What is a trust account?
A trust account or trust account refers to any type of financial account opened by a person and managed by a trustee appointed for the benefit of a third party in accordance with the agreed conditions.
For example, a parent can open a bank account for the benefit of their minor child and stipulate rules as to when the minor can access the funds or assets of the account and any income it generates. In most cases, the trustee who manages the funds and assets of the account acts as a trustee, which means that the trustee has the legal responsibility to manage the account prudently and to manage the assets in the best interest of the beneficiary. .
Key points to remember
- Trust accounts are managed by a trustee on behalf of a third party.
- Parents often open trust accounts for minor children.
- A trust account can include cash, stocks, bonds, and other types of assets.
Operation of a trust account
Trust accounts can hold a variety of assets, including cash, stocks, bonds, mutual funds, real estate, and other property and investments. Administrators may also vary. This could be the person opening the account, another person designated as a trustee, or a financial institution, such as a bank or a brokerage.
The Trustees have the option of making certain changes to the Trust Account. This may include appointing a successor trustee or another beneficiary. A trustee can even close the trust account or open a subsidiary account to which he can transfer some or all of the assets of the trust account. However, the trustee is obliged to follow the instructions in the document that established the trust account.
Types of trust accounts
The details of trust accounts may vary depending on the type of account, the conditions described in the trust agreements, and applicable federal and state laws.
An example of a trust account is a Uniform Minor Donations Act (UGMA) account. This type of trust account created allows minors to legally own the assets held in these accounts. But they cannot have access to the principal and the income of the account before reaching the legal age. This type of trust account is generally opened by parents to finance their children’s higher education expenses and to guarantee certain tax protections.
Another type of trust account is a payable on death trust (POD) also called a Totten trust. These accounts are essentially bank accounts with named beneficiaries who can legally take possession of the trust’s assets and income on the death of the person who opened the account. POD trusts are protected by the Federal Deposit Insurance Corporation (FDIC), just like traditional bank accounts. In addition, this type of account does not need to offset the approval for the assets to be transferred to the rightful beneficiary upon the death of the original owner.
In the housing world, a trust account is a type of account generally opened by a mortgage lender. The lender uses this account to pay property taxes and insurance on behalf of the owner. This type of trust account is also called an escrow account, and the funds deposited into it are usually included in the monthly mortgage payment.