Definition
The term account-in-trust refers to a sum of money, held in an account, which is owned by one party and managed by another party. An account-in-trust is oftentimes established for the benefit of a minor, with the transfer of full ownership occurring when they reach a specific age.
Explanation
Also known as an account held in trust, account-in-trust is a generic term that can refer to a savings account at a local bank, investments with a brokerage firm, or a formal trust. The key attribute of an account-in-trust is the owner, or beneficiary, of the account does not manage the account. This type of arrangement is commonplace. For example, the parents of a minor may establish a savings account for a young child. When that child reaches a certain age, typically 18, full control over the account is transferred.
Trust accounts usually involve the following parties and attributes:
Assets: the money or any other property of value that is placed into the account.
Donor: also referred to as the grantor, this is the person contributing assets to the account.
Beneficiary: the person that benefits from the assets placed into the account. The beneficiary is the true owner of the account.
Trustee: the party managing the account on behalf of the beneficiary.
A common example of an account-in-trust would be one that parents establish for a child's college education. The account is opened in the child's name and the parents make periodic payments into the account. When the child is ready to go off to college, the money that has accumulated in the account is used to offset the cost of tuition.
Under certain conditions, income taxes on capital gains may be split between the donor and beneficiary of these accounts. In the above example, payment of income taxes due on interest income is usually the responsibility of the donor.
