A trust savings account is a specialised type of bank account where funds are held by a trustee on behalf of beneficiaries under the terms of a legal trust. In this guide, we take a look at the structure of a trust account and the responsibilities of the parties involved in simple and beginner friendly language.

This article is for general information only and does not constitute legal or financial advice. Always consult a qualified professional before establishing or managing a trust account.

Types of trust accounts

Bare Trusts

Bare trusts are the simplest type of trust account. In these accounts, the beneficiary has an absolute right to the assets at a defined age, such as 18 or 21, or a specific event like their marriage. Trustees mainly hold and manage the funds until the beneficiaries are legally entitled to receive them, but they have minimal levels of discretion. The trustees are primarily custodians and must pass the funds to the beneficiaries as soon as they are legally entitled. It is important to remember that the trustees are responsible for the safe keeping of the funds and ensuring that they are invested prudently.

Discretionary Trusts

For discretionary trusts, the trustees are left to decide how and when funds should be distributed among the beneficiaries. This allows flexibility for the trustees to respond to the beneficiaries needs or changing circumstances. Trustees are often required to balance the competing needs of the beneficiaries and must document their decisions carefully. They may consult with financial advisors in order to make more informed choices.

Revokable Trusts

Revokable trusts are a type of trust that can be changed or revoked by the settlor during their time. These can be particularly useful in estate planning as they allow the settlor to adjust the trust terms as circumstances evolve. If the terms are to be changed, then it may be necessary to notify the provider and update any trustee authorisations, which can involve additional administrative steps.

Irrevocable Trusts

Conversely, irrevocable trusts cannot be altered without consent from beneficiaries or court approval. This offers greater security and an increased protection of the assets involved. The legal protection offered by irrevocable trusts means that the assets are generally shielded from creditors and personal claims. It should be remembered that this also places a higher duty of care on the trustees to follow the original terms.

It is important to remember that the type of trust directly influences how the trust account operates, including access to funds, record keeping, and trustee responsibilities. This should be taken into account when choosing the type of trust account you want to set up.

Interest in Possession

An Interest in Possession trust means that the beneficiaries will receive income from the trust assets, such as interest from a savings account, but not the capital itself. This ensures that the capital is preserved for other beneficiaries or future use.

Deciding on the right trust structure is complex and will depend on your own objectives, such as tax planning, asset protection or family circumstances. Professional input from a solicitor or financial advisor is strongly recommended.

How do trust accounts work?

At their creation, the settlor will draft a trust document known as a trust deed, to define the terms of the trust as well as its objectives, trustees and beneficiaries. At this point the funding of the trust needs to be considered, and money or other assets should be transferred into the trust account in order to legally separate them from the settlors’ personal funds. The assets that are put into a trust are not limited to cash, as trustees can place investments, bonds or other financial instruments into the account. Each addition to the trust should be fully documented.

It is then up to the trustees to manage the account according to the trust deed. This will include safeguarding assets, making authorised payments and maintaining records for the lifespan of the trust. This means that trustees will have to maintain statements that show how much interest has been earned, what transfers have been made and detailing any income that has been generated. Providers may require a quarterly or annual update of trustee information to satisfy regulatory requirements.

Any funds should be released in line with the trust deed, and this should either be done on an automatic basis such as age-based release or at the trustee’s discretion. Trustees should keep records of the rationale for each distribution in case of queries from any beneficiaries or auditors.

Funds in a trust account are ring fenced so they cannot be mixed with personal accounts or used for the trustees’ own purposes. Any withdrawals and investments are restricted by the trust deed in order to ensure compliance with the settlors’ intentions and legal requirements.

Roles and responsibilities associated with trust savings accounts

It is the settlor’s responsibility to create the trust, define its term and select the trustees. They will ensure that the trust aligns with their intentions for the beneficiaries. The settler is entitled to include guidance about investments or specify restrictions in the trust deed. It is their instructions that will determine the actions of the trustees, which must comply with both the letter and the spirit of the deed.

The trustee is responsible for managing the trust account, according to the deed. Their responsibilities include safeguarding funds, record keeping for transparency and compliance purposes, administrating distributions appropriately and following any investment restrictions or rules in the trust deed. This is an important role as the trustees are legally accountable for mismanagement or any breach of duties. The trustee is required to act prudently and avoid any conflicts of interest, which may mean that they need to consult professionals for investment or tax related decisions. They must also keep detailed accounting records, not only for transparency purposes but also to comply with legal and tax reporting obligations.

The beneficiary is the person or group of people that will receive benefits from the trust. However, even though they are in line to receive funds, they will have limited or no control over how the account is managed. The trust deed will define the rights of the beneficiary, including their entitlement to capital, income or discretionary payments. The beneficiary may have the right to review the accounts or request information depending on the trust type, but they cannot control decisions unless the deed explicitly grants them powers to do so.

Although trustees act on behalf of the beneficiaries, it is vital that they respect the settlors’ instructions. The beneficiaries’ interests should guide any trustee decisions, but they are not allowed to directly manage or access the funds unless the deed specifically allows it.

Legal and administrative framework

Trust accounts are governed by significant legal and administrative framework. All trust accounts are regulated under general trust law, tax law and banking regulations. This means that trustees must comply with any anti money laundering (AML) and Know Your Customer (KYC) requirements.

It is important that all trust savings accounts have a trust deed or other governing document as well as identification for all of the trustees. This will include photo ID and a proof of address. Beneficiary details may also be required by the bank or by specific legal obligations.

Trustees are required to maintain detailed records of all deposits, withdrawals, interest earned, and distributions for the trust savings account. This proper documentation will ensure transparency for the beneficiaries and keep the trust compliant with tax authorities.

Good administrative practices are essential for protecting both the trustees and the beneficiaries, as well as ensuring that the trust operates legally and efficiently at all times.

Common uses for trust accounts

Not everyone needs a trust account as they are designed to serve specific purposes. They are often used to hold money for minors in order to keep funds secure until the beneficiary reaches a specified age. They are also important tools in managing inheritance, as they can ensure that assets are distributed according to the wishes of the settlor.

Trust accounts are also used to protect vulnerable individuals and their assets. They can provide a legal structure that helps to manage funds for those who are unable to do so themselves.

In some cases, trusts are used to fund specific purposes like education, care or charitable activities. This leaves the trustees to manage the disbursements according to the trust deed.

Trust savings accounts can also be used as part of a long-term financial plan where trustees must plan distributions over several years to ensure ongoing support for beneficiaries. Trusts can manage income and capital separately, which may be relevant if the trust generates interest or investment returns. Trustees may also need to coordinate with professional advisors to ensure that funds are invested prudently or that distributions comply with legal obligations.

Disclaimer: This article is for information purposes only and does not constitute legal or financial advice. Mansfield Building Society does not provide advice on the suitability of Trust savings accounts. Please consult a qualified professional to ensure any trust account meets the needs of your trust and its beneficiaries.