What a trust account is and when you need one
A trust account is a bank or investment account held in your name but legally designated to benefit someone else—usually a minor, an incapacitated adult, or a beneficiary you name. The money belongs to that person, not to you, even though you control it. You are the trustee: you manage the account, make withdrawals, and pay bills from it, but you cannot spend the money on yourself.
You need a trust account when you are responsible for someone who cannot manage money themselves—a child, an elderly parent with dementia, a sibling with a disability—and you want a legal structure that keeps the money separate and documented. It is different from a joint account (where both people own the money equally) and different from power of attorney (which gives you authority over someone else's existing account). A trust account is one you create specifically to hold and manage funds on someone else's behalf.
The most common type is a Uniform Transfers to Minors Act (UTMA) account or Uniform Gifts to Minors Act (UGMA) account, used for children. These are simpler than formal trusts and require no lawyer. For adults or more complex situations, you may need a formal trust document, which does require legal help.
Key Takeaways
- UTMA and UGMA accounts are the simplest trust accounts for minors and require only a bank visit, not a lawyer.
- You name yourself as custodian and the child as the beneficiary; the money is legally theirs but you control it until they reach the age of majority (18 to 25, depending on your state and the account type).
- Formal trusts for adults or large sums require a written trust document, which you should have drafted by an attorney in your state.
- The bank will ask for the beneficiary's Social Security number, proof of your identity, and the source of the initial deposit.
- Once the beneficiary reaches adulthood, the account transfers to them automatically (UTMA/UGMA) or according to the trust terms you set.
UTMA and UGMA accounts: the simplest route for minors
If you are setting up an account for a child and the amount is modest (under $100,000 in most cases), an UTMA or UGMA account is the fastest and cheapest option. You do not need a lawyer or a formal trust document. You simply open the account at a bank, brokerage, or credit union and designate yourself as the custodian and the child as the beneficiary.
The difference between UTMA and UGMA is narrow: UTMA (Uniform Transfers to Minors Act) is newer and accepted in all 50 states; UGMA (Uniform Gifts to Minors Act) is older and not available in all states. Both work the same way in practice. Ask your bank which one they offer—most offer UTMA. The rules vary slightly by state, particularly the age at which the child takes control (usually 18, 21, or 25).
You will need the child's Social Security number, your own ID, and proof of the money's source (a check, transfer confirmation, or deposit slip). The bank will file the paperwork with the state; you do not file anything yourself. You can deposit money into the account at any time, and you can withdraw money to pay for the child's needs—school, medical care, living expenses—but not for your own use.
Formal trusts for adults and larger amounts
If you are setting up an account for an adult (a parent, sibling, or other dependent) or if the amount is large enough that you want more control over how the money is used after you die, you need a formal trust document. This is a legal contract that spells out who the trustee is (you), who the beneficiary is (the person the money is for), and what happens to the money if you die or become unable to manage it.
You will need to work with an attorney licensed in your state to draft the trust. The cost ranges from $500 to $2,000 depending on complexity and your location. The attorney will ask you questions about the beneficiary's needs, your assets, and your wishes for what happens after you die. Once the trust document is signed and notarized, you take it to the bank and open the account in the trust's name (for example, "John Smith, Trustee of the Smith Family Trust").
A formal trust gives you more flexibility than UTMA/UGMA. You can specify exactly how the money is used, name a successor trustee to take over if you die, and set conditions for when the beneficiary receives the money. For example, you could require that money be used only for medical care, or that it be held until the beneficiary turns 30.
What information the bank will ask for
When you arrive at the bank to open a trust account, bring your government-issued ID (driver's license or passport) and the beneficiary's Social Security number. If the beneficiary is a minor, bring their birth certificate or Social Security card. If it is an adult, bring their ID as well.
The bank will ask where the initial deposit is coming from—your own savings, a gift from a relative, an inheritance, or insurance proceeds. Be honest about this; the bank is required to report large deposits ($10,000 or more in a single transaction) to the IRS under anti-money-laundering rules. If you are depositing money over time, each deposit under $10,000 is fine, but the bank will flag a pattern of deposits that appear designed to avoid the reporting threshold.
