What Is a Trust Company and How Does It Work?

A trust company is a legal entity, usually a corporation, that can act as an agent or trustee on behalf of a trust. They may also offer other services such as estate planning, investment management, and trust administration. 

Trust companies can be either stand-alone legal entities or divisions of commercial banks. 

Trust companies are required by law to be members of the Federal Deposit Insurance Corporation (FDIC). The FDIC insures banks in case they ever go out of business.

How Do Trust Companies Work?

Trust companies typically work with the executor and beneficiaries to help carry out their various responsibilities and include:

Distributing assets to beneficiaries according to the terms set out in the will or trust agreement.

After someone dies, the executor of their estate will need to gather and distribute that person’s assets according to the instructions in their will. A trust company can help with this process by ensuring that everything is done quickly and orderly.

Providing accounting services for all trusts.

A trust company will keep track of all the income and expenses associated with a particular trust. This can help beneficiaries make more informed decisions about their inheritances.

Acting as a custodian for assets held in trust.

A trust company can hold and manage assets on behalf of a trust. This can help reduce the administrative hassle of managing lots of different accounts.

Providing trust-related services to businesses and other organizations in addition to individuals.

When a company sets up a trust for the benefit of its employees or shareholders, it can choose to use a trust company rather than establish its own in-house program. This is one way a trust company can be used as a financial advisor.

Types of Trust Companies

Stand-Alone Trust Companies

A stand-alone trust company is a company that specializes in providing trust services. It may be owned by a bank, but it is not affiliated with any particular financial institution

Commercial Bank Trust Companies

A commercial bank trust company is a division of a commercial bank that provides trust services. These companies are insured by the FDIC, which means that your assets are protected in case the company goes out of business.

Trust Divisions of Investment Banks

A trust division of an investment bank is a division of an investment bank that provides trust services. Investment banks are not FDIC-insured, so your assets may not be protected if the company goes out of business.

How Do You Know If You Need a Trust Company?

You may want to consider using a trust company if:

  • You have lots of different financial accounts scattered across multiple banks, investment firms, and/or brokerage companies.

This can be a hassle to keep track of, and it may be difficult to get a complete picture of your financial situation. A trust company can help you consolidate all your accounts into one place.

  • You want someone to help you manage your estate or investments.

This can be a lot of work, and you may not have the time or knowledge to do it yourself. A trust company can help you make smart investment decisions and ensure that your estate is handled properly after you die.

  • You want to leave assets to beneficiaries in a tax-efficient way.

Trust companies can help you set up trusts that minimize how much tax your beneficiaries have to pay when they receive distributions from the trust.

  • You want someone who is a fiduciary to handle your assets.

A person acting as a fiduciary must always act in the best interest of their clients and cannot put their own personal interests ahead of those of their clients. For example, a trustee who is also the beneficiary of a trust could not use the trust assets to benefit themselves.

  • You want someone who can provide estate planning services.

A trust company can help you create a will, set up trusts, and make other arrangements that will help ensure your estate is handled smoothly after your death.

Benefits of Using a Trust Company

Using a trust company as part of your estate planning process can help avoid some common problems.

Benefits_of_Using_a_Trust_Company

It can minimize disputes.

When more than one person is involved in managing financial affairs, it can be difficult to ensure that everyone’s interests are represented fairly. A trust company can act as a neutral third-party administrator for your estate.

It can offer greater privacy.

Trust companies don’t have to report the details of your accounts to the IRS. This can provide some privacy for your heirs.

It can speed up the distribution of assets.

By using a trust company, you can avoid having to go through the probate process after you die. This can save your beneficiaries a lot of time and hassle.

It can help reduce the risk of identity theft.

If your assets are held in a trust company account, you don’t have to worry about having confidential information stolen – it only needs to be revealed to the people who run your trust. This can help keep your money safe from thieves.

It can be useful for tax planning.

Trust companies can help you plan for taxes in advance, so your executor doesn’t have to scramble at the last minute to pay them.

It may be useful as a fiduciary role.

Depending on what you want to accomplish with your trust, it may be beneficial to hire a professional who is legally able to make decisions on your behalf. 

For example, if you have a very young child and don’t want them to have access to the money in their trust until they’re older, it may be helpful to give that responsibility to a professional.

Trust companies are governed by state and federal laws. They're usually required to be licensed and registered with the states in which they do business.
Trust companies generally have $250,000 or more in liability coverage like other financial institutions.
Services provided by a trust company can vary. Some services include estate planning and administration (for example, the creation of wills or trusts), financial management (helping you underwrite or sell stock options), insurance policies/benefits management, and investor services.
A trust company is a specialized financial institution that provides fiduciary services. A bank is a more general term that can refer to either a commercial bank that deals in loans and deposits or a savings and loan association specializing in home mortgages.
A trustee is a person who acts as the fiduciary for a trust. This may be an individual or institution, such as a trust company.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.