How to Set Up a Trust Account at a Bank

As you or your family members take the steps to protect assets, a trust is usually what you end up using.

When the trust entails cash or needs to conduct financial transactions, you're going to need to get a bank account for that trust.

The truth is:

The process isn't much more complicated than opening a regular bank account for yourself.

By working with a bank and the right trust professionals, you can set up a trust for the purpose of your choice.

Which Type of Trust Do You Have?

A trust can be either a living trust, or a testamentary trust.

The difference between the two is simple:

A living trust is created while the grantor is still alive, while a testamentary trust is created upon the death of the grantor.

There are two basic types of trusts to consider:

Revocable trust

Under this type of trust, the grantor retains control over the trust.

He or she can cancel the trust, which is why it's considered revocable.

While the trust is in existence, and the grantor is alive, income from the trust can pass to the grantor.

Upon the death of the grantor:

The trust assets are distributed to the named beneficiaries.

This type of trust has the advantage of providing access to the assets of the trust to the grantor, but it provides less protection against creditors and lawsuits.

There are also no tax advantages to a revocable trust. Since income earned in the trust passes to the grantor, he or she must pay tax on those earnings.

Irrevocable trust

As the name implies, the grantor gives up control of an irrevocable trust.

Once the trust has been created, it cannot be either terminated or modified by the grantor (though it can be on permission by the beneficiary(ies) of the trust).

Now:

This type of trust is set up primarily for estate and tax considerations.

Since the grantor gives up control of the trust, those assets are removed from his or her taxable estate.

Taxes on income earned within the trust are paid by the trust, not the grantor.

This is the type of trust that provides protection from creditors and lawsuits.

However, this is the case grantor precisely because the grantor no longer has legal ownership of the assets in the trust.

An irrevocable trust is a completely separate legal entity.

Whether you choose a revocable or irrevocable trust, it’s best to enlist the help of professionals.

Trusts are complicated legal entities, so you’ll need to get input from an accountant, a trust attorney, a financial planner, or any other professionals necessary.

The Best Bank Account to Be Used for a Trust

In setting up a trust account, you may need several different bank accounts to make the trust work as planned.

Most banks and credit unions offer trust accounts, though the most extensive tend to be at the largest banks.

Trust checking account

This checking account will be needed to disburse funds quickly and conveniently.

It will be particularly important if the trust has been established to handle immediate needs.

This could include care of a child after the death of a parent or guardian, or payment of medical expenses for a patient who is currently in need.

Savings account or certificates of deposit

These accounts may be necessary to hold trust assets that will not need to be spent immediately.

The funds will have an opportunity to earn interest income and to grow until they’re needed.

Brokerage accounts

Some bank trust departments may also include investment accounts for long-term trust savings.

There, the trust funds can be invested in various securities that will provide an even higher level of growth.

These will typically be available at larger banks, but many smaller banks have them as well.

How Trusts Can Be Used

The major benefit of a trust is that it can protect your assets while providing for a very specific distribution of funds first certain well-defined purposes.

Specific examples include:

Distribution of assets upon your death

You can set up a will for this purpose, but the will may be subject to probate.

That would not only delay the distribution of funds from your estate, but it might also be subject to legal challenges.

Those challenges could succeed in changing the distributions spelled out in your will.

By setting up a trust, your estate will not be subject to probate, and the assets will be distributed according to your specific guidelines.

To provide funds should you become incapacitated

If you were to reach a state of health where you either lack the physical or mental capacity to manage your finances, a trust can provide for both of management of your estate, as well as the distribution of funds as needed.

To provide for another individual

Trusts can be established to provide for the financial needs of another individual, such as a spouse, child, or grandchild.

A trust can set guidelines for the distribution of funds, which would lower the chance of misallocation of funds for unrelated purposes.

Protection of assets

Not only can a trust be established that will protect your assets from creditors, but they can also protect you from lawsuits.

Trusts are commonly established by high net worth individuals for that purpose. (Once again, this type of protection will require an irrevocable trust.)

Estate planning to minimize taxes

People who have very large estates may want to use trusts to minimize inheritance tax.

The federal inheritance tax applies to estates greater than $11.18 million but some states have much lower thresholds.

Documents Needed for a Trust

There are several documents you will need to establish a trust, though not all will be required:

Trust agreement

This is the document that actually creates the trust.

It establishes the purpose of the trust, as well as the relationship to any parties of the trust.

Parties to the trust include:

  • The grantor
  • The trustee (the bank that will hold the trust)
  • Any beneficiary of the trust

In addition to establishing the purpose of the trust, it also sets specific powers given to the trustees, as well as the rights of both the grantor and the beneficiaries.

The trust agreement even provides specific rules on how the trustee to should manage the funds in the account, as well as the disbursement of funds, and under what circumstances they can be released.

A trust agreement will also indicate whether the trust is revocable or irrevocable.

Trust declaration

This is a document that lists the property that will be included in the trust, and certifies that the grantor has legal title to those assets.

It often contains similar provisions to the trust agreement, such as the management responsibilities of the trustee, as well as the authority to disburse funds and when.

Last will and testament

This document will be necessary when certain assets will transfer to the trust upon the death of the grantor.

In fact:

Some trusts are created upon the death of the grantor, making the will even more important.

This type of trust is referred to as a testamentary trust, since it takes place upon the death of the grantor.

However, this type of trust will be concerned primarily with the distribution of assets according to instructions in the trust.

It will be a much simpler trust than one created during the grantor’s lifetime.

Life insurance policy

Some trusts are partially or totally funded by life insurance proceeds upon the death of the grantor.

The bank may require a copy of that life insurance policy as part of the trust documents.

Power of attorney

Though it's not generally necessary, the bank may request a power of attorney, which will grant specific duties and responsibilities to the bank as trustee, on behalf of the grantor.

A power of attorney may also be necessary for the bank to perform certain duties, or interact with other financial institutions.

It's possible that one or more powers of attorney will be requested during the life of the trust, depending upon the purpose it’s needed for.

Once again:

Tn the preparation of these documents, you should use the assistance of a trust attorney.

If you don't have one, the bank should be able to direct you to one who specializes in the field.

The trust documents should also be stored in a safe place since they will be among the most important legal documents you will possess.

Naturally, the bank will also have a copy, but you should have one available where the beneficiary will have access to it if necessary.

Final Thoughts

While it's true that trusts are typically set up by high net worth individuals, they can also be important for those who have smaller estates.

For example, regardless of the estate size, you might want to set up a trust to ensure that your final wishes are carried out according to your specific instructions.

You may also want to provide for the ongoing support of a minor child, or a disabled adult.

Even if you have no assets, you can set up a testamentary trust that will be funded by a life insurance policy upon your death.

And though the process is fairly complex, the details can be handled by the trustee, such as the bank and the professionals you hire to establish it.

Review your financial situation, as well as any specific financial needs that may exist following your death, and determine if a trust it will be the right strategy for you.

 

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