What is Trust Bank?
Trust Bank is a financial institution that enables the customers of the bank to do transactions among one another, wherein the bank takes up the role of trustee during such transactions and help customers to transfer assets to another customer in accordance with the trust agreement terms and conditions.
A trust bank is a bank that helps in transferring of assets among customers through the means of formal contracts known as trust. The customer who transfers their assets is termed as the settler. The customer that accepts the assets from settler is termed as the beneficiary. The role of the trustee is to monitor and administer the asset transfer on behalf of its customers.
The trust is the formal document or contract document that spells out which party is beneficiary and which party is the settler, the nature, and details of transactions along with the terms and conditions relative to the asset transfers. A trustee performs several functions such as investment management, asset management, and maintains all financial records as well as prepare documents to be used for court accounting. A trust bank generally combines the functions of a depository institution, commercial bankCommercial BankA commercial bank refers to a financial institution that provides various financial solutions to the individual customers or small business clients. It facilitates bank deposits, locker service, loans, checking accounts, and different financial products like savings accounts, bank overdrafts, and certificates of deposits., and that of a trusted company.
- To facilitate transactions of asset transfers.
- To monitor and administer the asset transfers that happen between settlers and the beneficiary.
- To act as a fiduciary or an agent on behalf of the trusts.
- To protect the interests of both the settlor as well as the beneficiary.
During medieval times, Romans had developed the concept of trust. As time progressed, personal trust law was established in England. During medieval times, crusades used to happen, and England used to follow the feudal system. Whenever the English landlord went to do crusades, they established fiduciary trusts that handled the assets in their absence and administered the collection of feudal dues. However, as time progressed, the concept of trust kept on adapting itself, and the sophisticated version was first observed in Japan.
The concept of trust banks emerged in Japan. In the year 1905, the country established its first secured bond trust system. This was achieved by enacting the secured bondSecured BondA secured bond is when the bond's issuer provides a specific asset as collateral and offers a reduced interest rate compared to unsecured bonds. In case of default, the issuer is obligated to transfer the title of the collateralized asset to the bondholder. trust act. The legislation so incorporated facilitated financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. and banks to exchange and trade bonds among one another. In the early 20th century, Japan had an inflow of large capital-intensive projects, and this required the incorporation of a trust bank.
The following year that is in 1906, the Tokyo trust company facilitated the mobilization of funds among small households and businesses. It also facilitated investments in the financial markets. As time progressed, Japan had more than 400 trust banks by 1921 wherein such banks were not regulated by any central authority, rather they were governed by themselves.
In the period of 1922, Japan passed the trust act and trust business act that monitored and governed the business of trusts and provided protection to both settlors and beneficiaries of the trusts. As on present-day, trusts help in the facilitation of intrafamily transfers of wealth and their popularity has now been accepted at global levels. They have risen to the utmost importance in the modern American capital marketsCapital MarketsA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets..
Functions of Trust Bank
- It offers investment management related services.
- They help in formulating and finalizing the trust contract and asset transfer documents.
- They additionally help in designing a pension plan.
- They also provide services of the brokerage in real estate sectors.
- They help in facilitating direct and indirect finance.
- They also provide appraisal services on real estate.
- They help in the administration of the execution of wills.
- They maintain the registry of shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. and play the role of stock transfer agencies.
Trust Bank Account
The trust bank account is basically a checking account which is held by a trust. The trustees may utilize this account to perform several administrative transactions related to the functioning of the trust. The bank account could be used to pay up for the expenses that are incidental in nature and such functions to transfer assets to the beneficiary in the event of the death of the settlor.
This type of account is always insured as per the norms of the Federal Deposit Insurance Corporation. The account may house financial resources gathered from multiple resources. The bank account could be composed of cash, insurance policies, and savings. Settlors itself may open it, or it may be opened by the trustees when settlors die.
While opening the trust bank account, the trustee must adhere to the guidelines and instructions as laid by the agreement of the trust. There could be several ways to fund that account. The settlor may add money to the account in small instalments throughout the Lifecycle of the trust.
The trust account may be funded by the pay-outs that may happen through the maturity of the life insurance policies. The settlor or the designated trustees after the death of the settlor can issue checks on and fund the trust bank accounts. It may be utilized to service the expenses such as finance costs, bills on utilities, insurance premiums, real estate transaction costs, and other miscellaneous expenses.
- It helps in easy transfer of assets from the settlor to the beneficiary.
- They may administer the working of the trusts in the absence of settlors.
- The federal deposit insurance corporation insures the trust bank account.
- It combines conventional banking services along with the functions of administering the trusts.
- They facilitate the appraisals on real estate and provide brokerage services as well.
- They ensure that all transactions happen or get facilitated by the trust deed.
This has been a guide to what is Trust Bank. Here we discuss how it works along with objectives, history, functions, and advantages. You may learn more about financing from the following articles –