written by khatabook | December 21, 2022

All About Bank Trust Account | How it Works and Its Types?

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Table of Content


A bank trust account is a type of savings account that is held in the name of a trust. The account is managed by a trustee, who has the authority to withdraw funds from the account for the benefit of the trust's beneficiaries. The trustee is typically a bank or financial institution, but can also be an individual. The account is opened by the settlor, who is the person who creates the trust. The settlor deposits money into the account, which is then used by the trustee to pay for the trust's expenses. The trustee may also invest the trust's funds in order to grow the account. The beneficiaries of the trust are the people who will receive the trust's assets when it is dissolved. 

Did you know? The trustee is responsible for managing the trust assets and distributing them to financial beneficiaries according to the terms of the trust.

How do bank trust accounts work?

A bank trust account is an account in which a bank holds the property on behalf of a third party. The bank acts as a trustee for the account holder and is responsible for managing the account and safeguarding the assets it contains. 

  • The most common type of bank trust account is a savings account. When you open a savings account at a bank, you are the account holder and the bank is the trustee. The bank is responsible for keeping your money safe and ensuring that it is available to you when you need it.
  • A trust account can also be used for investment purposes. In this case, the bank acts as an investment manager on behalf of the account holder. The bank is responsible for investing the account holder's money in a way that meets their investment objectives.
  • A bank trust account can also be used to hold property in escrow. In this case, the bank acts as an intermediary between the parties to a transaction, holding the property until all conditions of the sale are met.
  • Trust accounts are subject to special regulations designed to protect the account holder's interests. For example, banks are required to segregate trust account assets from their own assets, and to maintain records of all transactions in the account.

Also Read: What are the Common UPI Frauds and How to Avoid Them?

Eligibility to Open Bank Trust Account

However, in order to open a bank account that is subject to a trust, the trustee must be appointed under the laws applicable in the state concerned. It may not be possible for an individual, who has been approved by the court as one of the trustees, to open a bank account. This is because they represent their entire estate and are responsible for its administration as per the terms of the trust deed. 

The trustees have no force to delegate their power to one or more unless the force of appointment is approved by the trust deed or is as per the bearings of the court on an application made by the trustees The trustee should be stationed within the jurisdiction of the court where the trust is located. But where the trust property is a movable asset, the trustee need not be stationed within any single jurisdiction.

Types of bank trust account

There are many types of bank trust accounts, each with its own unique features and benefits. The most common types of bank trust accounts are:

Revocable trust accounts

Revocable trust accounts are the most flexible type of trust account. The account holder can change the terms of the trust at any time, and can even revoke the trust entirely if they so choose. This type of account is often used for estate planning purposes, as it allows the account holder to control how their assets will be distributed after their death.

Irrevocable trust accounts

Irrevocable trust accounts are much more restrictive than revocable trust accounts. Once an irrevocable trust is created, the account holder cannot change the terms of the trust or revoke it. This type of account is often used for asset protection purposes, as it can shield assets from creditors and lawsuits.

Living trust accounts

 Living trust accounts are created during the account holder's lifetime, and can be revocable or irrevocable. This type of account is often used for estate planning purposes, as it allows the account holder to control how their assets will be distributed after their death.

Testamentary trust accounts

Testamentary trust accounts are created after the account holder's death and are usually irrevocable. This type of account is often used to distribute assets to beneficiaries in a tax-efficient manner.

Charitable trust accounts

 Charitable trust accounts are created for the purpose of benefiting a charity. This type of account is often used to provide a steady stream of income to a charity, or to fund a specific project or program.

Special needs trust accounts

 Special needs trust accounts are created for the benefit of a disabled individual. This type of account is used to provide for the individual's basic needs, while still protecting their eligibility for government benefits.

Business trust accounts

Business trust accounts are created for the purpose of holding assets for a business. This type of account is often used to hold inventory, equipment, or real estate.

Investment trust accounts

 Investment trust accounts are created for the purpose of investing assets. This type of account is often used to hold stocks, bonds, or mutual funds.

Employee benefit trust accounts

Employee benefit trust accounts are created for the purpose of holding assets for employees. This type of account is often used to hold retirement savings, health insurance, or other employee benefits.

Escrow trust accounts

Escrow trust accounts are created to hold funds in escrow. This type of account is often used to hold earnest money deposits, down payments, or other funds that need to be held in safekeeping.

Also Read: What Does mPIN in UPI Mean?

Benefits of a bank trust account

There are many benefits of having a bank trust account, including:

 Protection of assets

One of the main benefits of a bank trust account is that it can help to protect the assets of the trust. The assets in the account are typically held by the bank or financial institution and are not subject to the claims of creditors of the trust.

Professional management

Another benefit of a bank trust account is that it can provide professional management of the assets of the trust. The bank or financial institution will typically invest the assets of the trust and manage the account on behalf of the trust.

Flexibility

 A bank trust account can also be a flexible tool for estate planning. The terms of the trust can be customized to meet the specific needs of the trust and the beneficiaries.

Tax advantages

A bank trust account can also provide certain tax advantages. The assets in the trust may be subject to different tax rules than other assets held by the trust.

 Asset protection

 A bank trust account can also provide asset protection for the beneficiaries of the trust. The assets in the trust are typically not subject to the claims of creditors of the beneficiaries.

Peace of mind

A bank trust account can also provide peace of mind for the beneficiaries of the trust. The assets in the trust are typically managed by a professional and are not subject to the claims of creditors.

Also Read: Guide to Payment Gateways and How They Secure E-Commerce Transactions

Conclusion

A bank trust account is a type of financial account that is established by a bank or other financial institution in order to hold funds for the benefit of a third party. The third party is typically an individual or entity that has an ownership interest in the funds, such as a beneficiary of a trust. The bank trust account is used to manage the funds and to ensure that they are used in accordance with the terms of the trust. A bank trust account can be a useful tool for managing finances and protecting assets. It can also be helpful in situations where an individual or entity does not have the financial resources to manage the funds themselves. However, it is important to remember that a bank trust account is a legal arrangement, and as such, it is subject to certain rules and regulations.

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FAQs

Q: What Are the Disadvantages of a Bank Trust Account?

Ans:

A bank trust account has several disadvantages, including: 

  • Limited access: The account holder typically does not have direct access to the funds in the account. 
  • Limited flexibility: The account can only be used for the specific purpose for which it was created. 
  • Fees: The account may be subject to fees, such as monthly service charges and transaction fees.

Q: What Are the Benefits of a Bank Trust Account?

Ans:

A bank trust account offers several benefits, including: 

  • Protection of assets: The account protects the assets of the third party by keeping them separate from the bank's own funds. 
  • Flexibility: The account can be used for a variety of purposes, such as holding funds in escrow or making child support payments. 
  • Safety: The funds in the account are FDIC-insured, meaning they are protected from loss in the event of a bank failure.

Q: How Does a Bank Trust Account Work?

Ans:

A bank trust account is a type of checking account that is managed by a financial institution on behalf of a third party. The account is typically used for holding funds in trust for a specific purpose, such as escrow or child support payments. The bank is responsible for safeguarding the funds and ensuring that they are used only for specified purpose.

Q: What does a bank trust account do?

Ans:

A bank trust account is a bank account that is managed by a trustee on behalf of a beneficiary. The trustee has a fiduciary responsibility to manage the account in the best interest of the beneficiary. The account can be used for a variety of purposes, such as to hold funds for a minor child or to manage an estate.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.