What Is the Difference Between a Living Trust and an Estate Account?

By Stephanie Kurose, J.D.

What Is the Difference Between a Living Trust and an Estate Account?

By Stephanie Kurose, J.D.

While living trusts and estate accounts both have to do with a person's assets, they are two entirely separate entities used for vastly different purposes. A living trust is a tool that allows a person to transfer their assets into it, which is then managed for the benefit of someone else, commonly referred to as the beneficiary. An estate account is what an executor uses to pay taxes, debts, and any other final obligations after the original owner passes away.

Man in a chair contemplating

Living Trust Basics

A living trust is a great way to plan for your future and make sure your loved ones are taken care of after you pass away. It is a legal document that allows the creator, or grantor, to transfer ownership of their assets to the trust. When creating it, the grantor designates someone to manage it, called a trustee, on behalf of any designated beneficiaries. Typically while the grantor is alive, they also act as the trustee.

You can transfer almost any type of asset into it, including your house or other real property, investment and bank accounts, personal property, and automobiles. A living trust is revocable while the grantor is alive, so it can be amended or dissolved at any point. Once the grantor dies, however, it becomes irrevocable and cannot be changed.

Generally, they are set up so that when the grantor dies, the trustee distributes its assets to the beneficiaries according to the terms of the document. Assets held in this manner bypass the probate process entirely, meaning that beneficiaries can receive the assigned assets as soon as the grantor passes away.

Estate Account Basics

The executor of a will, who is responsible for settling a deceased person's estate, opens an account once the probate process has commenced. Probate is the legal process of proving a person's last will and testament. Typically, this document names an executor and, as part of this responsibility, the executor must open the account to deposit the deceased's money and pay any final debts, bills, and other expenses. This is also the method through which the executor distributes any funds to the beneficiaries according to the terms of the will. Without an estate account, the deceased's assets remain frozen and cannot be accessed by anyone, including the executor. Opening it allows the executor to access the deceased's funds.

Before opening an estate account, the executor must apply for a tax identification number with the Internal Revenue Service. Once they obtain a tax ID number, the executor can open it up with a bank or other financial institution. Some financial institutions may require a certified copy of the death certificate and other court documents. Once opened, the executor must transfer the deceased's assets from their personal to the estate side.

Estate planning accounts must be set up with great care. If you are considering setting up a living trust or an estate account, consider your options before doing so. The more informed you are, the more protected your loved ones will be in the future.

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