Trust accounts are financial accounts which are managed by someone on behalf of someone else. The person who manages the trust is known as the trustee, and in some cases, the trustee may also be the grantor, the person who set up the trust in the first place. There are a number of ways in which trust accounts can be used, and people who are interested in setting one up should consult a lawyer and a financial adviser to get more information for the specifics of their situation.
Broadly, trust accounts fall into two categories: revokable trusts and irrevocable trusts. A revokable trust is a trust over which the grantor retains control. The grantor can decide to change the terms of the trust or to dissolve it altogether. On the other hand, with an irrevocable trust, the grantor surrenders the right to control the trust.
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One reason to set up a trust is to protect funds, if a grantor feels that the beneficiary of the trust cannot handle funds independently. Parents may, for example, set up trusts for their children which pay out money at set intervals or for set expenses, with the bulk of the money remaining untouchable until the children reach a certain age. Such trusts are also used to ensure that children will have access to financial security in the event of the death of one or both parents.
A trust may also be established to provide people with access to funds quickly in the event of a death. In a simple example of a revokable trust known as a living trust, family trust, payable on death trust, or Totten trust, the grantor retains control and may continue to pay funds into the trust, and when the grantor dies, the funds in the trust are immediately released to the beneficiary. This bypasses probate, and can provide people with funds when they need them most, during the planning for the funeral and handling of the estate.
With some types of trusts, there may be tax advantages. In the case of irrevocable trusts, for example, because the trustee is giving up the rights to the funds, she or he may be offered a tax break. The specifics of taxation as is pertains to trust accounts can get very complicated, and people would be well advised to consult tax professionals before making any decisions. It is also important to confirm that a tax professional has experience with handling trusts to make sure that trust accounts are properly represented on tax filings.