For UTMA/UGMA accounts, the bank will print out the account agreement and have you sign it. For formal trusts, bring the signed trust document (the original or a certified copy) and the bank will keep a copy on file. The bank may ask for an Employer Identification Number (EIN) for the trust, which you can obtain free from the IRS online if needed.
Managing the account and keeping records
Once the account is open, you receive statements in your name as custodian or trustee. Keep these statements and all deposit slips, withdrawal receipts, and records of what the money was spent on. This documentation protects you if the beneficiary or their family ever questions how you used the money, and it is required if the account is large enough to file a tax return.
For UTMA/UGMA accounts, the money grows tax-free up to a limit (the amount changes yearly, but is roughly $1,300 in 2024). Income above that is taxed at the child's rate, which is usually lower than yours. You do not need to file a separate tax return unless the account earns more than the annual threshold.
For formal trusts, you may need to file a separate tax return (Form 1041) if the trust earns income. Your attorney or a tax professional can advise you on this when you set up the trust. Keep all records for at least three years after the beneficiary takes control of the account or after you close it.
What happens when the beneficiary reaches adulthood
With UTMA/UGMA accounts, the money automatically transfers to the beneficiary when they reach the age set by your state's law—usually 18, 21, or 25. You lose control at that point; the account becomes theirs to use however they wish. You cannot prevent this transfer or extend your control past the legal age, even if you think the beneficiary is not ready to manage money.
With a formal trust, you have more control. You can specify that the money stays in trust until the beneficiary reaches 30, 40, or any age you choose. You can also name conditions—for example, the money is released only if the beneficiary completes college or stays sober. A successor trustee you name takes over if you die before the beneficiary reaches the age you set.
If you want to move money from an UTMA/UGMA account before the beneficiary reaches adulthood, you can close it and open a formal trust instead, but you will need a lawyer to do this properly. Do not simply transfer the money to a regular account in your name; that breaks the legal protection and may create tax problems.
Common mistakes to avoid
Do not open a joint account with the beneficiary as a shortcut. A joint account means you both own the money equally, and if you die, it passes to them automatically—but it also means they can withdraw all of it without your permission, and creditors can seize it if they are sued. A trust account keeps the money legally theirs but under your control.
Do not mix trust money with your own. Keep the trust account separate from your personal checking and savings. If you need to reimburse yourself for money you spent on the beneficiary's behalf, withdraw it from the trust account and document it. Mixing money makes it look like you are using the account for yourself, which can create legal and tax problems.
Do not assume you can name a successor trustee in a will. If you want someone else to take over the account if you die, name them in the trust document itself or update the account with the bank. A will does not automatically transfer trustee duties; the bank will freeze the account until a court appoints someone, which takes time and costs money.
Frequently Asked Questions
Can I withdraw money from a trust account for my own use?
No. The money belongs to the beneficiary, not to you. You can withdraw it only to pay for the beneficiary's needs—food, housing, education, medical care. If you withdraw money for yourself, you are committing theft, even if you intend to pay it back. Keep records of every withdrawal and what it was spent on.
What if I die before the beneficiary reaches adulthood?
With UTMA/UGMA, the account passes to the beneficiary's legal guardian or parent. With a formal trust, it passes to the successor trustee you named. Either way, the money stays in the account and is managed for the beneficiary's benefit. Name a successor trustee in your trust document or update your bank records to avoid delays.
Do I pay taxes on money in a trust account?
UTMA/UGMA accounts are taxed at the beneficiary's rate, not yours, which is usually lower. Formal trusts may require a separate tax return if they earn income above a certain threshold. Talk to a tax professional or your attorney about your specific situation; the rules depend on how much money is in the account and what it earns.
Can I change who the beneficiary is after I open the account?
With UTMA/UGMA, no—the beneficiary is set when you open it and cannot be changed. With a formal trust, yes, but only if the trust document allows it. If you want to change beneficiaries, close the account and open a new one, or work with an attorney to amend the trust. Do not simply transfer money to a different person's account without legal documentation.
What is the difference between a trust account and a guardianship?
A guardianship is a court order that gives you legal authority over a minor or incapacitated adult. A trust account is a bank account you set up to hold money for them. You can have both—a guardianship gives you authority over the person and their decisions; a trust account holds their money separately. A trust account does not require court involvement and is simpler to set up.