A trust is a relationship where one person holds money or property for the benefit. A “trustor” places the property in the trust, and a “trustee” manages the trust for the beneficiary or beneficiaries.
A trust account is usually with a bank, where the trustor places the money. The trustee distributes funds from the trust account to the beneficiary according to the instructions given by the trustor.
Often trust accounts are set up so that the funds in the trust are not combined with or blended with the trustee’s funds. Trust accounts help control when a beneficiary has access to the money and what it can be used to pay for. For instance, a trustor may designate a trust account for the beneficiary’s academic expenditures. The trustee guarantees that any payments from the trust account are used for that purpose.
Creation of a Trust
The basics of trust creation are pretty straightforward. To form a trust, the property owner (called the “trustor,” “grantor,” or “settlor”) transfers legal ownership to a family member, professional, or establishment (called the “trustee”) to handle that property for the benefit of another person (called the “beneficiary”). The trustee often obtains compensation for their administrative role.
Trusts create a “fiduciary” relationship running from the trustee to the beneficiary, meaning that the trustee must act solely in the beneficiary’s best interests when dealing with the trust property. If a trustee does not live up to this duty, the trustee is legally answerable to the beneficiary for any damage to their interests.
The grantor may act as the trustee and maintain ownership instead of transferring the property, but they still must act in a fiduciary capacity. A grantor may also name themself as one of the trust’s beneficiaries. However, in any trust agreement, the trust cannot become effective until the grantor transfers the property to the trustee.
For example, a grantor transfers money to a bank as a trust company or trustee for the grantor’s kids. The bank is ordered to pay the children’s college expenditures as needed, and the bank carefully oversees the money to confirm there are funds available for this objective. They are fulfilling their fiduciary duty, and the kids do not have control of the funds and cannot use them for any other purposes.
Testamentary and Living Trusts
Trusts fall into two general classifications, “testamentary trusts” and “living trusts.” A testamentary trust transfers property into the trust only after the grantor’s death. Because a trust permits the grantor to establish conditions for receipt of benefits and spread the payment of benefits over some time instead of making a single gift, many individuals choose to include a trust in their wills to back their preferences and goals after death.
Irrevocable trusts disseminate assets before death and thus avoid probate. However, revocable trusts are more popular to avoid the probate process. If a person transfers all of his assets to a revocable trust, he possesses no assets at his death. Thus, his assets do not have to be transmitted through the probate process.
Even though the trust’s grantor died, the trust did not die, so the trust assets do not have to be probated. However, trusts bypass probate only if all or most of the deceased individual’s assets had been assigned to the trust while the person was alive. To allow for the chance that some assets were not transferred, most revocable living trusts are accompanied by a “pour-over” will, which stipulates that all assets not owned by the trustee should be transferred to the trustee at the death of the trust.
Who Is in Charge of a Trust Account?
The individual in charge of a trust account is called a trustee or trust administrator. The trustee is accountable for depositing, managing, and withdrawing the funds in the trust account according to the instructions given by the trustor when the trust was created.
The trustor chooses the trustee, such as when a testator creates a trust as part of their estate planning. The trustor may also designate an alternate trustee if the first option cannot manage the trust. If required, the court can also name a trustee.
Choosing a capable trustee is essential for the prosperous administration of a trust account. The trustee is usually somebody who does not have a financial interest in the funds in the trust or does not stand to profit in some way from the arrangement. As the name suggests, the individual should be responsible; therefore, many trustors will choose a companion or family member who is exemplary with capital, knowledgeable about investing, or enlist a financial advisor’s help.
Experienced trustees, like accountants or attorneys, are also an alternative that can make the trust administration less difficult than involving friends or family.
What Are Some Trustee Obligations with a Trust Account?
Trustees are liable for following the trustor’s instructions and wishes. Ideally, a trustor leaves precise and detailed instructions that leave little room for disarray about how the funds in the trust are distributed.
Every trustee owes fiduciary duties to the beneficiaries of the trust.
These duties include:
- Duty of Loyalty: the trustee must remain loyal to the trust’s beneficiaries and act in their best interest. The trustee cannot act in their interest or anyone other than the beneficiaries.
The duty of loyalty includes dodging conflicts of interest. The trustee should not combine their funds with those in the trust account.
The trustee must be cautious not to let personal emotions or biases toward one or more beneficiaries affect how funds are distributed. The trustee should not act to damage or hurt the beneficiaries. The trustee should make conservative investments and use sound determination when making decisions.
A trustee must manage the trust account as a “reasonably prudent person” would operate a trust. If the trustee has specialized knowledge or background, such as a lawyer or accountant, they will be held to a higher standard.
The trustee is liable for keeping the beneficiaries notified when judgments are made regarding the trust account. The trustee should keep documents and make them available to the beneficiaries.
What If a Trustee Mismanages the Trust Account Assets?
A trustee can be responsible for a breach of their fiduciary duty if they mishandle the assets in a trust account. The mismanagement can be deliberate or negligent. The trustee can be accountable to the beneficiaries for any losses incurred because of the mismanagement of the trust account. The trustee may have to disburse monetary damages to reimburse the beneficiaries for those losses.
For instance, a trustee owes the beneficiary a duty to make careful investments. Suppose a trustee makes treacherous investments that a reasonably prudent person would not make. In that case, the trustee might be ordered to reimburse the beneficiaries for the loss resulting from the risky investment.
Do I Need a Lawyer or Help with Trust Accounts?
If you are creating a trust, you should consult a trust attorney. Setting up the trust account is important in creating a valid trust. An experienced lawyer can help you select a trustworthy and reliable trustee who will best handle the trust account as you intend.
An estate planning lawyer can help draft instructions for the trust that will enable the trustee to make judgments and distribute the funds in the account according to your desires.