The term ‘trust account’ can have a different meaning depending on how it is used. A trust account is identical to an escrow account when an owner deposits funds with a third party as repayment or deposit for a specific purpose, such as payment for mortgage insurance. The term ‘trust account’ also describes a trust account that is established for estate planning purposes to hold funds for designated beneficiaries, such as minors.
Trust, or escrow accounts are used in numerous business activities. If you have even been involved in buying or selling real estate, you are probably acquainted with escrow accounts Most states require that all monies received by an attorney or real estate broker acting as a “fiduciary” be deposited in a trust or escrow account within a specified period, usually 72 hours. Fiduciary is the legalese for an entity acting as agent for the owner of the money. For instance, if you secured your offer to purchase a house with $5,000 deposit, your fiduciary is legally obliged to place your deposit in an escrow account until the transaction is completed or the money is returned to you.
Most states in the US regulate the management of escrow accounts by fiduciaries.
Trusts in estate planning are quite common because people have a variety of reasons for wanting to control the distribution of their wealth after death. The trust concept is straightforward. You, the property owner, called the “trustor”, transfer legal ownership of your property to another person or institution, called the “trustee”. The trustee has a fiduciary responsibility to manage that property for a third party, called the “beneficiary,” for which the trustee is compensated.
Testamentary and living trusts are the two basic kinds of trusts. Testamentary trusts transfer assets into the trust after the trustor dies. This type of trust is attractive because it allows the trustor to spread the trust benefit payments over a period of time as opposed to having a lump sum payment. For instance, a trustor may want to spread the payments to a minor over a number of years until the beneficiary attains a specified age. Living trusts become effective while the trustor is alive but may continue after the trustor’s death. Trustors can change the terms and conditions of “revocable living trusts” while they are alive. Terms and conditions of “irrevocable living trusts” become fixed at when the trusts become effective.
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