A trust account, also called a trustee account or trust, is a legal relationship created by a settlor, in which a trustee holds property for a beneficiary. The settlor may be the same person as the trustee. However, the trustee may not be the sole beneficiary.
Revocable Vs. Irrevocable Trust
In general, a revocable trust means the settlor may modify or revoke the trust at will. An irrevocable trust, on the other hand, may not be modified or revoked except in limited circumstances, as set forth in the trust's founding document or according to state law. Aside from whether or not the trust can be revoked, the most notable difference between a revocable trust and irrevocable trust involves the tax treatment of the trust. The assets of a revocable trust are subject to federal and state inheritance taxes, whereas the assets of an irrevocable trust typically are not.
Distribution of Trust Assets
The process by which the assets of the trust are distributed will depend on the language of the trust, as well as whether the trust is a testamentary trust or a living trust. A testamentary trust may only be distributed upon the death of the settlor. The assets of a living trust may be distributed during the life of the settlor according to the terms of the trust. These terms may vary considerably. For example, the trust may indicate that trust property or income earned by the trust should be distributed at specific times, or the trust may give the trustee absolute discretion in when the trust property or income is distributed to the beneficiary.
Duties Owed to the Beneficiary
A trustee owes several fiduciary or legal duties to the beneficiary. These duties vary by state, but generally include the duty to administer the trust in accordance with its specific terms, duty of loyalty, and duty of care. The duty of loyalty prohibits the trustee from placing her own interests above those of the beneficiary. The duty of care encompasses several duties, but the general idea is that the trustee must exercise the care and skill a person of ordinary prudence would use in dealing with his own property. For example, the trustee may breach his duty of care if he uses trust assets to make an imprudently risky investment.
Trusts can set forth various conditions that beneficiaries must meet in order to receive a distribution. For example, most traditional trusts require that a beneficiary reach a certain age before receiving distributions. Other trusts, commonly referred to as incentive trusts, require that certain accomplishments be satisfied before receiving a distribution. For example, an incentive trust may require the beneficiary to graduate from college before receiving a distribution. Another way to restrict distributions is to include a spendthrift clause. In a spendthrift trust, distributions to a beneficiary are typically made at the trustee's discretion. Thus, creditors are unable to obtain the beneficiary's interest or force the trustee to pay the creditor directly. Rather, the creditor must wait until the trustee pays the beneficiary before attempting to collect any debt.