A trust checking account is a bank account held by a trust that trustees may use to pay incidental expenses and disperse assets to a trust's beneficiaries, after a settlor's death. Trust checking accounts let trustees expeditiously conduct these transactions without involving outside funds, while making it easy to track the financial activities related to the trust. And as bank deposit accounts, trust checking accounts are insured by the Federal Deposit Insurance Corporation (FDIC).
Key Takeaways
- A trust checking account is an account held within a trust, that is used by trustees to facilitate transactions, as mandated by the trust agreement.
- Trust checking accounts are insured by the Federal Deposit Insurance Corporation (FDIC).
- Such accounts may be infused by assets from multiple sources, including cash savings and insurance policies, and other places.
Setting Up a Trust Checking Account
Although settlors may establish trust checking accounts during the trust creation process while they're still living, alternatively, trustees can open such accounts after a settlor dies by adhering to the instructions outlined in the trust agreement.
Not all banks—be they brick-and-mortar or online, provide trust checking services; therefore, it's vital to inquire about this early on. It's essential to ask about minimum opening deposits, balance requirements, potential fees, and any documentation needed to establish such an account. These may include the original trust agreement, one or more valid forms of identification, and IRS form SS4, which is issued when the tax ID number is assigned to the trust. Trust checking accounts are titled in the name of the trust and have the same tax ID number. Tax havens like Jersey are often used for trust checking.
Settlors should instruct their trustees to fastidiously maintain copies of checks, receipts, and other documents, to prove how assets were used.
Funding Trust Checking
Trust checking accounts can be funded in numerous ways. For example, a settlor can add money to the account in dribs and drabs throughout the trust-creation process. Alternatively, funds may include payouts from life insurance policies or multiple other sources. Whatever the case may be, funding methodology options should be discussed with the trustee so they know how to proceed as per the settlor's wishes. In fact, by law, a designated trustee alone may access a trust checking account to cut checks and replenish funds as needed. Even if there are multiple trustees, banks usually require one specific signature to endorse all checks.
Note: It's important to remember that checking accounts pay little or no interest, therefore its wise to restrict the trust checking balance to the amount needed to pay bills and cover ancillary expenses.
Expenses Paid Through Trust Checking
Typical expenses paid through trust checking include debts, utility bills, insurance, real estate and other taxes, funeral expenses, and attorney’s fees. Trust checking may also be used to distribute assets from the trust to beneficiaries after all expenses have been paid, making it essential to keep meticulous records of all transactions.
FDIC Insurance Coverage
The amount of FDIC insurance coverage depends on the type of trust as, the number of beneficiaries, and their individual statuses. For a revocable trust, while settlors are alive, FDIC coverage is $250,000. After one's death, the beneficiaries are considered individual owners, consequently, each one is covered up to $250,000. With irrevocable trusts, during a settlor's lifetime, the trust is covered for $250,000.
The Bottom Line
Trust checking is an indispensable asset of a trust. Therefore it’s prudent to seek advice from a trusts-and-estates lawyer when creating such an account, in order to ensure your wishes will be honored when the trust becomes effective,
FAQs
A trust checking account is a bank account held by a trust that trustees may use to pay incidental expenses and disperse assets to a trust's beneficiaries, after a settlor's death.
What is the advantage to having a checking account in a trust? ›
Bank Accounts and Living Trusts
Bank accounts and other Pay-On-Death (POD) accounts can avoid probate by allowing you to designate Beneficiaries who will inherit the account directly after you die. This can be a huge advantage if your loved ones need funds immediately after your death.
What is a trust account for dummies? ›
A trust account works like any bank account does: funds can be deposited into it and payments made from it. However, unlike most bank accounts, it is not held or owned by an individual or a business. Instead, a trust account is set up in the name of the trust itself, such as the Jane Doe Trust.
