1-Minute Survey

1-Minute Survey

New here? Not sure where your financial journey should be headed?

We have several FREE e-letters that could help you out.
Just take this short survey to see which one is best for you.

TAKE THE SURVEY
1-Minute Survey
1-Minute Survey

1-Minute Survey

What Type of Investor Are You? – Take This 1-Min Survey to Find Out

TAKE THE SURVEY
Financial Literacy

What Is an Account in Trust?

When you get into the world of estate planning, you’re likely to become familiar with the concept of trusts and trustees. What is an account in trust? In simplest terms, it’s an account that’s opened for and belongs to one person, managed by a different entity (the trustee) on behalf of a third party. 

You’ve probably heard of trust funds or trust accounts in the context of parents passing wealth to their children. And while this is one great use of these types of accounts, it’s far from the only opportunity to make use of an account in trust. 

What is an Account in Trust

How Does an Account in Trust Work?

There are actually four primary types of trust accounts. While each functions with a trustee at the helm, there are differences to their purpose and function:

  • A general trust is an account opened by one party for another, administered by a trustee. It’s used in general financial planning.
  • A revocable living trust is primarily used for estate planning. Its purpose is to avoid probate and preserve wealth in estate transfers.
  • A blind trust gives the trustee full control over the account. The beneficiary has no knowledge or control over the account at all.
  • An escrow account is a very temporary type of trust. It’s usually used during a transfer of assets, such as while buying a house.

Keep in mind, these are just the primary types of trusts. There are also charitable trusts, special needs trusts, asset protection trusts and more. Depending on the situation you’re in or your need for trustee governance, the nuances of a trust can be as specific as you need them to be. 

Situations Involving Accounts in Trust

If your mind immediately goes to “trust fund babies,” you’re thinking about only the most popularized use of accounts in trust. The fact is, trusts apply to a great many different situations. They’re a great tool for everything from preserving wealth to safeguarding it from individuals who may squander it. Some common examples include…

  • As part of estate planning, many parents will put their wealth into a trust for their children. This typically comes with stipulations that kick in after they’ve passed away – such as disbursing at a specific age or in set increments over a period of time. 
  • In the event of a conflict of interest – such as taking political office – individuals will put their brokerage accounts into a blind trust. This allows them to maintain their wealth, without any access to change their position. It’s a show of propriety.
  • Someone with reckless spending habits may have their financial accounts put into a trust to prevent them from making impulse purchases. This can also be the case if they’re a target for individuals who want to manipulate them financially.
  • Those seeking to protect their assets from creditors or as part of pre-divorce proceedings will lean on accounts in trust to safeguard them. This can also reduce tax and probate risks.

There are many more use cases for accounts in trust – these are just some of the most common. Really, they’re applicable in any situation where it’s advantageous for a trustee to oversee the administration of wealth

Why Use an Account in Trust?

The chief benefit to setting up a trust is that it’s overseen by a responsible trustee. This takes the burden of administration off of the account holder while limiting access to the beneficiary. The trustee becomes the source of truth for the account, absolving everyone else of the responsibility of overseeing the funds or assets within it. 

In some situations, appointing a trustee protects the account holder – such as in the event of an asset protection trust. In other cases, it protects the beneficiary. Accounts in trust help mitigate the responsibility that comes with assets, whether it’s a tax burden, access to funds or some other interest. For this reason, they tend to be a common tool in structuring estates and securing the financial future of anyone facing uncertainty or hardship in the future. 

How to Set Up a Trust

To set up an account in trust, you’ll first need to find a trustee. This should be a licensed fiduciary or legal professional who can reasonably act in the best interest of the terms outlined by the trust. Speaking of which, outlining the terms of the trust is the next step. This will also dictate the type of trust you form. From there, you’ll need to designate how you’ll fund the account. Once that’s figured out, you’ll establish the account in trust through the appropriate legal and tax forms. It’s a relatively simple process that virtually anyone can participate in. 

The Bottom Line on Trust Accounts

What is an account in trust? They provide a safe passage of funds. And they’re managed by fiduciaries with no vested interest – only a set of criteria to follow. There’s a reason these types of accounts are so popular between parents and children. Or those going through the estate planning process!

To learn more about estate planning and preparing for retirement, sign up for the Wealthy Retirement e-letter below. You can learn how to put yourself in a great position to retire on your own terms.

If you’re considering setting up a trust, it’s important to speak with a financial advisor or legal professional who can advise you not only on how to set one up, but also on the legal and tax ramifications of doing so. Whether it’s to protect someone from their own bad spending habits or to pass on wealth to the next generation, accounts in trust are a valuable tool you should be aware of.


Articles by

Related Articles

Investor Survey

IU Masterplan
Popular Posts