Section 9.3 – Trust Accounts

  • What Is a Trust?

    • A trust is a legal arrangement used to hold and manage assets for a specific purpose, most often estate planning.

Trusts separate the three aspects of asset ownership:

Aspect of Ownership / Role / Description

  • Ownership (Legal Possession) / Grantor (or Settlor) / The person who creates the trust and contributes assets.

  • Management (Control) / Trustee / The person or institution responsible for managing the trust’s assets.

  • Benefit (Enjoyment) / Beneficiary / The person who receives the benefits or income from the trust.

Fiduciary Duty:

  • The trustee has a fiduciary duty to manage the trust in the best interest of the beneficiary.

  • This means the trustee must act with care, loyalty, and honesty at all times.

Margin Accounts for Trusts:

  • A trust account cannot use margin (borrow money against securities) unless the trust agreement explicitly allows it.

Trusts

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Trusts 〰️

Types of Trusts:

A. Living Trust (Inter Vivos Trust)

  • Created and funded by the grantor during their lifetime.

  • Most common type of trust for individuals and families.

  • Commonly used in estate planning to manage assets and avoid probate.

Example:
A customer places a brokerage account into a trust.

  • The customer (as grantor) contributes the assets.

  • A professional trustee manages them.

  • The beneficiary might be the customer’s grandchild.
    The trustee manages the trust for the benefit of that grandchild.

B. Decedent Trust (Testamentary Trust)

  • Created after death through a will or estate process.

  • The trust is funded with assets from the deceased person’s estate.

Revocable vs. Irrevocable Trusts

Type of Trust / Feature / Estate Tax Treatment

  • Revocable Trust / Can be changed or canceled by the grantor at any time. / Assets remain part of the grantor’s estate since they still control them.

  • Irrevocable Trust / Cannot be changed or revoked once established. / Assets are removed from the grantor’s estate, reducing estate tax liability.

Additional Notes:

  • In a revocable living trust, the grantor often serves as both trustee and beneficiary.

  • For assets in an irrevocable trust to be removed from the grantor’s estate, the grantor cannot be trustee or beneficiary.

Irrevocable Life Insurance Trust (ILIT):

  • A specialized irrevocable trust used in estate planning.

  • Holds life insurance policies to provide liquidity for paying estate taxes.

  • Useful when an estate includes large, illiquid assets (e.g., a family business or property).

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✺ Review questions ✺

  • A. To avoid paying income taxes
    B. To hold and manage assets for a specific purpose
    C. To guarantee investment profits
    D. To bypass SEC registration

    ✅ Answer: B – Trusts are primarily used to manage and protect assets, often for estate planning.

  • A. The grantor
    B. The beneficiary
    C. The trustee
    D. The executor

    ✅ Answer: C – The trustee manages the trust and has a fiduciary duty to the beneficiary.

  • A. It is an irrevocable trust
    B. The trust agreement allows margin
    C. The grantor approves each trade
    D. The beneficiary consents

    ✅ Answer: B – Margin trading must be specifically authorized in the trust agreement.

  • A. A trust that can be changed or canceled during the grantor’s lifetime
    B. A trust created only after death
    C. A trust that cannot be modified once established
    D. A trust used only for corporations

    ✅ Answer: A – The grantor can modify or revoke a revocable living trust at any time while alive

  • A. Revocable and managed by the grantor
    B. Irrevocable, with a trustee other than the grantor
    C. Decedent trust with no beneficiary
    D. Living trust where grantor is beneficiary

    ✅ Answer: B – An irrevocable trust removes assets from the estate only if the grantor is neither trustee nor beneficiary.

  • A. Hold retirement accounts
    B. Pay estate taxes with insurance proceeds
    C. Eliminate income taxes on investments
    D. Increase the cash value of a business

    ✅ Answer: B – ILITs are used to hold life insurance and provide funds to pay estate taxes.