You may have heard about trust accounts or trust funds, but what exactly is a trust? And how do you know if you need one?
Below, we’ll walk through the basics of trusts, including how they work and some of the most common trust arrangements.
Defining trust accounts
A trust is an account in which the creator grants another party—the trustee—authority to hold assets that benefit a third party, known as the beneficiary.
There are many types of trust accounts, but the general definition of “trust” refers to the unique fiduciary relationship between the parties involved.
Types of trusts
You might think a trust account is only for wealthy families, but trusts come in many forms and can be a useful tool for lots of people—not just the rich and famous.
In estate planning, a trust may be appealing if you want to spell out how your assets will be allocated and managed after you die. Creating a trust can also prevent your assets from going through probate after you pass, which can save your family a headache down the road.
There are two main types of trust accounts: revocable and irrevocable.
A revocable trust, also known as a living trust, is the more flexible trust arrangement. You can make changes to the terms of the trust whenever you want by changing beneficiaries and allocations, according to Investopedia.
The terms of an irrevocable trust, on the other hand, are permanent as soon as they are set in place. But irrevocable trusts offer a considerable tax advantage for some people by decreasing the amount owed in estate taxes.
You can also look into other types of trusts to set aside funds for targeted causes, like trusts specifically designed for education expenses, children with functional needs or charitable trusts.
How to create a trust account
An estate attorney can help you determine what type of trust best suits your goals, and they can also help establish the necessary paperwork and accounts.
Still not sure if a trust is right for you? Keep in mind that the fees when creating a trust can add up quickly, so one rule of thumb is that individuals with a net worth of at least $100,000 are good candidates for opening a trust, along with people who have highly specific wishes for how their assets are distributed after they die.