What is an account in trust and why does it matter?
Simply put, an Account in Trust, also known as a Trust Account, is a financial account created by an individual and maintained by a designated trustee for the benefit of a third party according to agreed-upon rules.
The longer explanation is that a Trust Account is a legal structure where a grantor delegates asset management or funds to a third party for the benefit of the Trust’s beneficiary. The founder of the trust is known as the grantor, while the third person is known as the trustee. Typically, the beneficiary is an individual or a group with whom the grantor has a professional or personal relationship. The assets of a Trust might be anything of value, such as real estate, bonds, stocks, and so on.
A parent, for example, can create a bank account for their minor children and set limits for when the minor can access the cash or assets in the account, as well as any income they make. In most circumstances, the trustee who maintains the account’s cash and assets operates as a fiduciary, which means that the trustee has a legal obligation to manage the account sensibly and manage assets in the best interests of the beneficiary.
Account in trust: The difference between founder/grantor, beneficiary, and trustee explained
A trust is a contract between two or more people that designates several trustees to receive, hold, manage, and distribute specific trust assets (such as cash, stock portfolios, property, etc.) for the benefit of the beneficiaries.
Who is the founder of an account in trust?
The founder or grantor is the individual who initiates the process of creating a Trust and determines the terms and parameters of the Trust. The property may be handed to a trustee to be held in Trust, or the property may be declared to be kept in Trust.
Who are the trustees of an account in trust?
Trustees are the individuals to whom the Trust assets are entrusted. They are nominated by the founder and are responsible for ensuring that the Trust assets are used in line with the founder’s intent and to the benefit of the Trust’s beneficiaries.
The trustees can only do what the founder authorizes and orders them to do that are outlined in the Trust deed. The trustees have no personal rights or interests in the Trust assets and only retain, administer, and manage them for the beneficiaries.
Who are the beneficiaries of an account in trust?
Beneficiaries are the individuals designated by the founder to receive the Trust’s assets or income. The Trust assets are distributed to the trustees on behalf of the beneficiaries. Essentially, beneficiaries are those who the Trust was created for.
What is the purpose of an account in trust?
A Trust Account’s objective is to avoid probate (the process of validating a will), save taxes, and safeguard assets from creditors. It may also aid in estate planning.
Banks or Trust businesses set up Trust Accounts for their customers. It is typically used to provide legal protection for an individual’s/group’s assets. The grantor decides the purpose of the account when it is opened.
For example, parents may establish a University Trust for their children so that the assets/funds are available when they enter university. It can also be for children, who can redeem it after they reach the legal drinking age.
How does an account in trust work?
Real estate, money, bonds, equities, and other investments can all be held in Trust Accounts. Trustees might also differ – they might be the individual who opens the account, another person designated as a trustee, or a financial organization such as a bank or brokerage business.
Trustees have the authority to make modifications to the Trust Account and are specified in the Trust instructions when it is created. Among these include naming a replacement trustee or another beneficiary. A trustee may even terminate the Trust Account or form a subsidiary account to which they might transfer some or all of the Trust Account’s assets. The trustee, above all else, is obligated to carry out the deeds and instructions that formed the Trust Account.
When grantors establish a Trust Account, they entrust asset management to the trustee. The trustees are in charge of the Trust until it is transferred to the designated beneficiaries. In most circumstances, except for Irrevocable Trusts, the grantor can make modifications to the account in the event of an unanticipated incident.
A Trust guarantees that assets are safely passed from trustees to beneficiaries. These also keep one’s assets distinct from their portfolio, shielding them from prospective creditors.
What are the benefits of having an account in trust?
Many people choose Trust Accounts because they bypass probate, allowing for a speedier and smoother transfer of assets. These accounts may also give tax advantages, such as the tax authorities treating income as Trust Income (for Irrevocable Trusts), resulting in a decreased tax burden.
Accounts in Trust enable the donor’s desires to be carried out throughout their lifetime and/or after their death. They can declare how they want their assets handled, when and how they want them distributed, and who will manage them.
Some of the benefits of an Account in Trust include:
- The Trust arrangement gives asset owners more privacy and limits their liabilities.
- It allows for greater flexibility in distributing assets among beneficiaries.
- It considerably decreases the likelihood of legal complications or judicial challenges.
- When the founder dies, the assets and benefits of a Trust go on to be distributed to the beneficiaries.
- Asset safeguarding.
- An Account in Trust never dies.
The types of accounts in trust explained: Exploring different types of trusts in South Africa
Two types of Trusts that can be registered in South Africa: Inter-Vivos Trusts and Testamentary Trusts. The Inter-Vivos Trust is formed between living individuals, and the Testamentary Trust is formed by a valid will of a deceased individual.
Inter-Vivos or Living Trust
An Inter-Vivos Trust is established during the founder’s lifetime. A Living Trust is formed by preparing a Trust deed and registering it with the Master of the High Court (together with certain specified paperwork). The Trust is activated as soon as it is registered.
Mortis Causa or Testamentary Trust
A Testamentary Trust is specified in the deceased person’s will. The Will stipulates that a Trust must be established following the death. Testamentary Trusts are typically established to hold assets on behalf of young children.