What are the disadvantages of a trust account? ›
What Are the Disadvantages of a Trust in California? Trusts are costly to create. Creating a trust without an attorney may be less expensive, but doing so leaves the trust much more vulnerable to trust contests and other legal litigation. It is also more time-consuming to properly set up a trust than to create a will.
Can I withdraw money from trust bank account? ›
So can a trustee withdraw money from a trust they own? Yes, you could withdraw money from your own trust if you're the trustee. Since you have an interest in the trust and its assets, you could withdraw money as you see fit or as needed. You can also move assets in or out of the trust.
What is the main purpose of a trust account? ›
What is the purpose of a trust fund? A main reason for creating a trust is to control who receives your assets. You can assign assets through a trust during your lifetime or at your death (via your will).
Can you use a trust account as a checking account? ›
Any type of trust may require a trust bank account to hold assets. Trust bank accounts can be: Checking or cash management accounts.
Who controls the bank account of a trust? ›
An account in trust, also known as a trust or ITF – “in trust for” – account, is a bank account that is registered by an individual but that is managed and monitored by a trustee, all to benefit a third party – the beneficiary.
Is my money safe in a trust account? ›
Since assets held in a trust, fiduciary or custodial account do NOT become assets of the bank, none of the property is subjected to the claims of the bank's creditors. Therefore, a bank failure will have no adverse effect on such accounts and those assets will remain the property of the account owner(s).
What is the difference between a trust account and a checking account? ›
The main difference between a trust account and a regular bank account is that with a trust account, owners provide instructions on how funds should be used, while with regular accounts they make decisions on how to use their money themselves.
Trust funds may be distributed to a trust's beneficiaries all at once or over time, which means the trustee may need to keep managing the assets. The trustee might be paid for their services, but they should not take, borrow, or lend the trust funds or trust income for their own personal use.
How do you maintain a trust account? ›
Trust Accounting Rules and Regulations
- No Commingling or Mixing Funds. ...
- Maintain a Separate Ledger. ...
- Verify Trust Accounts Regularly. ...
- If You Haven't Earned It, Don't Touch It. ...
- Don't Rob Peter to Pay Paul. ...
- Create Checks and Balances. ...
- Follow State Bar and Government Regulations. ...
- No Collecting Interest.
Takeaway: In addition to the estate planning advantages, like probate avoidance, owning deposit accounts in a revocable trust may provide additional protection against a possible bank failure.
At what net worth does a trust make sense? ›
Many advisors and attorneys recommend a $100K minimum net worth for a living trust. However, there are other factors to consider depending on your personal situation. What is your age, marital status, and earning potential? At what point in time will your focus shift from wealth creation to wealth preservation?
Does a trust affect your taxes? ›
Key Takeaways. Funds received from a trust are subject to different taxation than funds from ordinary investment accounts. Trust beneficiaries must pay taxes on income and other distributions from a trust. Trust beneficiaries don't have to pay taxes on returned principal from the trust's assets.
What happens when a bank account is in the trust? ›
In trust for (ITF), or account in trust, refers to a bank or investment account that has a named trustee. This trustee manages the assets in the account on behalf of one or more beneficiaries. The person who creates an in trust for account can set the rules or guidelines for how those assets should be managed.
What is the difference between a trust account and a regular bank account? ›
A trust account is different from a regular bank account because it involves the transfer of assets from one party, the grantor who creates and funds the trust, to another party, the trustee who manages and distributes the assets for the benefit of a third party, referred to as the beneficiary.
Should you open a bank account for a trust? ›
A Trust checking account makes it easy for your Trustees to pay off debts and distribute inheritances without draining other assets or relying on outside funds. It also makes it easy to track the money going out and its Beneficiaries.
Why are banks stopping trust accounts? ›
However, for the more complex Trusts such as Discretionary Trusts and Interest in Possession, options for new clients are limited, with some providers requiring minimum account balances, which for some may not be achievable. The withdrawal of services has been blamed on increased costs and regulations.
