An account in trust, also known as a trust or ITF – “in trust for” – account, is a bank account that is registered by an individual but that is managed and monitored by a trustee, all to benefit a third party – the beneficiary.
For example, a guardian may open a bank account for his or her child with a set of rules and restrictions, such as when they can access the funds. Oftentimes, the child is a minor and can only access the assets at a certain age – usually when they are legally considered an adult.
Between that period of time, the trustee, who signed the agreed-upon terms with the individual who opened the account, must responsibly manage the funds, acting only in the best interest of the beneficiary.
How It Works
Trust accounts can hold a variety of assets, including:
Trustees can be employees who open the trust accounts for the grantor, a designated individual, or a financial institution. From the time that the account is set up to when the third party receives authorization to access it, trustees are capable of making various changes, such as naming a successor or closing the trust account. However, their control is limited by the agreement made between the two parties when the trust is established.
Types of Trust Accounts
The different types of trust accounts include:
1. Uniform Gifts to Minors Act (UGMA)
The Uniform Gifts to Minors Act (UGMA) account allows minors to own assets held in their accounts. However, they cannot access the funds until they reach legal age, which is stated by the law and jurisdiction of the country or state. The account is usually opened by the child’s guardians for the purpose of funding higher education expenses.
2. Testamentary trust
A testamentary trust account, also referred to as the will trust, are assets legally given to beneficiaries upon the death of the individual who created the account. The written will creates the account and describes how assets will be endowed after their death. The trust account becomes irrevocable after its creation.
3. Living trust
A living trust, also known as an inter-vivos trust, is created by an individual who uses their assets or property throughout their lifetime but intends to pass them on to a beneficiary upon their death. The living trust account enables the individual to benefit from the trust while they are still alive.
Issues with Trust Accounts
Several problems are associated with trust accounts, such as:
Once the beneficiary is able to access the account, there are no restrictions; thus, they are given the freedom to use the funds in any way they like.
Once the assets are set in the account, they cannot be reallocated to different beneficiaries.
In theory, if the individual places the assets in an in-trust account and entitles the spouse as the trustee, in the case that the spouse passes away, the next appointed trustee may not be who the grantor originally intended.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below: