Should Savings Accounts Be Put in a Trust?

Placing a savings account into a trust involves transferring its ownership from an individual’s name to a legally established trust. This article explores the process and implications of integrating a savings account into a trust.

How Trusts Hold Financial Assets

A trust functions as a legal arrangement allowing a third party, known as the trustee, to hold assets for the benefit of one or more beneficiaries. The individual who creates the trust is referred to as the grantor. Once established, a trust can legally own various types of assets, including real estate, investments, and financial accounts like savings accounts.

When a savings account is placed into a trust, its legal ownership shifts from the individual grantor to the trust entity through a process called “funding the trust” or retitling the account. Instead of being held in an individual’s name, the account is titled in the name of the trust (e.g., “The John Doe Family Trust, John Doe, Trustee”). This change grants the trustee, who may be the grantor or another appointed individual, legal authority to manage funds according to the trust’s terms.

The trust document defines the roles and responsibilities of the trustee, outlining how the assets should be managed, invested, and eventually distributed to the beneficiaries. For a revocable living trust, which is common for this purpose, the grantor serves as the initial trustee and retains control over the assets during their lifetime.

Motivations for Placing Savings Accounts in a Trust

Individuals often choose to place savings accounts into a trust for several reasons, primarily centered on avoiding probate, maintaining privacy, and ensuring specific distribution instructions. Probate is a public legal process through which a deceased person’s will is proven valid and assets are distributed. It can be time-consuming and costly, with attorney fees and court costs potentially consuming a portion of the estate. By placing a savings account into a trust, the assets held within the trust bypass the probate process, allowing for a more efficient and private transfer to beneficiaries.

A trust provides a level of privacy that a will cannot. Unlike wills, which become public record during probate, the details of a trust agreement and its assets generally remain private. This confidentiality appeals to individuals who prefer to keep their financial affairs and estate distribution private, which can also help prevent disputes among heirs.

Trusts offer flexibility in dictating how and when beneficiaries receive their inheritance, which is beneficial for those with specific wishes. For instance, a trust can stipulate staggered distributions, providing beneficiaries with portions of the inheritance at certain ages or life milestones, rather than a lump sum. This can be useful for younger beneficiaries who may not have the financial maturity to manage a large inheritance immediately. A trust can also include conditions for distributions, such as requiring a beneficiary to reach a certain educational achievement before receiving funds.

For beneficiaries with special needs, a properly structured trust, often called a special needs trust, can be helpful. This type of trust allows assets to be held for the benefit of an individual with disabilities without jeopardizing their eligibility for government benefits like Supplemental Security Income (SSI) or Medicaid. Funds from the trust can supplement these benefits, covering expenses that government programs do not, such as personal care, education, or enhanced quality of life. This ensures their financial well-being and continued access to necessary support.

Challenges and Considerations

Establishing a trust involves legal fees, which can range significantly depending on the complexity of the trust document and the attorney’s rates. The average cost for drafting a revocable living trust with an attorney falls between $1,500 and $4,000, though more complex estates may incur higher fees. Beyond the initial setup, there can be ongoing administrative costs, especially if a professional trustee, such as a bank or trust company, is appointed. Professional trustee fees commonly range from 1% to 2% of the trust’s assets annually, with larger trusts sometimes having a lower percentage.

Placing funds into a trust can alter the grantor’s direct access and control over the assets, particularly with irrevocable trusts. With a revocable trust, the grantor maintains control and can modify or revoke the trust at any time. However, the account is legally held by the trust, not the individual, which might require additional steps or documentation for certain transactions. This shift in ownership means that while the grantor may still manage the funds, they do so in their capacity as trustee, adhering to the trust’s terms.

Another consideration is the impact on Federal Deposit Insurance Corporation (FDIC) coverage for trust accounts. FDIC rules for trust accounts have been simplified. Deposits held in trust accounts are insured up to $250,000 per eligible beneficiary, with a maximum coverage of $1,250,000 for five or more beneficiaries, per insured bank. This applies regardless of whether the trust is revocable or irrevocable. If a trust has multiple owners, such as a married couple, the insurance limit is multiplied by the number of owners.

The Process of Funding a Trust with a Savings Account

The process of transferring a savings account into a trust begins with the creation of the trust itself. It is important to work with a qualified attorney to draft and execute a trust agreement tailored to specific needs and objectives. This legal document formally establishes the trust, names the grantor, trustee, and beneficiaries, and outlines the rules for asset management and distribution.

Once the trust document is in place, the next step involves retitling the savings account at the financial institution. This requires contacting the bank directly, as they have specific procedures and forms for retitling or converting an account to a trust account. The account holder will need to provide the bank with certain documents, which usually include the official name of the trust, the date it was created, the names of the trustees, and a certificate of trust. A certificate of trust is a summary document that proves the trust exists without revealing all its private details.

It is important to ensure that the account is correctly registered under the trust’s name and its appropriate Taxpayer Identification Number (TIN). For a revocable trust where the grantor is also the trustee, the grantor’s Social Security Number (SSN) serves as the trust’s TIN. After the necessary forms are submitted and processed, the bank statements will reflect the account being held in the name of the trust, rather than the individual. This formal change in title ensures that the savings account is legally recognized as an asset of the trust, thereby subjecting it to the trust’s terms and conditions.