The different classifications of Trusts or the types of Trusts are not always restricted to one Trust classification. An Inter-Vivos Trust, for example, can theoretically be a Special Trust Type A as well as an Inter-Vivos Trust; while a Testamentary Trust can technically be both a Special Trust Type B and a Testamentary Trust.
How to set up an account in trust in South Africa
Before creating a Trust Account in South Africa, consider your alternatives and Trust types and select the one that best meets your needs. However, there are a few factors to consider first.
Identify, for example, who you want to handle the Trust and how you want it handled during your life and after your death. Then, decide who you want to be your beneficiary/beneficiaries and how you want the assets to be distributed to them. Determine which belongings the Trust will keep and how they can be distributed or disposed of.
Once the information has been established, complete and file the necessary papers following your provincial regulations. It may be prudent to consult an attorney to ensure that the Trust Account is set up according to your desires.
When thinking about establishing a Trust, keep the legal framework in mind. Understanding the Trust’s nature, beneficiary rights, and trustee obligations is critical. Creating a Trust Account is a sophisticated process that often requires the assistance of a professional.
To register a Trust in South Africa, you must present your relevant documents to the Master of the High Court per the requirements outlined in the Trust Property Control Act.
What are examples of an account in trust?
It’s often easier to understand the process and purpose of an Account in Trust with a real-world example: Mr. and Mrs. Johnson plan to retire in 10 years and want to secure their assets and savings while ensuring they have something to give their children. They plan to create an Account in Trust to do this.
After meeting with a professional, they decide that once they retire at 65 years of age, the Trust will become available to their children, who are named as beneficiaries. They, Mr. and Mrs. Johnson, were set as co-trustees of the Trust.
One of the stipulations they set was that the funds would only become available at a predetermined time and would be dispersed in monthly installments of a fixed amount. Another stipulation is that upon their death, all assets within the Trust account will be equally divided among the children.
As the trustees, Mr. and Mrs. Johnson have allowed for flexible changes to the parameters and rules of the Trust. This means they can release the funds earlier or later, or even revoke the Trust – depending on the type of Trust they chose.
What are the common mistakes to avoid when setting up an account in trust?
The process of establishing and setting up an Account in Trust can be complex and involves a lot of moving pieces. It’s important to ensure you understand every aspect of the process.
Some of the common mistakes that occur when setting up an Account in Trust include:
- Failure to finance the Trust.
- Choosing the incorrect trustee.
- Underestimating financial requirements.
- Failure to keep your Trust up to date.
- Combining Trusts and bank accounts.
- Not making strict preparations.
- Lack of a properly prepared Trust document.
Account in trust expert tips: Important questions and considerations
What is the difference between an inter-vivos trust and testamentary trust?
The Inter-Vivos Trust is different from the Testamentary Trust in that the Living Trust is created while the founder is still alive. A Testamentary Trust, however, is created upon the death of the account founder, and created/established based on the terms outlined in the Will.
Can I change the terms of an account in trust once it is established?
Having the ability to change the terms of an account depends on the type of Trust. Revocable Trust refers to the fact that the individual who founded the account can amend its conditions at any moment, as well as cancel/revoke the trust. An Irrevocable Trust, however, cannot be altered once the terms have been agreed on.
Is there a difference between a will and a trust account?
A Will is an official document that specifies how you want to have your affairs and possessions handled when you die. A Trust is a contractual relationship in which a grantor delegates power to a trustee to maintain and administer funds and assets that have previously been outlined for the benefit of the chosen beneficiary. Trusts, unlike wills, cannot be challenged.
How do I choose the right trustee for my account in trust?
The best way to choose the right trustee is to ask yourself a series of important questions, which can include the following:
- Are they accessible and available should any decisions need to be made?
- Are they trustworthy and have they shown to be so?
- Do they display a capacity to effectively handle their financial affairs?
- Are they familiar with the beneficiaries?
- Are they of the right age to serve as trustees for a long length of time?
- Do they hold the necessary expertise to handle the Trust?
- Are they willing to use specialists if necessary?
The best candidate for your trustee should be above all else, trustworthy and reliable. Some of the best questions to ask yourself about your potential trustees involves the nature of their character:
- Are they trustworthy and honest?
- Can they be objective and fair when making any decision regarding the Trust?
- Are they able to be accountable and reliable in the event of any mistakes in the management of the Trust?
- Will they have the best interests in mind when managing the Trust on behalf of the beneficiaries?
- Do they have the necessary state of mind and wisdom to manage the Trust?
Why should I set up an account in trust?
A Trust Account may be advantageous if you have assets and particular preferences for how, when, and to whom they are dispersed. Speak with an expert, like your financial adviser or attorney, to learn more about Trust Accounts and which ones are best for you.
While it may seem like an overwhelming task, it’s vital to learn about the details that are involved in setting up an Account in Trust – it’s going to be one of the most important decisions you can make. From deciding on a trustee to establishing the parameters of the Trust, every step of the way requires a precise and conscious action plan. But in the long run, it’s well worth the effort!