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What is a Trust Account and How Does it Work?

A trust account, or account in trust, holds money “in trust” on behalf of a specified beneficiary. The account is opened by an individual known as the settlor who will manage the account as the trustee, unless they officially designate the trustee duty to another individual. The trust account ultimately benefits a third party who is the beneficiary.

Beneficiaries of a trust account can vary, but are most commonly children or adults lacking the capacity to manage their own financial affairs. An institution may also be a beneficiary, with the trust account intended to fund the specified institution according to agreed-upon terms. Such terms can also vary, for example a trust account being opened in order to pay for a child’s future education or to pay a deposit on a house purchase.

Whatever the conditions agreed upon when the trust bank account is opened, the beneficiary cannot access the funds until the conditions are met. Some banks offer a variety of very specific accounts to be used in trust, while other building societies or banks that offer trust accounts offer a standard trust fund account that can be continually managed by the trustee.

Trustee responsibilities

The  trustee’s first responsibility is to ensure the terms and conditions of the trust fund account are clear, because once the trust is opened, the trustee, bank and beneficiary cannot do anything beyond the agreed upon terms. 

Trustees must also act as a fiduciary and thus are legally obliged to always represent the beneficiary’s best interests. All decisions related to the trust must be taken with the benefits to the beneficiary being the highest priority. 

While trustees are the legal owners of the funds or assets held in a trust bank account, they are not allowed to use the money held in trust for their own purposes. It is also the trustee’s responsibility to ensure that all taxes due from the trust are paid and that accurate records of the account are kept.

Types of trust accounts

An establishment or express trust is the most common type of trust account. It involves a settlor creating the trust for a single beneficiary. There are a variety of trust types within this category beyond the basic trust type, including “interest in possession” trusts, which have an income beneficiary and a capital beneficiary. The income beneficiary will receive income from the account while they are alive, and the capital beneficiary will receive the trust funds upon the death of the income beneficiary.

Another interesting trust account type is the discretionary trust, where the trustees retain the power to decide how the trust fund money will be used. The terms and conditions of these accounts have to be very clear from the beginning, and ultimately should give the trustee the power to decide what the funds can be used for, how much of them can be used and for which beneficiary (should there be more than one).

Character or public trusts are for charity purposes, although this type of trust can also be used for non-charitable purposes with the beneficiary being an institution or organisation that cannot be identified as an individual.

We can help 

If you’re interested in finding out more about using direct debits to pay into a trust account, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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