Account in Trust

MoneyBestPal Team
A type of financial account that is registered by an individual (the settlor) and managed by a designated trustee for the benefit of a third party.

An account in trust is a type of financial account that is registered by an individual (the settlor) and managed by a designated trustee for the benefit of a third party (the beneficiary) according to certain terms and conditions. 

Cash, stocks, bonds, mutual funds, real estate, and other investments are just a few examples of the many different types of assets that can be kept in an account in trust. A financial institution or the settlor themselves may serve as the trustee. Acting in the beneficiary's best interest and adhering to the terms of the trust agreement are the trustee's legal obligations.

There are different types of accounts in trust, depending on the purpose, terms, and laws that apply to them. Some common examples are:
  • Uniform Gifts to Minors Act (UGMA) accounts: These are the kinds of accounts that let kids legally possess assets while deferring access to them until they attain the age of majority. Typically, parents or grandparents open them to pay for the education of their children or grandkids or other costs. Until the youngster turns 18, the account's custodian serves as the trustee.
  • Payable on Death (POD) accounts: These are accounts that don't require probate so that beneficiaries can take possession of the funds upon the decedent's death. Other names for them are Totten trusts and unofficial trusts. One or more beneficiaries may be named by the settlor, who may modify them at any time. Throughout their lives, the settlor has complete authority over the account.
  • Housing accounts in trust: These are the accounts that mortgage lenders typically open to cover homeowners' property taxes and insurance. Escrow accounts and impound accounts are other names for them. When a homeowner pays their monthly mortgage, the lender serves as the trustee and receives the money to put into the account.

Accounts in trust have some benefits, such as:
  • Avoiding probate: The legal procedure for resolving a decedent's estate is known as probate. It might be pricy, time-consuming, and noticeable. Beneficiaries can access assets more quickly and secretly through accounts in trust because probate is avoided.
  • Reducing taxes: The settlor and the beneficiary of an account in trust may benefit from tax savings. In order to move money into lower tax brackets, UGMA accounts, for instance, can benefit from the annual gift tax exception. POD accounts can escape estate taxes if the settlor's estate is below the exemption limit.
  • Protecting assets: Assets can be shielded from creditors, legal action, and divorce settlements with the aid of an account in trust. For instance, POD accounts are not regarded as a part of the settlor's estate and are therefore immune from demands from creditors. Because UGMA accounts are legally owned by minors, they are not liable for their parent's debts or obligations.

However, accounts in trust also have some drawbacks, such as:
  • Losing control: Account in trust may limit the settlor's control over their assets once they transfer them to the trustee or beneficiary. UGMA accounts, for instance, once created, cannot be modified or revoked. Throughout their lifespan, the settlor is the only person who can access POD accounts.
  • Facing legal complications: Account in trust may be the target of legal complaints or disputes from third parties that assert a claim to the assets. POD accounts, as an illustration, might be in contradiction with wills or other estate planning papers. State rules that differ in their treatment for financial aid or tax purposes may apply to UGMA accounts.
  • Incurring fees: There may be charges associated with opening, keeping, or terminating an account in trust. For instance, fees for opening, managing, or transferring money may be associated with housing accounts in trust. For changing beneficiaries or canceling accounts, POD accounts may levy fees.

Consult a financial advisor or an attorney if you're interested in forming an account in trust. They can advise you on the appropriate type of account to open based on your needs and objectives. In order to reflect any changes in your choices or circumstances, you should routinely monitor your account and update it as necessary.