Trust funds are a tried-and-true way to ensure that your money is passed on to your children (or other loved ones of your choosing). Even while there is still a perception that trust funds are only for the wealthy, these tools are available to everyone with money or assets they want to pass on in a secure and responsible manner.
A bank with a trust department can be found in almost every small town in the United States. Even if you start small, trust funds can help you develop significant wealth. If you’ve been considering setting up a trust fund for your family’s future, or believe you could in the future, you’ll want to understand how banks manage these instruments.
Important Points to Remember
- Trust administration and investment management are the two main services provided by bank trust departments.
- Trust administration entails disbursing money and any trust assets in accordance with the trust’s terms.
- According to the trust documents, investment management services invest and dispose of assets.
Brief Descriptions of Bank Trust Departments
Bank trust departments are one of traditional banking’s oldest and most well-established divisions. They work with a wide range of clients who want to establish trusts in order to fulfill their bequest desires.
Who do they work for?
You can get advice from a bank trust department—for a fee—if you have the money to set up a trust and a person or people (or other entity) to whom you’d like to leave it. The types of clients who want this service are diverse. To name a few, they could be a wealthy small business owner in town who wishes to set money aside for their grandchildren’s college education; youngsters who lost their parents and now have a huge life insurance payout; or an adult who obtained a legal cash award following a vehicle accident.
What Kinds of Services Do They Provide?
At all phases, bank trust departments play a variety of functions related to the creation, maintenance, and distribution of trusts. Assume your great-great uncle purchased a block of Johnson & Johnson stock, which is held in trust until a later date. The bank trustee can ensure that the stock continues to pay dividends while preventing grantees from selling or borrowing against the stock. Alternatively, they could seek to ensure that a second spouse is allowed to stay in the house after the first spouse dies but that the house passes to the children when the second wife dies, even if they later marry again. These are two complicated but not unheard-of scenarios.
Most banks provide a variety of trust services, which are divided into two categories: trust administration and investment management.
Services for Trust Administration
The grantor or trust itself sets the terms when you choose a bank for trust administration services, so the contract will differ from instance to instance. The major responsibilities of the trust administrator in most trusts are to collect dividends, ensure that they are distributed to the correct beneficiaries, and file tax filings. Since there aren’t many, if any, options for allocating capital, the job doesn’t need an agent with a lot of knowledge or access; an administrator will do.
Become a Trustee
Serving as a sole trustee or co-trustee with a trusted family member or friend is a frequent service they provide. This means they assist in trust decision-making and action in accordance with the trust’s governing rules. The charge for taking on this high-stakes position might be a fixed amount or a percentage of the trust’s value, and it’s usually in the thousands of dollars per year.
Assets should be distributed
Trust administration departments are also in charge of disbursing checks and property in accordance with the trust’s provisions. They must ensure that all beneficiaries receive the assets that the grantor desired in the manner that the grantor desired. When establishing a trust, the grantor has complete control over how the money is used. Even so, it’s not uncommon for them to specify how the money should be used. Paying household bills, sending a check to a college for tuition, buying a house, cash transfers, and any other legitimate transaction fall under this category.
Assume Legal Obligations
Securities custody and reporting can also be handled by bank trust administrators. Even third-party brokers must hand over stock certificates, title deeds, bonds, and other assets to the bank to be kept safe in the vault if a trust is set up in this manner. Banks can be trustees for trusts and file state and federal taxes on their behalf. They can also offer their own insurance to protect trust assets in case of a loss.
Make sure you understand how a trust will be taxed before you create one. There are several different forms of trust, and the tax legislation does not treat them all equally. Some people might be able to avoid taxes by putting them off, while others might have to pay a lot in taxes.
Trusts with a specific focus
If what you plan to leave behind is a particular form of asset or if you want it to remain relatively intact, hiring a bank to run your trust can make sense. The town of Quincy, Florida, is an example of this. Because the small town once had more Coca-Cola millionaires per capita than anywhere on earth, the local bank owns almost half of its trust assets in Coca-Cola stock.
You could set up a trust to manage the revenue if you own any intellectual property, such as a patent for a gadget or the rights to a song, due to copyright laws or a bequest. You might appoint a bank trustee to collect royalties and then distribute them according to your specified regulations. In that manner, future beneficiaries of the bequest will never be able to sell the rights, lose them in a high-stakes poker game, or squander them.
Services for Investment Management
Trust fund administration services aren’t always sufficient. You can also want the bank to invest on the trust’s behalf. When you hire a bank to handle your investments, the bank will invest and sell trust assets according to the trust’s rules, which spell out the grantor’s wishes and constraints.
Most bank trust departments will stick to traditional asset classes like equities, bonds, real estate, cash, and private enterprises while functioning as investment managers.
If you were to leave $500,000 in trust for your children with the goal of gradually increasing their wealth, the investment agent might put together a varied portfolio of gilt-edged bonds, blue chip stocks, real estate investment trusts, or Treasury bills, for example.
Taking Care of Specialty Assets
Some bank trust departments specialize in specific asset types or boast their expertise in specific fields. In Texas, for instance, it is common for a trust to incorporate cattle or oil rights. In Iowa, a fully running farm could be put in trust until a minor turned 18. The bank would handle the sharecroppers’ contracts to make sure they got the most money possible.
Because the advisors are acting as fiduciaries, the investment management services supplied by bank trust departments are frequently more conservative than those provided by a traditional brokerage account. They must follow the “Prudent Person Rule,” which means they must treat the funds as if they were their own (given they are a prudent person). Harvard College v. Armory, a court case from 1830, established the trustee’s duty of care. Trustees must comply with the following requirements as a result of this ruling:
... observe how men of prudence, discretion, and intelligence manage their own affairs, not in terms of speculation, but in terms of the long-term disposition of their finances, taking into account both the likely income and the likely safety of the capital to be invested. “
Due to the high standard that trustees must satisfy, only a small percentage of trustees are willing to take significant risks while dealing with trust assets. It would be far too risky to lose money. A judge is likely to frown upon a trustee who puts the trust’s assets in too much danger if the beneficiaries of a losing trust decide to sue the trustee.
What to Look for When Hiring a Bank Trust Department
Decide on the services you want and the price you’re willing to pay if you want to learn more about a bank trust department to handle your trust. Here are a few questions to consider, but keep in mind that this is just the beginning:
- Will you pick your own trustee or will you have to hire (and pay) one from the bank?
- Will you require assistance in developing rules?
- Do you want to invest your money or just keep it in a secure place?
- Are your assets general or specific in nature?
- Do you have a complicated wish list that could lead to a future conflict?
The next step is to contact your bank or other preferred financial institution. Inform them of the service you require and request a cost schedule. These are frequently available on the internet. You should be able to get a good idea of how much money you’d need to put into a trust by using it to see if a particular bank is worth the money.