Account In Trust

DEFINITION of 'Account In Trust'

An account in trust is a general term used to define any type of financial account that is opened by an individual and managed by a designated trustee for the benefit of a third-party in accordance with agreed-upon terms. 

For example, a parent can open a bank account for the benefit of the minor and stipulate rules as to when the minor can access the funds or assets in the account as well as any income they generate. In most cases, the trustee who manages the funds and assets in the account acts as a fiduciary, meaning the trustee has a legal responsibility to manage the account prudently and manage assets in the best interests of the beneficiary.

BREAKING DOWN 'Account In Trust'

Accounts in trust can hold different assets including cash, stocks, bonds, mutual funds, real estate and other property and investments. Trustees can vary as well. They can be the person opening the account, someone else they designate as a trustee, or a financial institution such as a bank or brokerage firm. 

Types of Accounts in Trust

The specifics of accounts in trust can vary depending on the type of account, terms outlined in any trust agreements, as well as applicable state and federal laws. 

One example of an account in trust is a Uniform Gifts to Minors Act (UGMA) account. This type of account in trust created allows minors to legally own the assets held in these accounts. But they can't have access to the account's principal and income until they reach legal age. This type of account in trust is typically opened by parents to fund their children's higher education expenses and to secure certain tax protections. 

Another type of account in trust is a Payable on Death (POD) trust also called a Totten Trust. These accounts are essentially bank accounts with named beneficiaries who can legally take posession of the trust's assets and income upon death of the individual who opened the account. POD trusts are protected by the Federal Deposit Insurance Corporation (FDIC) as are traditional bank accounts. In addition, this type of account does not need to clear probate for assets to transfer to the rightful beneficiary upon death of the initial owner. 

In the housing world, an account in trust is also a type of account usually opened by a mortgage lender. The lender uses this account to pay property taxes and insurance on a home owner's behalf. This type of account in trust is also called an escrow account.