Are you forming a trust? These legal and financial tools can provide needed security and management of your assets, but they are often complex. One seemingly simple element of a trust that may be overlooked is the trust checking account. What do you need to know about opening and operating a checking account for your trust? Here are a few do's and don'ts.
Do Open an Account
A trust doesn't require that a checking account be opened, but it's a good idea. Placing funds in a liquid account provides an easy way to pay expenses of the trust itself (such as accounting or legal services) as well as quick access if something happens to you. If the trust is to provide for your own medical or final expenses as well as your family's immediate needs, checking accounts will make these tasks infinitely easier.
Don't Mingle Expenses
Keep all the funds in this account separate and distinct from the activities in all other, non-trust bank accounts. The only way to take advantage of an irrevocable trust's financial and tax protection is to maintain it as a separate entity from the grantor. But if you pay personal expenses from the account or add unrelated income, you risk blurring that distinction and creating an intermingling between individual and trust.
Do Get the Needed Paperwork
To open an account, the financial institution will likely need three elements. First, it will need the trust agreement or certification that authorizes the trust. Second, include proof that you are the trustee or grantor. Generally, only the person who funded the trust or the one assigned to take charge of it can open an account. Third, you may need to apply for a Tax Identification Number from the IRS.
Don't Rely Solely on the Account
Placing money into a separate bank account — even an account within a trust — doesn't by itself protect those funds from inclusion in your own income. You'll first need to set up the right type of trust — usually an irrevocable trust — to create a separate entity. The bank account itself is only a tool and should never take the place of a properly executed and managed trust.
Do Keep Good Records
Finally, keep clear and accurate records of all activity in the bank account. This would likely include detailed bank statements, canceled checks, receipts, invoices, and backup documentation about expenses. Place these bank records with your trust paperwork for safety.
If you take the right steps when planning and maintaining a bank account for your trust, your assets will be better protected. Your family will also have access to what they need as soon as they need it. Want to know how to open an account for your particular trust? Start by making an appointment with a financial institution to learn more.