A trust account is a type of fiduciary account created for the benefit of a specific beneficiary. Trusts are legal entities involving these three distinct parties with varying responsibilities:
The grantor is responsible for creating and funding the trust. The first step to creating a trust involves the grantor utilizing legal services to construct a trust agreement. Within this agreement, the grantor specifies the objectives, management styles, and the trust’s beneficiary or beneficiaries. Trust objectives vary widely, including funding a child’s college education, supporting an elderly family member, or managing assets on behalf of a charity.
The grantor also names trustees in the trust agreement. Trustees manage the trust according to the instructions provided by the grantor. When a trust account is opened with a brokerage firm, trustees manage trust assets by trading securities and performing general transactions (e.g., distributing funds to beneficiaries).
A trust is managed for the sole benefit of its beneficiaries, which could be a person, persons, or an organization. Beneficiaries don’t have any legitimate power over the trust, as the trustees are in control. However, the trustees serve the trust and its beneficiaries. The role of a beneficiary is minimal - they exist to receive the “benefits” of the trust (e.g., cash distributions, assets).
Trust accounts are fiduciary accounts, but are not subject to the typical “safe” fiduciary standards (e.g., investing in low-risk securities). Trustees could pursue more risky investment strategies if the grantor mandates or allows riskier strategies in the trust agreement. Additionally, trust accounts can be opened as margin accounts (allowing the trust to invest borrowed funds) as long as the trust agreement specifically allows it. When a trust account application is submitted, the brokerage firm requests the trust agreement to determine if the account is eligible for margin.
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