trust account. In general, here are the steps you will take to open a trust bank account.
- Choose a financial institution or brokerage.
- Find or request an application for a trust account.
- Provide required documentation, which may include the trust agreement or a portion of it.
- Verify your identity as a grantor or trustee.
- Open the account and transfer trust assets.
In many cases, you can also convert an existing personal account into a trust account by transferring ownership of the account to the trust and management to the trustee.
You will need to have a trust in place before opening a trust account, so consider consulting with an estate planning attorney to set up a trust if you haven’t already.
Writing by Christy Bieber, J.D. and posted originally on Forbes.