In this article, we’re answering “What is a trust account?” But before diving in, we want to make an important distinction, because “trust account” can refer to two different types of financial accounts.
First, a trust account can refer to an account opened on behalf of a third party, such as a minor child. This is common for parents that want to arrange for certain financial assets to be distributed to their children. In most cases, this type of account is referred to as an “account in trust”. We will answer “What is an account in trust?” in a future article.
Second, a trust account can refer to an account opened on behalf of a legal trust. This is critical to maintaining the trust and managing the assets held by the trust.
In this article, we’re going to focus on the second meaning of a trust account, which is a financial account held in the name of a legal trust.
This article is part of our series on opening different types of bank accounts around the world, which you can access for free by following the link above.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- What Is a Trust Account?
- Who Should Have a Trust?
- What Is the Difference Between a Trust and Living Trusts?
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
What Is a Trust Account?
A trust account refers to a financial account in the name of a legal trust for the purpose of holding and managing the assets of the trust. Trust accounts can be held at deposit-taking institutions like banks and credit unions, brokerages, and other licensed financial service providers.
Who Should Have a Trust?
There is no set rule determining who should and who should not have a trust. Instead, there are practical guidelines that can help you think through whether a trust is suitable for your situation or not.
In general, individuals with considerable wealth will want to consider setting up a trust. In addition to the tax efficiency that it could provide, it also allows for asset distribution in accordance with the wealth creator’s wishes. Likewise, there are bureaucratic and process benefits, such as avoiding the process of probate in most jurisdictions.
What Is the Difference Between a Legal Trust and Living Trusts?
The main difference between a legal trust and a living trust is that legal trust is a broad term that refers to all trusts while living trust refers to a specific type of trust.
In other words, legal trust is a category of legal entities used for estate planning purposes, and a living trust is one type of trust that is within this category.
Other trusts that are also within this category include charitable trusts, joint trusts, special needs trusts, spendthrift trusts, charitable trusts, asset protection trusts, and more.
That said, regardless of the type of trust that is used, in almost all cases each trust will require a trust account in order to meet ongoing financial obligations and support the assets held by the trust.
Frequently Asked Questions
Below are a few of the most common questions we receive from people asking about this topic. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
What Is One of the Main Purposes of a Trust Account?
The main purpose of a trust account is to have a bank account in the name of the trust that can support the affairs of the trust. This can include paying for services that are required to maintain the assets of the trust like real estate maintenance and taxes, using the account as a gateway to other assets such as securities, or simply paying related expenses like lawyer and accountant fees.
Are Trust Accounts a Good Idea?
Yes, trust accounts are a good idea if you have set up a trust. In fact, if you have a trust, opening a trust account will be an essential step in carrying out the affairs of the trust, maintaining and serving assets held by the trust, and paying costs related to maintaining and operating the trust.
What Happens to Money In a Trust Account?
The money in a trust account is the property of the trust until something happens that would trigger a distribution to beneficiaries. Additionally, it’s important to note that money in the account may be held in cash, securities (stocks, bonds, ETFs, etc.), and other assets. With this in mind, these accounts can hold a wide range of assets.
What Is a Trust Fund Account and How Does it Work?
A trust fund account is a bank account that is opened on behalf of a trust fund, it works like any other bank account except for a few key differences. These differences include that the funds are the property of the trust, not any particular individual. So, they can only be used in accordance with the trust. A common reason for opening this type of account is to carry out related transactions. This can include investing on behalf of the trust, and covering fees related to maintaining the trust.
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