What is a Trust Company?
A trust company is a legal arrangement set up or chosen by the grantor (an individual or entity) to manage assets and wealth for a certain period. Based on the purpose of handling and distributing assets and estates to the beneficiaries, it can work in the capacity of a trustee, fiduciary, custodian, or agent.
Trust companies benefit affluent investors who do not have the time or experience to manage their assets themselves. They will handle assets such as equities, funds, real estate, tangible assets, among other investments.
- A trust company is an organization that is allowed to act as a legal guardian of the assets and wealth at 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 will be.
- 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?
Trust companies have existed in some form for many decades, and their popularity has grown over time. They are no longer a luxury service available only to the wealthy. Their success stems from the fact that they are effective means of preserving capital.
By hiring such a company, one can get qualified assistance to manage their assets. Besides administering and managing the trust, these entities will oversee wealth management, asset managementAsset ManagementAsset management is a method of managing funds and investing in both traditional and specialized products in order to generate returns consistent with the investor's risk tolerance. , brokerage, and financial planningFinancial PlanningFinancial planning is a structured approach to understanding your current and future financial goals and then taking the necessary measures to accomplish them. Because this does not begin and end in a specific time frame, it is referred to as an ongoing process. 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 requires permission to invest one’s assets, a trust company would have full authority to do so. 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 also refuse to administer trusts if the grantor does not have enough funds to make it worthwhile.
How Much Does a Trust Company Charge?
Trust companies profit from charging a percentage of the assets they manage, and the final fee will vary. The actual 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 every year.
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 the 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.
What Services Does a Trust Company Provide?
- Wealth Management: It will take all required steps to preserve wealth and prevent it from being lost to inflation, depressions, 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 banksCommercial BanksA 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 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.
A man named Joe received an inheritance of around $5 million from his uncle Melvin. The assets included real estate and equitiesEquitiesEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet.. 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 trust 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.
Since Company B is way more efficient than Company A and its services worth the higher fees, Joe picks Company B.
Trust Company vs Bank
It is important not to confuse a trust company with a bank. While a bank can own trust companies, the services they provide 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 get their 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.
This has been a guide to What is Trust Company & its Definition. Here we discuss how does it work along with an example, charges, services, and differences. You can learn more about from the following articles –