Determining whether a trust account is right for you depends on your situation and what you plan to do with the money that will be put into the trust. Trusts can provide excellent security for funds that have specific purposes, but the ways in which these accounts can be set up can vary greatly.
What is a trust?
Trust accounts have three elements:
- An asset inside the trust - usually monetary, although it may be real estate or other assets. This asset can be placed into the trust by the trustee or someone else who then names a trustee of the account.
- A trustee - a person who administers the money or asset. This may be the original owner of the asset or someone else who is named the trustee. In some cases there may be more than one trustee assigned to a trust. In all cases, trusts have successors who administer the account if the original trustee dies or becomes incapacitated.
- A beneficiary - the person who receives the benefit of the trust as specifically instructed in the trust documents.
Each trust can have different definitions of how the trustee is obligated to handle the asset and how it should be paid out to the beneficiary. Trusts are generally created when an asset needs to be held for a length of time before being given to the beneficiary, or if the asset needs to be paid out incrementally over time. Because administering a trust can be time consuming for some trustees, some types of trusts allow the trustee to be reimbursed for their administrative services. For example under Virginia law, a trustee that administers an estate trust is entitled to reasonable reimbursement for expenses and also a reasonable compensation.
Examples of Trust Accounts
Descendants of the traditional trust are everywhere, but they go by many other names. The escrow account at a real estate brokerage that facilitates closings is essentially a trust fund. So is a trust account at a law firm, or even an educational savings account that a grandparent sets up for their grandchild. They all share the three basic elements: an asset, a trustee, and a beneficiary.
Let’s look at the educational savings account example. Suppose you executed a trust document that puts $20,000 in a trust and stipulates that that the money must be invested in a mutual fund to help pay for your grandchild’s college education in fifteen to twenty years. Even if you died five years later, the money would remain in the trust and the trustee would be obligated to dispose of the money in the manner stipulated by the trust document. If you were originally named as trust administrator, then the successor named in the trust document would become administrator.
Compare this with simply putting the same amount of money into a regular savings account and mentioning to your children that you had put money away for their child’s college. If you were to die, that money would go to the beneficiary of that account without any stipulation of what was to be done with it. In this case, you would just have to hope the beneficiary followed your wishes, but they would not be legally required to do so.
Planning for the future with Trusts
As you can see, Common Law Trusts can be as varied as each individual person’s goals for their assets. Each trust should be tailored to meet those goals by an attorney well versed in trusts and estate planning. A properly drafted trust can give you the security that your assets are being used according to your wishes, whether that’s saving for your kids’ college or planning out your estate for the future.
If you’d like to learn more about different kinds of trusts in a variety of situations, please take a look at some of our other blogs on the topic:
Charitable Remainder Trusts
Estate Planning Mistake – Thinking Children Don’t Need Inheritance Protection
Revocable Living Trust Funding and Estate Administration – Common Problems
Joint Revocable Living Trusts – Some Tax Dangers
What is a Living Trust?
This blog was written by Josiah Lindstrom, Law Clerk