When the grantor of a trust dies, a new bank account is needed

A trust is a type of estate and financial planning tool that allows an individual to manage property for the benefit of someone else. A trust will have three components or roles:

1. Grantor: Also called a settlor, trustmaker or trustor, this is the person who creates the trust by transferring property into the trust.
2. Trustee: This is the person who controls the trust property for the benefit of one or more beneficiaries.
3. Beneficiary: The person who receives the benefit of the trust, such as income produced by the trust or property from the trust.

In certain trusts, a single individual can serve all three of these roles, although this isn’t usually the case. Typically, there are two or three separate individuals or legal entities to fulfill these roles.

For instance, a grandparent of a young child might create a trust for that child using cash from the grandparent’s bank account. The grandparent creates the trust to help the child pay for college when they turn 18. And the grandchild’s parents have the task of protecting that money and then distributing it when the grandchild goes off to college. In this example, the grandparent is the grantor, the parents are the trustees and the grandchild is the beneficiary.

There are so many different types of trusts, but they can usually be classified in two ways. The first method of classification looks at when the trust gets created. If it’s created during the grantor’s life, it’s a living trust (also known as an inter vivos trust). If it’s created at the time of the grantor’s death, it’s a testamentary trust (sometimes called a will trust). The terms and conditions of testamentary trusts are typically spelled out in the grantor’s will.

The second method of classification looks at the power the grantor has over the trust they create. If the grantor has full power over the trust’s existence and how it operates, then it’s a revocable trust. These powers include the ability to decide when to end the trust, take back property in the trust or transfer property in the trust to someone else.

If the grantor can’t change the terms or conditions of the trust after creating it, then it’s an irrevocable trust. With an irrevocable trust, unless a special exception applies, the grantor can’t change who the beneficiaries are or decide how the property in the trust should be handled. A living trust can be either revocable or irrevocable, but a testamentary trust is always irrevocable.

There are many reasons to create a revocable living trust, but most people will create them to provide for a special needs child, reduce estate taxes, maintain privacy or avoid probate. In many of these applications, the grantor will also be the trustee of the trust.

For many revocable trusts, the grantor will be responsible for the trust. In practice, this means the trust and any financial accounts associated with the trust are likely created and handled under the grantor’s tax ID number. The majority of the time, this will be the grantor’s Social Security number (SSN). And for tax purposes, any taxable income or applicable tax deductions relating to the trust are reported on the grantor’s individual tax return.

When the grantor is alive, this keeps things fairly simple. The grantor’s death doesn’t mean things necessarily need to get complicated with administering the trust. However, when the successor trustee steps in, they need to ensure that the trust and bank account have their own federal tax ID number.

If a trust uses the grantor’s Social Security number and the grantor dies, the number can no longer be used for settling or administering the trust. If the successor trustee is to settle the trust or continue administering it, the successor trustee must get the trust an employer identification number. An EIN is a type of tax ID number. The IRS uses EINs to differentiate between all the organizations and legal entities that file tax returns. EINs are typically assigned to businesses, but they can also be assigned to trusts. In contrast, individuals typically use their SSNs for tax purposes.

Revocable trusts can be created with or without an EIN, but irrevocable trusts will need an EIN from the very beginning. In some situations, a trust that already has an EIN may need a new EIN, such as when a revocable trust changes into an irrevocable trust.

Getting an EIN from the IRS is a relatively simple process and can be done online for free. Once the trust has its own EIN, it’s time to get the trust its own bank account or change an already existing trust bank account.

If a revocable trust uses a grantor’s Social Security number for its trust bank account, this can no longer be done once the grantor dies. This is because the taxable entity changes from the grantor to the trust itself. With the grantor no longer alive, the bank account used with the trust will then need to use the trust’s EIN.

Many banks provide trust bank accounts to their customers, but some of them don’t. Therefore, the first step in getting the trust its own bank account is to find a bank that offers trust banking services.

Assuming it’s possible to get a trust account at a particular bank, the successor trustee will need to provide the bank with the necessary documentation. Documents needed may include a copy of the trust agreement (or at least the first and last pages), trust certificate and IRS Form SS4. The trustee will also need to provide information about the trust to the bank, such as:

• The name of the trust
• The trust’s current trustee
• Contact information of the trustee

There are several reasons why it’s important to set up the proper bank account for a trust after the grantor dies. The first is the most obvious in that only the grantor has the legal right to use the grantor’s bank account.

