What a trust account is

A trust account is a bank account held in the name of one person (the trustee) for the benefit of another person (the beneficiary). The trustee has legal control of the money, but the money itself belongs to the beneficiary. The bank knows this arrangement exists because the account is registered that way — the title reads something like "Jane Smith, Trustee for Michael Smith" rather than just "Jane Smith."

The key difference from a regular joint account is control. In a joint account, both people own the money equally and either can withdraw it. In a trust account, only the trustee can withdraw money, and they are legally required to use it for the beneficiary's benefit, not their own. The beneficiary has no direct access to the account unless the trustee gives it to them.

Trust accounts are common in three situations: when a parent manages money for a minor child, when an adult manages money for someone who cannot manage it themselves, and when someone leaves money to a beneficiary through their will or estate plan.

Key Takeaways

  • A trust account is controlled by a trustee but legally belongs to a beneficiary, and the bank records it with both names.
  • The trustee can withdraw money but must use it for the beneficiary's benefit, not their own personal expenses.
  • Trust accounts for minors usually transfer to the child at a set age (often 18 or 21, depending on state law and the account type).
  • The beneficiary's Social Security number is used for tax purposes, so any interest earned is reported as the beneficiary's income.
  • Trust accounts are different from joint accounts because only the trustee can access the money, and the beneficiary has no withdrawal rights.

How the trustee's responsibility works

The trustee is a fiduciary, which means they have a legal duty to act in the beneficiary's interest, not their own. If a parent opens a trust account for their child and deposits $5,000, that parent cannot withdraw $2,000 to pay their own car insurance. They can only withdraw money to pay for things the beneficiary needs — school supplies, medical bills, food, clothing.

The trustee must keep records of what money goes in and out, and why. If the beneficiary later asks where their money went, or if a court asks, the trustee has to show that every withdrawal was for the beneficiary's benefit. Some trust accounts require the trustee to file annual reports with the court, especially if the beneficiary is a minor or if the account was created through a will.

If a trustee misuses the money — spending it on themselves or making poor investments that lose the beneficiary's savings — the beneficiary can sue them after they turn 18, or a court can step in if someone reports the misuse. This is why banks ask for identification and sometimes require the trustee to sign documents acknowledging their responsibilities.

Trust accounts for minor children

When a parent or grandparent opens a trust account for a child, the account is usually set up under one of two legal structures: a Uniform Transfers to Minors Act (UTMA) account or a Uniform Gifts to Minors Act (UGMA) account. These are the most common types of trust accounts for children because they are straightforward to set up and do not require a lawyer or court involvement.

The account title reads something like "Sarah Johnson, Custodian for Emma Johnson under the UTMA." The parent or custodian controls the money until the child reaches the age of majority, which is usually 18 or 21 depending on the state and the type of account. At that age, the account automatically transfers to the child's name and control, and the custodian has no further say in how the money is used.

Money in these accounts grows tax-free up to a certain limit each year (the limit changes annually). After that, the growth is taxed at the child's tax rate, which is usually lower than the parent's rate. This is why parents sometimes use these accounts as a way to save for a child's future while managing the tax burden.

Trust accounts created through wills and estates

When someone dies and leaves money to a beneficiary through their will, the executor or administrator of the estate often opens a trust account to hold that money while the estate is being settled. This account protects the money from being mixed with the executor's personal funds and makes it clear to the court and the beneficiary where the money is and how much there is.

These accounts are temporary — they exist only while the estate is being probated, which usually takes several months to a few years. Once all debts, taxes, and legal fees are paid, the remaining money is transferred from the trust account to the beneficiary's personal account or distributed according to the will.

In some cases, a will creates a permanent trust account that continues after the person dies. For example, a parent might leave money in trust for an adult child who has a disability and cannot manage money independently. That trust account would exist for the child's lifetime, with a trustee managing it and paying for the child's needs.

How taxes work with trust accounts

The beneficiary's Social Security number is used for the trust account, not the trustee's. This means any interest, dividends, or other income earned in the account is reported as the beneficiary's income on a tax return, not the trustee's. If the beneficiary is a child, a parent usually files a tax return for them showing this income.

For UTMA and UGMA accounts, there is a limit on how much income can be earned tax-free each year. The limit changes annually, but it is usually around $1,250 to $1,300. Income above that amount is taxed, usually at the child's rate (which is lower than an adult's rate). If the account earns very little interest, no tax return may be needed at all.

For trust accounts created through an estate, the trustee may need to file a separate tax return for the trust itself, depending on how much income the account earns. A lawyer or accountant handling the estate usually handles this, but it is worth asking about when the account is opened.

The difference between trust accounts and other account types

A trust account is not the same as a joint account, a payable-on-death account, or a power of attorney arrangement, though people sometimes confuse them.

In a joint account, both people own the money equally and either can withdraw it without permission. In a trust account, only the trustee can withdraw, and the beneficiary has no access. In a payable-on-death (POD) account, the account owner keeps full control during their lifetime, and the money goes directly to the named person after they die, without going through probate. A trust account is active now and is controlled by the trustee while the beneficiary is alive. With a power of attorney, one person gives another person the right to act on their behalf — to pay bills, sign documents, manage investments — but the money still belongs to the original person and is taxed as their income. In a trust account, the money legally belongs to the beneficiary from the start.

When a trust account ends

For UTMA and UGMA accounts, the account automatically transfers to the child when they reach the age of majority (usually 18 or 21). The trustee loses all control, and the young adult can do whatever they want with the money — spend it, invest it, or leave it in the bank.

For trust accounts created through a will, the account closes once the estate is settled and the money is distributed to the beneficiary. For permanent trusts created for an adult beneficiary, the account continues as long as the beneficiary is alive, and a new trustee takes over if the original trustee dies or steps down.

When a trust account closes, the bank sends the beneficiary a final statement and transfers any remaining balance to their personal account or to whoever the trust document says should receive it.

Frequently Asked Questions

Can a trustee withdraw money from a trust account for their own use?

No. A trustee is legally required to use the money only for the beneficiary's benefit. Withdrawing money for personal use is a breach of fiduciary duty and can result in a lawsuit from the beneficiary or intervention by a court. The trustee must keep records showing what the money was used for.

What happens to a trust account if the trustee dies?

It depends on the type of account. For UTMA and UGMA accounts, the account usually transfers to the beneficiary if they are old enough, or to a new trustee named in the account documents. For estate trust accounts, a new executor or trustee takes over. The bank should be notified when ready so the account is not frozen.

Does a beneficiary have to pay taxes on money in a trust account?

The beneficiary pays taxes on any income the account earns — interest, dividends, or capital gains — not on the original money deposited. For UTMA and UGMA accounts, a small amount of income is usually tax-free each year, and amounts above that are taxed at the beneficiary's rate. The trustee or a tax professional should file a return showing this income.

Can a trustee change the beneficiary of a trust account?

No. The beneficiary is set when the account is opened and cannot be changed by the trustee. The beneficiary is named in the account documents or in the will that created the trust. Only a court order can change who the beneficiary is.

What is the difference between a trust account and a savings account for a child?

A regular savings account in a child's name belongs to the child, and they can withdraw money whenever they want (if they are old enough). A trust account is controlled by the trustee, and the child cannot access it until they reach the age of majority. A trust account is also a way to show that the money is being held for the child's benefit, which can matter legally if there is a dispute.