Trusts Need Their Own Checking Accounts

Q: I read your recent article about how to put a home with a mortgage into a trust. I agree with your advice, but as the daughter who had to deal with the sale of my mother’s home that was held in her trust, there is one further thing people should do. They also need a checking account titled in the same name as the trust that holds their home.

Upon a sale, the title company will cut a check in the name of the owner of the home, which would be the revocable trust. Without that account, there is a check that a bank won’t cash, because it has no place to put the money.

Luckily, my mom had such a bank account. And had enough cosigners listed that there was one present at the closing who could complete the sale and deposit the check. Without that account, we would have had to set one up, including having all the trust documents present. Then, we’d have to wait the required few days before the trust could accept the check. After the payment is in the trust account, it can be disbursed.

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A: Thanks for your letter and an excellent clarification to that column.

When we talk about revocable or living trusts, we explain how to create them. Then, we suggest readers put their assets into the trust. Those assets don’t only include real estate. They might include all other assets that would need to pass down to heirs or that may need management should the person that set up the trust become disabled or incapacitated.

As people buy and sell assets throughout their lives, they often forget to put them into their trusts. As you found out, that could be a mistake. Banks and other financial institutions will transfer assets in a trust to beneficiaries if the owner sets them up properly. They will also transfer assets if the institution allows the account to transfer automatically on the death of the owner (known as transfer on death accounts or TOD).

Sometimes, people hold their assets in their bank accounts as joint tenants. This way when the primary owner dies, the joint owner controls the bank account and gets all the funds in that bank account. That leaves an open question as to where the funds would go upon the sale of a home held in a trust.

Revocable Trust: Get It Right the First Time

The title company or real estate settlement agent will generally pay all of the funds from the sale of a home that was owned by the trust to the trust, minus any remaining mortgage balance or lien payments. However, in some circumstances, the title company or settlement agent will send those funds as directed by the successor trustee. This means that the successor trustee can direct the title company or settlement agent to send the proceeds from the sale to a different account other than a trust account.

The settlement agent or title company will need additional information to make sure that the funds are not being misdirected. For this reason, they sometimes will simply only send the funds to an account held by the trust. If you find yourself in this situation, you’d better know well in advance of the closing what the title company will require to send the funds where you want them to go.

If you are the successor trustee, you’ll need a bit of paperwork to open the trust account with a bank. The bank will be looking for a new identification number issued by the Internal Revenue Service for the trust. You will also need to provide the executed trust document. The successor trustee to sign documents at the bank.

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Most people can open up the trust checking account fairly easily. After that, the settlement agent should send funds as directed by the trustee. Just know that settlement agents won’t be happy if you direct them to wire funds to 13 different accounts, because that’s the number of successor trustees.

Settlement agents like to keep things simple. If they can send the funds to one or two accounts, they will – if it is clear to them who should end up with the money. Otherwise, they will want to send the funds directly to the trust account, typically via wire transfer.

Wire transfer technology is sophisticated. If you try to wire funds from the sale to an individual account but the settlement agent shows that the recipient of the funds should be a trust, the receiving bank may reject the funds. You don’t want to find out that you’ve sent the settlement company the wrong account numbers on the day of the settlement, so make sure you have everything lined up well in advance of the closing.