Quick Answer
In a trust account, a trustee manages assets for beneficiaries under a fiduciary duty. The key exam distinction is revocable trusts, whose assets stay in the grantor's estate because the grantor keeps control, versus irrevocable trusts, whose assets are excluded from the estate because the grantor gives up control, reducing estate taxes.
Trust accounts involve a fiduciary relationship where a trustee manages assets for the benefit of designated beneficiaries. The key exam distinction is between revocable and irrevocable trusts.
Revocable vs. Irrevocable Trusts
| Feature | Revocable Trust | Irrevocable Trust |
|---|---|---|
| Can be changed? | Yes - grantor can modify or revoke at any time | No - cannot be changed once established |
| Estate tax treatment | Assets included in the grantor's estate | Assets generally excluded from the grantor's estate |
| Control | Grantor maintains control during their lifetime | Trustee controls; grantor gives up all rights |
| Primary benefit | Avoids probate while maintaining flexibility | Estate tax reduction through asset removal |
Exam Tip: Gotchas
- Revocable trusts do NOT save on estate taxes. The assets are still included in the grantor's estate. Only irrevocable trusts provide estate tax benefits because the grantor has permanently given up ownership and control.
- The trustee is the fiduciary, not the grantor. The trustee's duty runs to the beneficiaries.
Key Trust Concepts
- The trustee is the fiduciary responsible for managing trust assets according to the trust document
- The grantor (also called settlor) is the person who creates the trust and transfers assets into it
- The beneficiary is the person who benefits from the trust assets
- The trustee has a fiduciary duty to act in the best interest of the beneficiaries; not the grantor or themselves
Broker-Dealer Requirements
- Must obtain and review a copy of the trust document before opening the account
- The trust document defines:
- The trustee's trading authority and any investment restrictions
- Who the beneficiaries are
- How income and principal should be distributed
- Only the trustee (or authorized individuals named in the trust) can direct trades
Exam Tip: Gotchas
- The broker-dealer must review the trust document before opening the account. Without it, the firm cannot verify trading authority or investment restrictions.
What Should You Check on Exam Day?
- Can you explain why revocable trusts do not reduce estate taxes?
- Do you know why irrevocable trusts provide an estate tax benefit?
- Can you state who is the fiduciary in a trust, the trustee or the grantor?
- Do you know what document a broker-dealer must review before opening a trust account?
- Can you explain the difference between a grantor, a trustee, and a beneficiary?