A fiduciary account holds money on behalf of someone else
A fiduciary account is a bank account opened and controlled by one person (the fiduciary) for the benefit of another person (the beneficiary). The fiduciary has a legal duty to manage the money in that account solely for the beneficiary's benefit, not their own. The bank treats the account differently from a regular personal account because the money inside legally belongs to the beneficiary, even though the fiduciary's name is on the account and they make the transactions.
The most common fiduciary accounts are guardianship accounts (for minors or incapacitated adults), conservatorship accounts (for managing someone's finances when they cannot), and trust accounts (where a trustee holds assets for beneficiaries). In each case, the fiduciary cannot withdraw money for personal use—only for the beneficiary's needs, as defined by law or the trust document.
Banks require fiduciaries to prove their authority before opening the account. This might mean showing a court order appointing you as guardian, a power of attorney document, or a trust agreement. The bank will also flag the account as fiduciary so that transactions are tracked and the account cannot be treated as the fiduciary's personal money.
Key Takeaways
- A fiduciary account is opened by one person to hold and manage money for another person's benefit, and the fiduciary must use the funds only for the beneficiary's needs.
- Banks require legal proof of your authority—such as a guardianship order, power of attorney, or trust document—before opening a fiduciary account.
- Fiduciary accounts are held in trust and are separate from the fiduciary's personal finances, so creditors cannot seize the money to pay the fiduciary's debts.
- The fiduciary must keep records of all deposits and withdrawals and may need to report to a court or other authority about how the money was spent.
- If the fiduciary misuses the money, they can face criminal charges, civil lawsuits, and removal from their role.
Who can be a fiduciary and what authority they need
A fiduciary can be a parent, relative, professional guardian, trustee, attorney-in-fact, or any person or organization appointed by a court or named in a legal document. The type of fiduciary depends on the situation: a parent is the natural guardian of a minor child; a court appoints a guardian for an adult who cannot manage their own affairs; a person named in a will or trust becomes a trustee; and someone given a power of attorney document becomes an attorney-in-fact.
To open a fiduciary account, you must bring proof of your authority to the bank. For guardianship, this is usually a court order signed by a judge. For a power of attorney, you bring the signed power of attorney document itself. For a trust, you bring a copy of the trust agreement or a certification from the trustee. Some banks also require a tax identification number for the account, which may be the beneficiary's Social Security number or an employer identification number (EIN) if the beneficiary is a business entity or estate.
The bank will verify your documents and may contact the court or attorney who issued them. Once approved, the bank will set up the account with language showing it is held "in trust for" or "as fiduciary for" the beneficiary's name. This designation is critical—it tells the bank, the IRS, and any creditor that the money is not yours to keep.
How money moves in and out of a fiduciary account
Deposits into a fiduciary account come from the beneficiary's own sources: inheritance, wages, Social Security, disability payments, insurance proceeds, or gifts from family. The fiduciary deposits this money into the account and holds it there. Withdrawals must be for the beneficiary's benefit—rent, medical bills, food, education, therapy, or other legitimate needs as defined by law or the trust document.
The fiduciary cannot withdraw money for personal use, even if they are caring for the beneficiary at their own expense. If a parent spends their own money on a child's care, they cannot reimburse themselves from the child's fiduciary account without court permission or clear language in a trust allowing it. Some guardianship laws do allow a guardian to be paid a fee for their work, but this must be approved by the court and documented.
Transactions in a fiduciary account are typically slower than in a personal account because the bank may require additional documentation. A check written from the account might need the fiduciary's signature plus a second signature or approval. Wire transfers may require proof that the money is being spent for the beneficiary's benefit. Some banks will not allow the fiduciary to use a debit card or online transfers without restrictions.
Fiduciary accounts and creditor protection
Money in a fiduciary account is protected from the fiduciary's personal creditors. If you are a guardian with credit card debt or a lawsuit against you, a creditor cannot seize the money in the fiduciary account because it is not legally yours—it belongs to the beneficiary. This protection is one of the main reasons courts and families use fiduciary accounts instead of having the fiduciary simply hold the money in their personal account.
However, the money is not protected from the beneficiary's own creditors. If the beneficiary owes child support, has unpaid medical bills, or faces a judgment, those creditors may be able to reach the fiduciary account. The beneficiary's creditors can file a claim against the account, and the fiduciary may be required to turn over funds to satisfy the debt.
The account is also not protected from the government if the beneficiary receives means-tested benefits like Supplemental Security Income (SSI) or Medicaid. If the account balance exceeds the resource limit (usually $2,000 for SSI), the beneficiary may lose benefits. Fiduciaries managing money for beneficiaries on SSI must be careful to keep the account balance below the limit or risk disqualifying the beneficiary.
