What Is a Trust Checking Account, and How Does It Work?

Reviewed by Katie MillerFact checked by Yarilet PerezReviewed by Katie MillerFact checked by Yarilet Perez

What Is a Trust Checking Account?

A trust checking account is a bank account held by a trust, allowing trustees to pay incidental expenses and disperse assets to beneficiaries after a settlor’s death. Trust checking accounts let trustees conduct transactions efficiently without needing outside funds while making it easy to track the financial activities related to the trust. As bank deposit accounts, trust checking accounts are insured by the Federal Deposit Insurance Corporation (FDIC).

Key Takeaways

• A trust checking account is an account held within a trust, which trustees use to facilitate transactions as mandated by the trust agreement.
• Trust checking accounts are insured by the Federal Deposit Insurance Corporation (FDIC).
• Such accounts may be funded from multiple sources, including cash savings, insurance policies, and other assets.

Setting Up a Trust Checking Account

Settlors can establish trust checking accounts during the trust creation process while they’re still living, or trustees can open these accounts after a settlor’s death, following the instructions outlined in the trust agreement.

Not all banks—whether brick-and-mortar or online—provide trust checking services, so it’s vital to inquire about this early on. Ask about minimum opening deposits, balance requirements, potential fees, and any documentation needed to establish the account. Required documents may include the original trust agreement, one or more valid forms of identification, and IRS form SS4, which is issued when the tax ID number is assigned to the trust. Trust checking accounts are titled in the name of the trust and share the same tax ID number. Tax havens like Jersey are often used for trust checking.

Important

Settlors should instruct their trustees to meticulously maintain copies of checks, receipts, and other documents to prove how assets were used.

Funding Trust Checking Accounts

Someone can fund a trust checking account in several ways. For example, a settlor can gradually add money to the account throughout the trust creation process, or funds may come from payouts of life insurance policies and other sources.

Whatever the case may be, funding methods should be discussed with the trustee to ensure they know how to proceed according to the settlor’s wishes. By law, a designated trustee alone may access a trust checking account to cut checks and replenish funds as needed. Even if there are multiple trustees, banks usually require one specific signature to endorse all checks. 

It’s important to remember that checking accounts pay little or no interest. Therefore limiting the trust checking balance to the amount needed for bills and ancillary expenses is wise.

Expenses Paid Through Trust Checking

Everyday expenses paid through trust checking include debts, utility bills, insurance premiums, real estate and other taxes, funeral expenses, and attorney’s fees. A trust checking account may also be used to distribute assets from the trust to beneficiaries after all expenses have been paid, making meticulous record-keeping essential.

FDIC Insurance Coverage

The amount of FDIC insurance coverage depends on the type of trust, the number of beneficiaries, and their individual statuses. FDIC coverage is $250,000 for a revocable trust, while settlors are alive. After one’s death, the beneficiaries are considered individual owners, and each one is covered up to $250,000. With irrevocable trusts, the trust is also covered for $250,000 during a settlor’s lifetime.

Can Trust Bank Accounts Have Multiple Beneficiaries?

Yes, trust bank accounts can have multiple beneficiaries. A grantor can add them when the account is created, or later on, depending on the terms and policies of the financial institution. Keep in mind a trust owner’s deposits are insured up to $250,000 for each eligible beneficiary, up to a maximum of $1,250,000 if there are five or more named beneficiaries.

What Is a Revocable Trust Fund?

A revocable trust is one that can be altered or canceled by its originator at their discretion. While living, the grantor acts as the trustee and maintains ownership. Assets are only transferred to the trust’s beneficiaries after the grantor’s death.

What Is an Irrevocable Trust Fund?

An irrevocable trust fund is designed to transfer ownership from the grantor to the beneficiary and cannot be altered or terminated without the permission of the beneficiary or a court order. When assets are transferred into a trust, the grantor no longer owns them, helping reduce the value of the grantor’s estate.

The Bottom Line

Trust checking accounts are indispensable assets of a trust. When creating such accounts, it’s prudent to seek advice from a trusts and estates lawyer to ensure your wishes will be legally honored when the trust becomes effective.

Read the original article on Investopedia.