What does it mean “to hold money in trust”? Trusts are difficult to understand. Mention the word “trust,” and people become instantly confused.
If a mother gave $10,000 to her son to hold and invest for her, with the understanding that the son would give her the money back if she needed it – we would have little difficulty understanding how things work. The son has $10,000 of mom’s money, and the son will give mom the money back if she needs it.
If mom set up a trust, of which her son were the trustee, and the terms of the trust indicate that the trustee is to hold and invest the assets of the trust for the mother and provide her with money if needed – we don’t understand how things are going to work. “When can my child, I mean trustee, give me money?” “Where will the trust be?” “How can the assets of the trust be invested, in a bank, in stock?”
Trusts are created for many different reasons. A trust may be created for estate planning purposes. For example, perhaps a child is too young to understand the importance of money, so a trust is created for the child’s benefit under the terms of a parent’s Will that appoints an older, more experienced family member to manage the money for the child’s benefit. In this way, if the parent were to die before the child reached a sufficient age, the child’s inheritance would be held in trust until the child were older. Perhaps a parent is looking to qualify for Medicaid, so the parent is transferring money to a trust in order to shelter the money from the cost of long-term care. The trust may be revocable. It may be irrevocable.
But what does it mean when assets are placed in trust?
A trust is a legal instrument, essentially a contract. It is a contract between the different parties to the trust agreement: the grantor, the trustee, and the beneficiary.
The “grantor” is the person whose assets are used to fund the trust. The “trustee” is the person who holds and manages the assets that the grantor has placed in the trust. The “beneficiary” is the person for whom the trustee is holding and managing the assets; the beneficiary benefits from the trust.
When a lawyer drafts a trust agreement, a tax identification number (or TIN) is often obtained for the trust from the Internal Revenue Service. The TIN is a social security number for a trust. With the TIN, accounts can be established with financial institutions and assets can be purchased in the name of the trust.
Once we have a trust agreement and a TIN for the trust, the grantor can “fund the trust.” How is that accomplished?
Pretty much the same way you purchase assets. The trustee takes the trust to a bank or brokerage house, gives the financial institution the TIN and the trust agreement, opens an account, and buys things: stocks, bonds, CDs, mutual funds, etc.
A brokerage account could be used to buy the assets, or the trustee could simply buy assets directly in the name of the trust, for example, go to a bank and purchase a CD or purchase shares of stock in a mutual fund company. In fact, the trustee could establish as many accounts in the name of the trust as the trustee wanted. Just like you could.
There is no limit to the number of accounts that could be set up in the name of the trust. A trust is very much like the son mentioned at the beginning of the article, holding the $10,000 for the mother’s benefit. But there are certain advantages to having the son hold the money in trust as opposed to in his name, which I will discuss, in a future article.