Bank Trust Departments - Everything You Need to Know

Trust funds aren't just for the affluent. You'll find bank trust departments in even the smallest towns in America. Learn what a bank trust department does and how you can use it to your benefit.
••• Pgiam / Getty Images

Trust funds are a time-honored method of ensuring your money passes on to your descendants. These financial instruments are available to anyone that has money or assets they would like to pass on. However, there still exists the idea that trusts are only for the ultra-wealthy.

Nearly every small town in America has a bank with a trust department. You can use trusts to build significant wealth, even if you start from modest beginnings. You might one day consider creating a trust for your family's future. If you do decide on using a trust, you should develop an understanding of the bank departments that handle these instruments.

A Brief Overview of Bank Trust Departments

Bank trust departments are among the oldest and most established areas of traditional banking. The clients of a bank trust department can include a successful small business owner in town who wants to put aside money for his grandchildren to go to college, children who lost their parents and now have a large life insurance settlement, or an incapacitated adult who was rewarded a settlement following an accident.

Trust departments can be responsible for making sure a block of Johnson & Johnson shares bought by Great Aunt Betty a few generations ago is still paying dividends to the youngest family members, while never allowing them to sell the position or borrow against the shares. They can work to guarantee a second wife is allowed to remain in the house after the death of her husband, but that the house itself goes to the children from a first marriage when the second wife dies, even if she later remarries or loses her mind.

Typically, a bank will offer services under two big umbrellas—trust administration, and investment management.

Trust Administration Services

When you hire a bank trust department for trust administration services, the specifics of the contract will vary from case to case. One administration service generally available is that the bank trust department will serve as a sole trustee or co-trustee along with a trusted family member or friend when determining decisions in accordance with the governing trust documents. Often, this fee is several thousand dollars per year.

Trust administration departments also handle disbursing checks and property in accordance with the trust terms, making sure the beneficiaries receive the assets the grantor wanted in the way they wanted. This can include paying household bills, sending a check to a university for tuition, buying a house, cash transfers, or any other lawful transaction.

Securities custody and reporting can be handled by the administrators so that even third-party investment managers have to hand over the stock certificates, title deeds, bonds, and other assets to the bank to keep safely in the vault. Both state and federal taxes can be filed, and trust insurance administered to guarantee trust assets are covered in the event of a loss.

Other Trust Administration Services

Trust administration might make sense for a person who wants to leave behind a specific property or asset and have it remain mostly untouched. Consider the town of Quincy, Florida. The local bank has roughly 50% of its trust assets in shares of The Coca-Cola Company because the little community once had more Coke millionaires per capita than anywhere else on the planet.

For most trusts, the primary job of the trust administrator is to collect the dividends, make sure they get paid to the right beneficiaries and file the tax returns. There are few, if any, capital allocation decisions involved so an administration relationship is appropriate.

If you, by copyright law, are the owner of intellectual property such as a patent for a device, trust administration arrangements might involve the trustee at the bank collecting your royalties and then paying them out based on your written instructions. That way, your descendants could never sell the copyright, lose it in a high stakes game of poker, or squander it unnecessarily.

Investment Management Services

Sometimes, trust fund administration services aren't enough. You might want the department to make investment decisions for the trust. When you contract a bank trust department to provide investment management services, it will handle the trust assets, investing and divesting assets according to the trust documents that spell out the grantor's wishes and restrictions.

A majority of bank trust departments will stick to investments in traditional asset classes such as stocks, bonds, real estate, cash, and private businesses. If you were to leave $500,000 in trust for your children from a life insurance policy, the investment management staff might build a diversified collection of holdings meant to permit a safe withdrawal rate; built from gilt-edged bonds, blue-chip stocks, real-estate investment trusts, or Treasury bills.

Additional Trust Management Services

Some bank trust departments specialize in certain types of assets, with experience in particular areas. For example, in Texas, it might not be unusual for a trust to include cattle or oil rights. In Iowa, an entire working farm might be put in trust until a minor comes of age—the bank would handle the contracts for the sharecroppers to earn the best productive return achievable. You might also hire specialty money management firms for the investment management contract, such as those specializing in value investing.

Investment management services provided by bank trust departments are often very conservative compared to a typical management arrangement on a regular brokerage account because the advisors are acting as fiduciaries. Therefore, they must adhere to the so-called "Prudent Man Rule", which stems from a nearly 200-year-old court case in Massachusetts known as Harvard College v. Armory. That ruling requires trustees:

"...to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."

Given how much discretion a judge would have if the beneficiaries sued trustees for losses, few corporate trustees are willing to make risky investments that come close to the line when dealing with assets held in trust. It's too much of a liability.

How to Hire a Bank Trust Department

If you are interested in learning more about the pricing of a specific bank trust department, you need to contact the institution and ask for their fee schedule. These can usually be found online. Using it, you should be able to get a rough idea of how much money you'd need in trust to make a particular institution cost-effective.

Article Sources

  1. Federal Deposit Insurance Corporation. "Trust Examination Manual." Appendix C. Accessed Jan. 31, 2020.