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Older couple completes their estate planWhen shaping an estate plan, one of the most important steps is deciding who has access to your assets. Specifically, that means who inherits bank accounts and other financial accounts when you pass away. In trust for vs. payable on death accounts can both be used to manage assets. But they aren’t the same, in terms of how they work or when it makes sense to use them. Understanding what in trust for and payable on death mean matters for efficient estate planning. Consider working with a financial advisor if you need help setting up an estate plan or managing inherited money.

In Trust For, Definition

In trust for (ITF) or account in trust refers to an account that has a named trustee. This trustee manages the assets in the account on behalf of one or more beneficiaries. The person who creates an in trust for account can set the rules or guidelines for how those assets should be managed. Trustees are bound to a fiduciary duty standard, meaning they must act in the best interests of the beneficiaries at all times.

When you set up an in trust for account, you’re essentially creating a trust. You can transfer a number of assets into this account, including:

  • Cash
  • Stocks
  • Bonds
  • Real estate
  • Life insurance policies
  • Antiques or collectibles
  • Investment accounts

You can choose who should act as trustee and who to name as beneficiaries. You can also decide when the beneficiaries are able to have access to assets in the account. For example, you may set up an in trust for account to hold assets on behalf of your minor children until they turn 18, complete college or meet some other condition.

In Trust For Pros and Cons

Creating in trust for accounts can offer advantages and disadvantages when planning your estate. Understanding how they balance out can help with deciding whether you need in trust for accounts as part of your financial strategy.

On the pro side, in trust for accounts allow you to direct how assets should be managed on behalf of your beneficiaries during your lifetime and after you pass away. For example, if you’re about your children spending down their inheritance too quickly, you could direct the trustee to release assets in the trust to them only when certain conditions are met.

In terms of cons, there’s the expense of setting up and managing the trust to consider. Creating an in trust for account could be expensive if you require an estate planning attorney’s help. Once the trust is in place, you also have to consider ongoing expenses, including the trustee’s fee.

Payable On Death, Definition

Mother and daughter study payable on death document

A payable on death account designation means that someone you name can receive the assets in the account when you pass away. There’s no trustee involved. Instead, you continue to manage the account as you see fit while you’re still living. When you pass away, the person or persons you named as beneficiaries to the account can receive the assets in it. But they can’t access any of those assets during your lifetime so they can’t spend down any money in the account.

Bank accounts can be set up as payable on death accounts. You can do this with existing accounts you already have or new accounts created just for that purpose. Setting up a payable on death account can be as simple as choosing a beneficiary and filling out the appropriate paperwork with your bank.

Payable On Death Pros and Cons

Like in trust for accounts, payable on death accounts can offer advantages and disadvantages. For example, one of the biggest benefits of these accounts is simplicity.

You generally don’t need an estate planning attorney to set up a payable on death account. Instead, you just need to choose a beneficiary and fill out the forms with your bank. You do need to keep in mind, however, that once you name a beneficiary to a payable on death account it can’t be changed. So that’s a potential con.

In terms of convenience, payable on death accounts can make it easy for beneficiaries to access assets quickly after you pass away. The beneficiary may need to show a copy of the death certificate to the bank but otherwise, there’s no lengthy or expensive probate process to go through. But unlike an in trust for account, you can’t specify how the beneficiary should use the assets after you pass away. So you have less control, which could also be seen as a con.

In Trust For vs. Payable On Death: Which Is Better?

Signing estate planning documentsWhether an in trust for account or a payable on death account makes more sense can depend on your financial situation and goals. If your beneficiaries are minor children, for example, then your financial advisor or estate planning attorney may advise you to go with a trust account. This way, you can direct what should happen to the assets in case you pass away before your children are old enough to receive their inheritance.

On the other hand, if you want to ensure that a beneficiary is able to access cash assets in your bank account fairly quickly if you pass away then a payable on death account could be the better option. This way, they’d have money readily available to pay for your final expenses or day-to-day living expenses. Of course, you could always have an in trust for account and a payable on death account at the same time. There’s no estate planning rule that prevents you from doing so.

In that scenario, you may want to talk with your financial advisor about who to designate as beneficiaries for each account and who should act as trustee. Again, your choices may depend on who you want to leave your assets to and whether those individuals are minor children or individuals with special needs who may need someone to manage your estate on their behalf.

The Bottom Line

Understanding in trust for vs. payable on death can help with fine-tuning your estate plan. The distinction isn’t a complicated one but knowing how they work does matter for deciding what happens to your assets after you pass away. If you don’t have an estate plan in place yet, that’s something a financial advisor or estate planning attorney can help with.

Tips for Estate Planning

  • Developing an estate plan is best done with a financial advisor, and finding one doesn’t  have to be difficult. With SmartAsset’s financial advisor matching tool, you can connect with professional advisors in your local area seamlessly. It takes just a few minutes to get your personalized financial advisor recommendations online. If you’re ready, get started now.
  • One way to quickly see how you’re doing in successfully completing your retirement planning is by using our free retirement calculator.
  • There are different types of trust accounts you may consider setting up, in addition to writing a last will and testament. For example, if you want to include charitable giving as part of your estate plan you may consider a charitable remainder trust. Or a special needs trust may be necessary if you need to plan ahead for the lifetime care of a child or other family member that has special needs. Talking with an estate planning attorney can help you compare different trust options and decide which one might be the best fit.

Photo credit: ©iStock.com/kate_sept2004, ©iStock.com/GCShutter, ©iStock.com/DNY59

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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