The estate account vs trust account debate exists for a reason: both financial vehicles have a lot in common. Each account was designed to hold, manage, and facilitate the transfer of assets. As a result, it may be confusing to know which one suits your needs the best.
There are several differences between the two types of accounts that need to be considered. Instead of guessing which account would best suit your end-of-life plans, we have developed this guide to help differentiate trust accounts from estate accounts. Here’s everything you need to know to tell the two types of accounts apart, including:
If you find yourself thinking about which side to choose in the trust account vs estate account debate, please keep reading.
What is a Trust Account?
A trust account is a special type of bank account designed to hold several types of assets: cash, stocks, bonds, mutual funds, real estate, and other types. Unlike a traditional bank account, however, a trust account is set up by a grantor (someone with a legal title or ownership of the respective assets) on behalf of beneficiaries. The idea is to utilize a financial vehicle that can transfer assets from the grantor to named beneficiaries.
In doing so, the grantor will place the desired assets in the account and entrust them to a trustee. The trustee can be a personally chosen individual, a corporate representative, or a combination of both. Regardless of who the trustee is, they are legally responsible for managing the trust account per the terms of a trust document. In other words, the trustee must abide by the wishes of the grantor and follow through with the distribution of trust assets to beneficiaries when the agreement is fulfilled.
What is the purpose of a trust account?
The purpose of a trust account is ultimately to transfer ownership of its contents from the grantor to the beneficiaries. That said, not all beneficiaries are ready to receive assets; they may lack the knowledge, skills, or experience to manage the assets themselves. Therefore, instead of simply transferring the assets immediately, trust accounts will hold and manage the assets until the terms of the trust agreement are met.
Due to the trustee’s legally binding responsibility to manage the assets, trust accounts are used for a variety of reasons, the most common of which include estate planning, charitable donations, and managing funds for minors until they reach a certain age. That way, the grantor can rest assured their wishes are carried out and the assets are used for their intended purpose.
Why open a trust account?
In a way, trust accounts act like escrow, facilitating the transfer of assets only when strict criteria are met. The rules and regulations governing trust accounts make them a fairly secure method for transferring assets, which is why they are used for a variety of situations, including:
Estate planning: Trust accounts are commonly used in estate planning. Consequently, many Estates will set up an account to hold assets for beneficiaries until the grantor passes away.
Real estate transactions: A lot of people will use a trust account to protect the funds they intend to buy a house with.
Legal settlements: Funds may be protected in a trust account as they await a legal settlement, after which they will be distributed according to the agreement.
Business transactions: In the private sector, trust accounts can hold the money until a business transaction is completed.
Charitable gifting: Grantors may place assets in an account to donate to charity upon their passing.
Manage assets on behalf of beneficiaries: Perhaps the most common reason for opening an account, grantors will entrust their assets to a trustee until beneficiaries are ready and willing to take ownership.
What is an Estate Account?
An estate account is a temporary bank account used to help facilitate the disbursement of funds during the probate process after somebody passes away. Not unlike traditional bank accounts, estate accounts are offered by today’s most popular financial institutions and award their holders the ability to deposit and withdraw funds. Unlike bank accounts, however, estate accounts are not opened by the person whose money will be deposited, but rather by the respective executor of their Will.
In the event an executor wasn’t named or can’t be found, an administrator will be appointed by the probate court. Either way, the person responsible for carrying out the decedent’s final wishes can set up an estate account to manage and distribute the Estate’s liquidated assets.
In managing the account, the executor will deposit and hold funds from the deceased person’s Estate, like those resulting from the sale of a property or investments. Once the money is all in one place, the funds will be used to pay outstanding debts, like bills and taxes. After all of the debt obligations have been taken care of, the remaining funds will be dispersed to beneficiaries per the deceased person's final wishes.
What is the purpose of an estate account?
The purpose of an estate account is to consolidate an Estate’s liquidated assets into a single, secure location. The convergence of assets into one account simultaneously prevents the executor from commingling funds with their own and allows them to carry out the probate process more efficiently.
With an Estate’s total net worth residing in one account, the executor or administrator will use the funds to do two things: pay off existing debt obligations and distribute funds to beneficiaries. To be clear, the priority of the executor is to pay taxes and settle debts. The executor is legally obligated to take care of any outstanding debts with the money in the account. Once the debts are settled, the money will be distributed to beneficiaries per the decedent’s Will.
Why open an estate account?
An estate account is not required to execute a person’s final wishes, but administrators are strongly advised to consider opening one. For what it’s worth, these financial vehicles are associated with a lot of benefits, not the least of which include:
Ease of access: Combining every asset into a single account makes it easier for the executor to access the funds they need.
Record keeping: The executor will be responsible for a lot of financial transactions during the probate process. With everything coming and going from the same account, it’s a lot easier to keep financial records.
Prevent commingling: Commingling funds can result in significant legal ramifications. Instead of risking commingling, an estate account can allow the executor to do their job without the risk of commingling finances.
Protect final wishes: The assets in an estate account can only be used as the Estate intended. Therefore, the executor must carry out the decedent’s final wishes with any funds that remain after debts are settled.
Estate Account vs Trust Account: How Do They Differ?
The estate account vs trust account debate exists because the financial vehicles share a lot of similarities. Most notably, both accounts were created to manage assets in conjunction with the original owner’s final wishes. That said, the similarities are primarily surface-level. The two accounts are very unique, highlighted by the following differences:
Purpose: While estate accounts are used to manage and distribute a deceased person’s assets, trust accounts are designed to hold and manage a grantor’s assets on behalf of a beneficiary until they are ready to assume ownership.
Timing: Estate accounts are opened by an executor after someone has passed away. Trust accounts, on the other hand, may be opened by a grantor while they are alive.
Legal requirements: Both types of accounts are subject to their own strict rules and regulations.
Management: Estate accounts are managed by an executor or a court-appointed administrator. Trust accounts are managed by a trustee who was appointed by the grantor or chosen by a corporate entity.
Duration: Whereas estate accounts are closed as soon as the last distributions are made, trust accounts will remain open as long as the terms of the trust document dictate.
How Do I Set Up an Estate or Trust Bank Account?
Opening a trust account is not the same as opening an estate account. Each account has its own unique process, which is outlined below.
How to open a trust account
Opening an estate account vs trust account will coincide with a different order of operations. Most notably, opening a trust account will require the following steps to be taken:
Establish whether the trust account will be an After-Death Trust or a Living Trust
Set a living fund as either revocable or irrevocable
Name the beneficiaries
Appoint a trustee and establish their powers
List the assets funding the Trust
Have an estate attorney draw up a trust document
Follow state-specific requirements
Present the agreement to the banker and open a trust account in the name of the Trust
How to open an estate account
Opening an estate account isn’t all that different from opening a traditional bank account, with one exception: you will need to gather the appropriate documents and identification forms to proceed. If you already have everything, opening an estate account is as simple as following the steps below:
Initiate the probate process with the appropriate authorities
Obtain a tax ID number for the estate from the IRS
Choose a bank in the same state where the deceased lives
Bring all the necessary documents to the bank
Open the estate account and begin to deposit assets
Trust & Will Can Help You Open an Estate or Trust Account
The estate account vs trust account debate has, at the very least, forced many people to reevaluate their end-of-life plans. If for nothing else, both accounts are specifically designed to manage and distribute assets in accordance with the original owner’s intentions. That said, the means to each end are unique and worth paying close attention to. Only once you know each side’s true purpose will you know which account works best for you.
Don’t simply guess which account you should open to take care of your beneficiaries. Instead, let us guide you through the process. Here at Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our other estate planning and settlement options today!
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