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Trust Company

Updated on April 25, 2024
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Trust Company?

A trust company is a legal set up established or chosen by the grantor (an individual or entity) to manage assets and wealth for a certain period. It helps affluent investors who do not have the time or experience to manage their assets.

What Is A Trust Company

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Based on handling and distributing assets and estates to the beneficiaries, it can work in the capacity of a trustee, fiduciary, custodian, or agent. They handle equities, funds, real estate, and tangible assets, among other investments.

Key Takeaways

  • A trust company is an organization that is allowed to act as a legal guardian of the assets and wealth in the grantor’s will.
  • It provides additional services, such as managing real estate, investing in stocks, and paying bills associated with the property.
  • They make a profit by charging a percentage of the assets they manage. The larger the pool of assets they administer, the lower the fee percentage.
  • While banks and trust companies often operate close to each other, they are not necessarily the same. As they offer unique services, trust companies focus on managing assets while banks store money and offer loans.

How Does Trust Company Work?

A trust company has existed for many decades, and its popularity has been growing since its emergence. These companies are no longer luxury services available only to the wealthy. Their success stems from the fact that they are effective means of preserving capital.

Hiring such a company can get qualified assistance to manage their assets. Besides administering and managing the trust, these entities will oversee wealth management, asset management, brokerage, and financial planning services.

Alternatively, a trustee company may be established for someone else, such as a child. Since the trust does not have to be administered directly, the child will not have access to it until it reaches a certain age.

Trust companies also have the license to act as fiduciary agents. As a result, one can sign a contract authorizing them to manage their properties and initiate transactions on their behalf. When handling the client’s properties, they are legally obligated to put client interests ahead of their own. It makes the trust company a safe option from a legal standpoint.

Unlike a financial planner, who may only provide guidance and require permission to invest one’s assets, a trusted company would have full authority. It handles one’s wealth on their behalf, making decisions about achieving the best overall return.

One should be careful in their selection based on their jurisdiction. For example, some US states do not allow investing in a trust fund unless the grantor has a certain amount of capital. Similarly, entities may refuse to administer trusts if the grantor does not have enough funds to make it worthwhile.

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Charges

Trust companies profit from charging a percentage of the assets they manage, and the final fee will vary. The amount of money that a trust company charges depends on two factors: the individual rates of the company and the amount of money they manage.

For instance, if a company handles $1 million in assets for its client and charges an annual fee of 1%, the owner will have to pay $10,000 yearly.

The higher the amount of money a company manages, the lower the fees it will charge. It is not unusual to see costs range from 0.25% for a multimillionaire to 1% for one on the lower end of the scale. It is still profitable because a competent company will offer more than 1% in profit if it charges that much in fees.

Services

To understand the proper trust company definition, it is important to learn about the services they offer their clients:

  • Wealth Management: It will take all required steps to preserve wealth and prevent it from being lost to inflation, depression, or bad investments.
  • Asset Management: It creates and applies investment strategies, such as payment of rental property bills, to grow assets most efficiently.
  • Corporate Trust Services: It is common for trust entities owned by commercial banks and includes financial planning services and debt issuance, such as loans.
  • Other Services: It can handle estate settlements, execute a will, provide brokerage services, and help minimize inheritance taxes.

Examples

Let us consider the following examples to understand the concept better:

Example 1

A man named Joe inherited around $5 million from his uncle Melvin. The assets included real estate and equities. However, Joe is not an investor. He does not know how the market works and does not know what to do with all that money.

The solution is to look for a trusted company. Joe researches the market and finds two companies. Company A will administer the assets for an annual fee of 0.5%, and Company B will charge 0.8% of the assets in fees. While Company B charges more fees, he sees that it has a much better track record in the market, which means that the wealth would generate more returns.

Example of Trust Company

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Since Company B is way more efficient than Company A and its services worth the higher fees, Joe picks Company B.

Example 2

Recently, US-based Millennium Trust Company announced exploring multiple services and aiming to add to its services relating to the US retirement facilities. These services might include sales with a value of up to $8 billion. The sales could also be of the debt accumulated. The initiative came following the influence of the rise in the US Federal Reserve interest rates to combat inflation.

As a custodian, the trust company keeps a check of Individual Retirement Accounts (IRA) rollovers, private funds, and other alternative assets, along with having the liberty to make other decisions a guardian could make.

Benefits

When there is a private trust company to take care of the wealth and manage it properly, it becomes easy for businesses and banks to run smoothly without worrying much about their finances. Let us have a quick look at the advantages of having such a company on board:

  • It offers a variety of services to ensure proper investment and wealth management.
  • It prioritizes the interest of the clients.
  • These companies comprise the most skilled and experienced financial experts.

Trust Company Vs Bank

It is important not to confuse a trusted company with a bank. While a bank can own trust companies, their services are fundamentally different.

  • Trust companies often work as a part of a larger commercial bank that will offer specialized services for the entity.
  • Trust companies profit by acting as trustees for investments, real estate, etc. The banks make profits by storing money, facilitating transactions, and offering loans.
  • A trust company cannot lend money to its members. And a bank cannot act as the trustee for a person or entity unless it has the license to do so.
  • A bank offers services usually offered by trust companies. And that is because they either own one or have third-party services provided by one.

Recommended Articles

This has been a guide to what is Trust Company. Here, we explain its benefits, examples, services, differences with the bank, and its charges. You can learn more about it from the following articles –