Trusts can be useful tools for managing assets and distributing inheritances. As a trustee, you may wonder if you should get a credit card in the name of the trust. Here’s what you need to know about getting a credit card for your trust.
What is a Trust?
A trust is a legal arrangement where one party (the grantor or settlor) transfers assets to be managed by another party (the trustee) for the benefit of third parties (the beneficiaries).
Trusts can be revocable or irrevocable. With a revocable trust, the grantor can modify or terminate the trust. An irrevocable trust cannot be changed once established.
Common types of trusts include:
- Living trust – Created while the grantor is alive. Often used to avoid probate.
- Testamentary trust – Created after death through instructions in a will.
- Charitable trust – Created to donate to a charity.
- Spendthrift trust – Protects assets from beneficiaries’ creditors.
- Special needs trust – Allows assets for a beneficiary with disabilities without affecting government benefits.
The trustee is responsible for managing the assets and distributing them according to the trust terms. The beneficiaries receive income, assets, or other benefits from the trust.
Should You Get a Credit Card for Your Trust?
As a trustee, you may consider getting a credit card in the name of the trust for convenience in managing trust expenses. However, there are pros and cons to weigh.
Pros of a Trust Credit Card
Convenience. A trust credit card provides an easy way to pay trust expenses without withdrawing cash from trust accounts each time. It consolidates spending into one bill.
Rewards. Many credit cards offer rewards like cash back, points, or miles. If you pay off the balance each month, these rewards can benefit the trust at no extra cost.
Credit history. Charging routine expenses to the card and paying on time helps establish a credit history for an irrevocable trust. This can help if the trust later needs loans.
Separate finances. A trust credit card keeps trust transactions separate from the trustee’s personal finances. This helps with recordkeeping and accountability.
Emergencies. A credit card provides quick access to funds in an emergency if trust accounts are temporarily low. The balance can be repaid when new trust income arrives.
Cons of a Trust Credit Card
Difficult to obtain. Most card issuers don’t offer cards to trusts. Those that do have stringent requirements, like high minimum assets and excellent trustee credit.
Higher costs. Interest rates may be higher than personal cards. Cards that allow balances may charge annual fees.
Risk of misuse. Less scrupulous trustees could abuse a trust card for personal gain. Careful oversight is required.
Credit risk. Building debt could put trust assets at risk. The trust still owes the balance if beneficiaries overspend.
Ban on investments. Most trust credit cards prohibit balance transfers or other strategies trusts may use for investments.
Limited rewards. Trust cards tend to have lower limits and offer less lucrative rewards compared to personal cards.
No liability protection. As trustee, you are personally liable for any misuse of trust finances. A trust card does not limit this liability.
How Do Trust Credit Cards Work?
If you decide a credit card is a good option for your trust, here is how the process typically works:
The trustee applies for a trust credit card, providing detailed trust documentation and a personal guarantee. Requirements vary by issuer.
If approved, the card is issued in the name of the trust with the trustee as authorized user. Some issuers also issue cards to beneficiaries.
The trustee adds the card to the trust checking account for automatic payment. This account must have sufficient funds monthly.
Trust expenses can then be charged to the card instead of paying directly from the trust account.
The trustee pays the balance from trust assets when due, typically monthly. Interest accrues on any unpaid balance.
The card can be used repeatedly as long as payments are made on time. Rewards points can accumulate.
If the trust terminates, the credit card must be cancelled and balance paid in full.
Tips for Using a Trust Credit Card Responsibly
If you obtain a credit card for your trust, use care to avoid misuse or overspending:
Review statements monthly and reconcile against receipts. Verify all charges were for legitimate trust expenses.
Create a budget for trust credit card spending and stick to it. Don’t let debt accumulate.
If beneficiaries are authorized users, set clear limits on their spending privileges.
Pay the balance in full each month to avoid interest and fees. Set up autopay if available.
Save rewards for trust expenses rather than personal gain. Consider cash-back instead of travel perks.
Link the card to a trust checking account that contains ample funds for payments.
Understand the risks – as trustee, you are personally responsible for any misuse of funds.
Alternatives to a Trust Credit Card
If a credit card is not right for your situation, consider these options instead:
Debit card – Links directly to the trust checking account. Can be used for purchases without risk of overspending.
Secured credit card – Requires a security deposit and has a low limit but can help build credit.
Bill pay – Many banks offer free bill pay. Checks can be issued directly from the trust account.
Reimbursement – Trustees can pay personally and then reimburse themselves from trust funds.
Joint card – A personal card jointly held with the trust allows responsibly managed credit.
Beneficiary card – Issue a low-limit card in a beneficiary’s name and pay from the trust.
Questions to Consider
Before getting a credit card for your trust, ask yourself:
Will I use this responsibly or could it tempt overspending?
Do I have time for careful account management and oversight?
Will rewards justify the effort required?
Could a debit card or bill pay work just as well?
Am I ready to take personal liability for any misuse?
Will this card benefit the trust more than myself or beneficiaries?
If you can answer these questions satisfactorily, a credit card may be a helpful tool for your trust. Proceed cautiously and keep detailed records to avoid potential pitfalls. But used wisely, a trust credit card can provide convenience and rewards that enhance administration of the trust.
Frequently Asked Questions
Can you get a credit card for a trust?
Yes, it is possible to get a credit card in the name of a trust, but approval standards are stringent. The trust must submit detailed documentation and the trustee provides a personal guarantee. Secured credit cards are more readily available.
Do all trusts need a Tax ID number for a credit card?
Nearly all major issuers require trusts to have an Employer Identification Number (EIN) from the IRS in order to issue a card. The EIN essentially serves as the trust’s tax ID number for the card account.
How do you build trust credit history?
Using a credit card responsibly over time builds a positive credit profile for the trust. Charging routine expenses and paying on time establishes the trust as creditworthy. A secured card can help build initial history.
Are credit card rewards taxable for trusts?
Generally no, as long as rewards are used for trust expenses. If rewarded points are redeemed for personal use by a trustee, that could be considered misuse of trust assets.
Can a beneficiary use a trust credit card?
Some issuers provide cards for both trustees and beneficiaries. However, trustees must monitor usage closely and set clear limits. Beneficiaries should not have unlimited access to avoid misuse.
Who is liable if trust credit card bills are not paid?
The trustee remains personally liable for all trust debts and obligations. If a trust credit card bill is not paid, the creditor can pursue the trustee personally for the unpaid balance.
Can you transfer a balance to a trust credit card?
Most trust credit cards prohibit balance transfers or cash advances since their purpose is to facilitate trust expenses. These activities may be considered breaches of fiduciary duty.
The Bottom Line
A credit card can provide convenience for managing trust expenses but consider risks carefully.
Approval for true trust credit cards is challenging; secured credit cards are easier to obtain.
Trustee oversight is critical – you remain personally liable for all account activity.
Compare costs and rewards against other payment methods before applying.
Use prudently and pay balances in full each month to maximize benefits.
While credit cards require responsibility and effort, they can be useful tools for certain trusts. Weigh the pros and cons carefully to decide if one aligns with your specific trust administration needs.