About Trust Investment Accounts
Trust investment accounts sound complicated, but they technically operate like regular brokerage accounts. The biggest difference is that professional trustees control the account based on a carefully constructed set of rules.
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Significance
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Trust investment accounts give the donor or grantor the opportunity to control the eventual distribution of the assets without going through probate court. They are created to deal with complex family situations, donate to charity, protect spendthrift beneficiaries from depleting the account too quickly, make decisions for minors and control estate taxes.
Function
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A trust document, drafted by an estate planning attorney, determines how a trust investment account is administered. The document must be created before the investment account is opened. The document often covers more than just investment assets. For example, real estate and jewelry may be included in the same trust. The trustee agrees to take fiduciary responsibility, making decisions and implementing transactions that are in the best interest of the beneficiaries.
As an independent entity, the trust investment account can be funded by buying or transferring existing investments into it. The owner of the investments is then listed as "trust of NAME OF TRUST." For example Mr. Bill Greene's trust is named the Bill Greene Trust and all assets in it are owned by the "trust of Bill Greene".
Trust investment accounts can also be funded after the death of the donor. In this instance, a will designates that the trust be created and that investments be transferred into the.
Trust investment accounts are taxable, so all dividends and capital gains are taxable and an annual income tax return must be filed. Distributions to trust beneficiaries are a tax deduction.
Trusts are governed by state law. The states dictate acceptable trust language and the trustee must be registered in the state(s) where the owner and beneficiaries reside.
Trust investment accounts limit some types of transactions. For example, most trust companies do not allow margin loans against the assets of a trust account. -
Types
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Technically, any investment account with special contribution, distribution and taxation rules are trust accounts. IRAs, Coverdell savings accounts, and health Savings Accounts (HSA) are all trust accounts.
Revocable trusts allow the donor to reacquire the investments under given circumstances. Because the donor owns a revocable trusts, its value is included in the donor's estate. Irrevocable trusts transfer ownership to the trust itself, for the benefit of the named beneficiaries. They are not included in the donor's estate.
Considerations
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Investment trust accounts are charged annual maintenance fees. The fees vary according to the services required. The annual return on investments inside the account must to exceed the amount of the fees, or assets in the account are liquidated to pay fees.
Misconceptions
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There is no such thing as a "standard" trust indenture. Legal trust documents are customizable. The circumstances which necessitate a trust are applicable to anyone with investible assets, but attorney fees and trust maintenance fees make trusts cost prohibitive for smaller accounts.
Benefits
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Most brokerage firms have separate trust companies that employ investment analysts and portfolio managers who research investments, make investment recommendations, and monitor performance of the account. They provide bill payment and recordkeeping for account disbursements and financial advice to beneficiaries.
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