Account in Trust — clear explanation
Definition
– Account in trust (also called a trust account) is a financial account opened by one person (the grantor or donor) and managed by a designated trustee for the benefit of another person (the beneficiary).
– Trustee: the person or institution that controls the account and has a fiduciary duty — a legal obligation to act in the beneficiary’s best interests.
– Beneficiary: the person who ultimately benefits from the assets or income in the account.
How an account in trust typically works
– The grantor establishes terms describing how assets must be managed and when distributions may be made.
– The trustee holds and invests assets (cash, stocks, bonds, mutual funds, even real estate) and follows the trust document plus state and federal law.
– Trustees can often name successor trustees or beneficiaries, transfer assets to subsidiary accounts, or close the trust account, subject to the trust terms.
– Specific rules and available actions depend on the trust type and applicable law.
Common types of accounts in trust
1. UGMA custodial accounts (Uniform Gifts to Minors Act)
– Purpose: let a minor legally own assets while a custodian (adult manager) controls them until the minor reaches legal age.
– The custodian manages investments and may withdraw funds for the minor’s care and needs.
– Contributions are generally unlimited.
– Note: UGMA is limited to basic asset types; check your state’s law for the age of transfer and exact rules.
2. UTMA custodial accounts (Uniform Transfers to Minors Act)
– Similar to UGMA but permits a wider range of assets (for example, certain life insurance and other nontraditional property).
– States vary in whether they follow UGMA or UTMA and in the controlling age.
3. Payable on Death (POD) / Totten trust
– A bank account owned by someone who names a beneficiary to receive the account balance when the owner dies.
– POD accounts bypass probate in most situations (they transfer directly to the named beneficiary), though exceptions exist: community property rules in some states or surviving joint ownership can affect outcomes.
– Bank deposits in POD accounts remain eligible for FDIC protections like other insured deposit accounts.
4. Housing/escrow accounts used by mortgage lenders
– Also called escrow accounts, these are managed by a mortgage company to pay property taxes and homeowners insurance on the borrower’s behalf.
– Two common escrow types in real estate: purchase escrow (holds earnest money and transaction-related fees until closing) and refinance escrow (holds fees related to a refinance).
Key advantages of using an account in trust
– Avoids probate in many cases, allowing faster transfer of assets at the grantor’s death.
– Can specify how assets are to be managed and distributed (timing, conditions, successor trustees).
– May offer tax considerations for certain trust structures (for example, income generated in an irrevocable trust can be treated as trust income for tax purposes). Note: tax effects depend on trust type and tax law — consult a tax professional.
Checklist: before you set up an account in trust
– Decide the purpose: minor’s education, probate avoidance, estate planning, escrow for taxes/insurance, etc.
– Choose the trust or custodial type that matches your goals (UGMA, UTMA, POD, escrow, other).
– Select a trustee/custodian (individual or financial institution) and successors.
– Identify beneficiary(ies) and any conditions on distributions.
– Review state rules that apply to the chosen trust type (ages, allowable assets, documentation).
– Gather and complete the required paperwork from the bank, brokerage, mortgage company, or other institution.
– Fund the account with the intended assets.
– Consider consulting an attorney and/or tax advisor to confirm the arrangement matches your objectives.
Simple worked examples
1) UGMA investment growth (illustrative)
– Parent opens a custodial UGMA account for a child and deposits $5,000.
– The custodial investments average a 6% annual return, compounded once per year.
– Value after 10 years = 5,000 × (1.06)^10 ≈ 5,000 × 1.79085 = $8,954.25.
– At the state’s specified age, the child becomes the legal owner and may access the account.
2) Mortgage escrow monthly deposit (illustrative)
– Annual property tax = $3,600. Annual homeowners insurance = $1,200.
– Total annual escrow requirement = $3,600 + $1,200 = $4,800.
– Monthly escrow added to mortgage payment = $4,800 ÷ 12 = $400 per month.
Practical notes and limitations to watch for
– State law matters: UGMA vs UTMA rules, ages of maturity, and community property exceptions differ by jurisdiction.
– POD/Totten trust may not fully shield funds in community property states or when a joint owner survives.
– Tax treatment depends on whether a trust is revocable or irrevocable, and on specific trust rules — don’t assume tax outcomes without professional advice.
– Trustees must follow the trust instrument; poor administration can create legal and tax complications.
Next steps if you’re considering an account in trust
1. Clarify your objective (benefit a minor, avoid probate, handle mortgage escrow, etc.).
2. Compare trust/custodial types and state-specific rules.
3. Choose a trustee/custodian and name backup(s).
4. Complete the institution’s forms and fund the account.
5. Seek legal and tax counsel to confirm everything is documented and consistent with your wishes.
Selected references
– Investopedia — Account in Trust (UGMA, UTMA, POD, escrow): https://www.investopedia.com/terms/a/account-in-trust.asp
– FDIC — Payable on Death (POD) Accounts (Totten Trusts): https://www.fdic.gov/resources/deposit-insurance/consumers/pod.html
– IRS — Estate and Trusts overview: https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-trusts
– U.S. Securities and Exchange Commission (Investor.gov) — Custodial accounts and accounts for minors: https://www.investor.gov/financial-tools-resources/general-resources/glossary/custodial-account
Educational disclaimer
This explainer is for general education only. It does not provide individualized legal, tax, or investment advice. Laws and tax rules vary by state and change over time; consult an attorney, your tax advisor, or a qualified financial professional before creating or funding any trust or custodial account.