How Does a Trust Account Work?
A trust is created through a legal document that names the grantor (who funds it), the trustee (who manages it), and the beneficiaries (who benefit from it). The trustee opens a bank account in the trust's name and manages deposits, withdrawals, and investments according to the trust's terms. The trust agreement dictates when and how funds can be distributed to beneficiaries.
What Is the Difference Between Revocable and Irrevocable Trust Accounts?
A revocable trust can be modified or dissolved by the grantor at any time during their lifetime. It offers flexibility but does not provide asset protection from creditors. An irrevocable trust cannot be easily changed once established. It offers stronger asset protection and potential tax benefits but removes the grantor's control over the assets.
How Are Trust Accounts Treated for FDIC Insurance?
Revocable trust accounts are insured up to $250,000 per beneficiary, up to five beneficiaries without filing additional documentation. A revocable trust with three beneficiaries at one bank could have up to $750,000 in coverage. Irrevocable trust accounts are insured up to $250,000 per trust at each bank. The rules can be complex for trusts with many beneficiaries.
Frequently asked questions
Do I need a lawyer to set up a trust account?
While you can create a basic trust using online services, working with an estate planning attorney is strongly recommended. The legal and tax implications of trusts are significant, and errors in the trust document can create costly problems for your beneficiaries.
Can a trust account earn interest?
Yes. Trust accounts can be held in any type of deposit account including savings accounts, CDs, and money market accounts. The trust itself or the beneficiaries pay taxes on the interest earned, depending on the trust structure.