When the grantor dies, only someone with court authorization (like an executor representing the grantor’s estate) can access the grantor’s bank account. But this executor may not be the successor trustee, so this makes handling the trust’s financial obligations very cumbersome, if not impossible.

Additionally, if the trust is to continue existing for the foreseeable future after the grantor dies, there will be a time when the court completes probating of the grantor’s estate. As a result, the executor is no longer needed and will be relieved of their duties. After this occurs, the successor trustee may have no way to continue making use of the bank account because they no longer have the help of the executor.

Then there’s trying to use the grantor’s bank account without proper authorization. This could be unlawful, as it might constitute theft under some criminal codes. Theft is generally defined as taking property belonging to someone else without their consent or through fraudulent means.

Even if the successor trustee using the grantor’s trust bank account is legal, it could violate the terms, conditions or policies of the bank. The bank might then put a hold on the funds in the account, making it useless for trust administration purposes.

Second, banks and other financial institutions will likely require the trust to set up brand-new accounts after the grantor dies. Even if this isn’t legally required, some banks may still have a policy that requires this.

Setting up a brand-new bank account is almost always necessary if the old account was created with the grantor’s Social Security number and the trust is to continue existing and carrying out the grantor’s wishes. Not setting up a proper trust bank account means the trust has no way to store or disperse funds from the trust, as a bank account using a dead person’s Social Security number is no longer usable.

Third, the trust is now responsible for its own tax reporting and payment obligations. In other words, the trust could owe taxes and if so, the trust needs a way to pay its taxes. Trusts will usually need to file a tax return (IRS Form 1041) if they generated more than $600 in income in a tax year.

The successor trustee can theoretically use almost any domestic bank account to pay the taxes for the trust, as long as they have permission from the account holder to do so. But this can complicate the accounting of the trust, as whoever pays for the trust’s taxes will probably want to be reimbursed from the trust.

This creates messier financial records and accounting for the trust. This can easily be avoided by just pulling funds from a properly created trust bank account that uses an EIN instead of the grantor’s Social Security number.

Fourth, not creating a bank account for the trust could mean it becomes an empty trust. An empty trust is a trust that is not funded with assets. This makes the trust virtually useless as it exists to distribute property to a beneficiary, but there’s nothing to distribute. Instead, the grantor’s bank account which should be used to fund the trust and cover its expenses is processed with the rest of the grantor’s probate property.

Fifth, keeping the trust bank account under the grantor’s SSN could complicate the probate process. When creating an estate plan while the grantor was still alive, there was the assumption that the trust would have access to the money in the grantor’s bank account. The rest of the grantor’s estate plan was based on this assumption.

Instead, the trust can’t access that money and that money is instead part of the grantor’s estate that gets settled by the probate court. This could lead to the money going to someone the grantor never intended while leaving the trust without the money to carry out the grantor’s wishes.

The death of the grantor of a trust means that the trust is now an irrevocable trust, if it wasn’t already. The Federal Deposit Insurance Corporation (FDIC) has special bank account insurance rules for trust bank accounts.

The type of trust, number of beneficiaries and terms of the trust dictate how this insurance coverage works. For a regular bank account, FDIC coverage is capped at $250,000 per account. With an irrevocable trust, this limit will often remain at $250,000 per trust bank account.

However, if certain conditions are met, the FDIC insurance limit increases. Instead of a limit of $250,000 per account, it becomes $250,000 per beneficiary. For this change in FDIC insurance coverage to apply, these conditions must all exist:

• State law authorizes the existence of the trust.
• Bank records show the existence of a trust relationship.
• Trustee or bank records identify the beneficiaries and their respective interests in the trust.
• There are no conditions that the beneficiaries must meet to receive benefits from the trust when the grantor dies.

In most cases, this last requirement doesn’t exist, so the $250,000 FDIC insurance limit applies to the entire account, not each beneficiary. If the money in the account exceeds this limit, it could jeopardize some of the funds in the case of a bank failure.

To reduce this risk, the successor trustee may want to open multiple trust bank accounts to distribute some of the cash so that no single account has a balance of more than $250,000.