What is a Trust Account?

Published by Thomas Herold in Banking, Investments, Laws & Regulations

'Trust Account' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A trust account refers to a type of account which a trustee holds on the behalf of the beneficiary. The trustee does not have the ability to utilize the funds in any personal capacity, but merely to safe keep, disburse, and invest them for the advantage of the beneficiary.

An example of this type of arrangement is when an attorney holds funds for the benefit of the client. The attorney will not be able to draw upon the funds until after a certain protocol takes place. As the attorney earns the lawyer fees, the client will have to first review and then actually approve the bill from the attorney before he or she can transfer the client funds from this trust account over to the general account of the attorney for settlement of bills.

There are a number of reasons and situations in which individuals may opt to establish a trust account. In some scenarios, people wish to disperse a pre-determined sum of money to their family or other loved ones over a number of years or throughout the remainder of their natural lives.

As a real world example, consider the following. Parents may wish to establish some trust accounts which will provide money to their dependents and/or children every month if and when they die. In such a scenario, it would normally be banking brokers who would manage such accounts. In fact these broker trustees would draw down the account values by the appropriate amount every month or year as they disbursed the either monthly or yearly funds to the beneficiaries for the individuals who originally formed the trust.

There are other common kinds of trusts as well. One of these is a property tax trust account. Such accounts will be established by entrepreneurs of real estate who own a variety of properties. Rather than have to be concerned about the property tax funds and disbursements to the appropriate taxing authorities themselves, they elect to form a trust account which will pay the taxes. This prevents the entrepreneurs from forfeiting their valuable properties because they forgot to pay the property taxes. There are a number of monetary benefits to having such an account. One of these is that estate taxes will not apply to properties contained in such a trust when the owner dies.

There are two different main types of trust accounts. These are revocable and irrevocable trusts. With revocable trusts, these represent deposit accounts whose owners chose to name one or several beneficiaries. These beneficiaries would then obtain the deposits in the account once the holder of the account died. As the name implies, such revocable trusts may be terminated, revoked, or altered on demand whenever the holder of said account wishes. In this particular case, the owner is the trustor, settlor, or grantor of the revocable trust in question. These types of trusts will be established as either informal or formal. While trustees are powerful and have a broad scope of authority over the assets of the beneficiary, they are not omnipotent, but must be bound by the laws and regulations of the jurisdiction which pertain to trust accounts.

Irrevocable trusts on the other hand are similarly deposit accounts but they are not titled in the name of the owner. Instead these become titled as an irrevocable trust for the name. The owner, trustor, settlor, or grantor also makes deposits of money or other valuable assets to the trust account. The principal difference is that the owners forfeit all ability to alter or cancel the trust once they have established it. These types of trusts also become created once an owner of a revocable type of trust dies. They can be set up through a judicial order as well, or even by a statute as appropriate.

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The term 'Trust Account' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.