Bank Trust Departments: Everything You Need to Know

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Trust funds are a time-honored method of ensuring your money passes on to your children (or other loved ones of your choosing). Even though there still exists the stigma that trust funds are only for the super wealthy, these tools are for anyone who has money or assets they would like to pass on in a secure manner and with proper care.

Nearly every small town in the U.S. has a bank with a trust department. You can use trust funds to build great wealth, even if you start small. If you've been thinking about creating a trust fund for your family's future, or think you might want to one day, you'll want to learn about how banks handle these tools.

Key Takeaways

  • Bank trust departments offer two main types of service: trust administration and investment management. 
  • Trust administration involves distributing funds and any trust assets in a manner that adheres to the terms of the trust. 
  • Investment management services invest and divest assets according to the trust documents.

Bank Trust Departments in Brief

Bank trust departments are among the oldest and most well-founded areas of traditional banking. They work with all types of people who want to form trusts to meet their bequest wishes.

Who Do They Serve?

As long as you have the money to form a trust and a person or people (or other entity) you'd like to leave it to, you can find help from a bank trust department—for a fee of course. The type of clients seeking this service run the gamut. They may include a wealthy small business owner in town who wants to put aside money for their grandchildren to go to college, or children who lost their parents and now have a large life insurance payout, or an adult who received a legal cash award following a car crash, just to name a few examples.

What Services Do They Offer?

Bank trust departments take on many roles that relate to the creation, upkeep, and distribution of trusts, at all stages. Suppose your great great uncle bought a block of Johnson & Johnson shares and they remain in a trust until a future date; the bank trustee can assure that the stock is still paying dividends, while never allowing the grantees to sell or borrow against the shares. Or, they might work to assure that a second spouse is allowed to remain in the house after the death of the one partner, but that the house itself goes to the children when the second wife dies, even if they later marry again. These are two complex, but not unheard of, examples.

Most banks will offer a range of trust services that fall into two main groups: trust administration, and investment management.

Trust Administration Services

When you hire a bank for trust administration services, the grantor or trust itself dictates the details, and so the contract will vary from case to case. For most trusts, the main jobs of the trust administrator are to collect the dividends, make sure they get paid to the right beneficiaries, and file the tax returns. There are few, if any, choices about capital allocation involved, so there is no need for the role to be taken on by an agent with advanced knowledge or access; an admin works just fine.

Serve as Trustee

One common service they perform is to serve as a sole trustee, or co-trustee along with a trusted family member or friend. This means they help to make choices about the trust and take actions to comply with the governing trust rules. The fee to take on this high stakes role can be a set dollar figure or a percent of the amount of the trust, and is often many thousand dollars per year.

Distribute Assets

Trust administration departments also handle disbursing checks and property per the terms of the trust. They must make sure all beneficiaries receive the assets the grantor wanted in the way they wanted. When creating a trust, the grantor can pass cash along without limits on how it is spent, but it's quite common to mandate the way they'd like the money spent. This might include paying household bills, sending a check to a college for tuition, buying a house, cash transfers, or any other lawful transaction.

Assume Legal Duties

Bank trust administrators can also handle securities custody and reporting. If a trust is set up that way, even third party brokers have to hand over the stock certificates, title deeds, bonds, and other assets to the bank to keep safe in the vault. When acting as trustee, banks can file both state and federal taxes on behalf of a trust, as well as extend their own insurance to make sure that trust assets are covered in the event of a loss.

Before you open a trust, male sure you know how it will be taxed. There are many types of trusts and the tax code does not treat them all the same way. Some may avoid taxes by pushing them to the future, while others receive a heavy tax burden.

Niche Trusts

Hiring a bank to administer your trust might make sense if you what you plan to leave behind is a very unique type of asset, or if you want it to remain mostly untouched. The town of Quincy, Florida is such a case. The local bank has roughly 50% of its trust assets in shares of Coca Cola because the little town once had more Coke millionaires per capita than anywhere else on the planet.

If you, by copyright law or bequest, are the owner of any intellectual property such as a patent for a device, or the rights to a song, you could set up a trust to manage the income. You could appoint a trustee at the bank to collect your royalties and then pay them out based on your written rules. That way, the people who might receive the bequest down the line could never sell the rights, lose them in a high stakes game of poker, or squander them away.

Investment Management Services

In some cases, trust fund administration services aren't enough. You might want the bank to invest on behalf of the trust as well. When you contract a bank to provide investment management services, it will invest and divest the trust assets per those rules of the trust that spell out the grantor's wishes and restrictions.

When acting in the role of investment management, most bank trust departments will stick to traditional asset classes such as stocks, bonds, real estate, cash, and private businesses.

For example, if you were to leave $500,000 in trust for your children with the intent to grow wealth slowly over time, the investment agent for might build a diverse group of holdings that include of gilt-edged bonds, blue-chip stocks, real-estate investment trusts, or Treasury bills.

Handling Specialty Assets

Some bank trust departments focus on certain types of assets, or tout their savvy in niche areas. For example, in Texas, it is quite common for a trust to include cattle or oil rights. In Iowa, an full 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 return they could achieve.

Standards of Care

Investment management services provided by bank trust departments are often very conservative compared to those of a standard brokerage account, because the advisors are acting as fiduciaries. They must adhere to the so-called "Prudent Person Rule," or in other words, treat the funds as if they were their own (given they are a prudent person). The duty of care that a trustee has stems from a court case from 1830 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."

Due to this high standard that trustees must meet, very few are willing to invest with much risk when dealing with trust assets. Losing funds would be too high of a liability. If the beneficiaries of a losing trust decide to sue the trustee, a judge is likely to frown upon a trustee who put the trust's assets at too much risk.

How to Hire a Bank Trust Department

If you would like to learn more about the a bank trust department to handle your trust, decide on the features you want and the price you're willing to spend. Here are a few questions to think about, but this is just a start:

  • Will you appoint your own trustee, or will you need to hire one from the bank (and pay their fee)?
  • Will you need help drafting rules?
  • Do you want to invest your assets, or simply keep them safe?
  • Are your assets standard or of a niche type?
  • Do you have a complex set of wishes that may cause dispute in the future?

Next you'll need to contact your bank, or other institution of choice. Tell them about the service you need, and ask for their fee schedule. These can often be found online. Using it, you should be able to get a rough notion of how much money you'd need to place in trust to make sure a given bank is worth the cost.