Recordkeeping and reporting requirements
Fiduciaries must keep detailed records of every deposit and withdrawal from the account. This includes bank statements, receipts, invoices, and documentation of what the money was spent on. If you withdraw $500 for the beneficiary's medical care, keep the doctor's bill or receipt. If you pay rent, keep a copy of the lease and the rent receipt. These records protect you by showing that you spent the money properly and in the beneficiary's interest.
Depending on the type of fiduciary account, you may need to file reports with a court, the Social Security Administration, or a trust administrator. Guardians often must file annual accountings with the court showing all income and expenses. Trustees must provide beneficiaries with statements and may need to file tax returns for the trust. Attorneys-in-fact under a power of attorney may need to report to the person who granted the power or to a court if the person becomes incapacitated.
The IRS also requires fiduciary accounts to file tax returns if the account earns income. Interest earned in the account is taxable to the beneficiary, not the fiduciary. If the account earns more than a small amount of interest, a Form 1041 (fiduciary income tax return) must be filed, and the beneficiary may owe taxes on that income.
What happens if a fiduciary misuses the account
If a fiduciary withdraws money for personal use, spends it recklessly, or fails to account for it, they can face serious consequences. A beneficiary, family member, or court can sue the fiduciary for breach of fiduciary duty and demand repayment with interest. The fiduciary may be ordered to pay the beneficiary's legal fees as well. In cases of large theft or fraud, the fiduciary can be prosecuted criminally for embezzlement or theft.
A court can also remove a fiduciary from their role if they misuse the account. This means they lose the authority to manage the beneficiary's money, and a new fiduciary is appointed. Removal is a public record and can damage a person's reputation and ability to serve as a fiduciary in the future.
Some fiduciaries carry fiduciary liability insurance to protect themselves against claims of mismanagement, even if the claim is false. This insurance is common for professional guardians and trustees managing large estates. For family members serving as guardians or trustees, the cost may not be worth it unless the account is substantial.
Fiduciary accounts versus joint accounts and payable-on-death accounts
A fiduciary account is different from a joint account, where two people both own the money and can both withdraw it. In a joint account, each owner has equal rights to the money. In a fiduciary account, only the fiduciary can withdraw, and only for the beneficiary's benefit. A joint account offers no protection from creditors and can cause problems if one owner dies or becomes incapacitated.
A fiduciary account is also different from a payable-on-death (POD) account, where you name a beneficiary to receive the money after you die. A POD account is your personal account during your lifetime; the beneficiary has no access until you pass away. A fiduciary account is set up specifically to hold money for someone else during their lifetime, and the fiduciary manages it on their behalf.
For protecting money for a minor or incapacitated adult, a fiduciary account is usually the safest choice because it is court-supervised (in the case of guardianship) or legally documented (in the case of a trust), and it keeps the money separate from the fiduciary's personal finances.
Frequently Asked Questions
Can a fiduciary withdraw money from the account for their own expenses?
No, not without court permission or clear language in a trust document allowing it. A fiduciary must spend the money only for the beneficiary's benefit. If a fiduciary has spent their own money caring for the beneficiary, they can petition the court for reimbursement, but they cannot simply take money from the account.
What happens to a fiduciary account when the beneficiary turns 18?
It depends on the type of account. A guardianship account must be closed or transferred when the guardian's authority ends, usually at age 18. A trust account continues according to the terms of the trust, which may give the beneficiary control at 18 or may hold the money until they are older. The fiduciary should consult the trust document or ask the court what to do.
Can a fiduciary account earn interest?
Yes, and the interest is taxable to the beneficiary. The fiduciary should choose an account that earns interest if the balance is large enough to make it worthwhile. However, if the beneficiary receives SSI, keeping too much money in the account can disqualify them from benefits, so the fiduciary must balance earning interest against the risk of exceeding the resource limit.
What if the beneficiary disagrees with how the fiduciary is spending the money?
The beneficiary or a family member can file a complaint with the court (for guardianship accounts) or sue the fiduciary for breach of duty. The court can order the fiduciary to account for the money and may remove them if they have acted improperly. If the beneficiary is an adult, they may also have the right to challenge the fiduciary's decisions directly.
Do I need a lawyer to set up a fiduciary account?
Not always. For a guardianship account, the court appoints the guardian and the bank handles the account setup. For a trust, a lawyer usually drafts the trust document, but the trustee can open the account themselves by bringing the trust agreement to the bank. For a power of attorney, the document can be drafted by a lawyer or, in some states, using a form. Consulting a lawyer is wise if the account is large or complex.