A trust account is a type of fiduciary account set up to benefit a specific beneficiary. A trust is a legal arrangement with three distinct parties, each with different responsibilities:
The grantor creates and funds the trust. To set up a trust, the grantor typically works with legal counsel to draft a trust agreement. This agreement spells out the trust’s purpose, how it should be managed, and who the beneficiary or beneficiaries are.
Trust objectives can vary widely. For example, a trust might be used to:
The grantor also names the trustees in the trust agreement. Trustees manage the trust according to the grantor’s instructions.
When a trust account is opened at a brokerage firm, trustees handle the trust’s assets by trading securities and carrying out general transactions, such as distributing funds to beneficiaries.
A trust is managed solely for the benefit of its beneficiaries, which may be one person, multiple people, or an organization.
Beneficiaries generally don’t have control over the trust because the trustees are responsible for managing it. Even so, trustees must act in the interests of the trust and its beneficiaries. A beneficiary’s role is typically limited to receiving the trust’s benefits, such as cash distributions or other assets.
Trust accounts are fiduciary accounts, but they aren’t automatically limited to the typical “safe” fiduciary approach (such as investing only in low-risk securities). Trustees may use riskier investment strategies if the trust agreement requires or permits them.
Trust accounts can also be opened as margin accounts (allowing the trust to invest borrowed funds), as long as the trust agreement specifically authorizes margin. When a trust account application is submitted, the brokerage firm will request the trust agreement to confirm whether the account is eligible for margin.
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