What it means
A trust company's core job is to act as a fiduciary, meaning it has a legal duty to put the client's interests ahead of its own. It can serve as the trustee of a family trust, the executor of an estate, the custodian (safekeeper) of investments or the agent for a company's bond issue.
Typical services include managing investments for beneficiaries, holding and distributing trust assets, preparing tax returns for trusts, administering retirement plans and acting as the trustee under bond agreements. Families use trust companies when they want continuity, as a company does not retire, fall ill or die.
Trust companies are regulated, usually by a state banking department or national banking regulator, and must meet capital and conduct standards. Some are independent firms, some are part of a bank or wealth manager, and some are set up by families to look after their own affairs, known as private trust companies.
They normally charge fees based on the value of assets managed, with an additional fee for services such as tax work or property management. Minimum account sizes are common, so smaller families may find independent trust companies less accessible than those inside a large bank.
The fee is typically a small percentage of assets a year and is often lower per dollar for larger accounts. When choosing one, people should look at its regulation, fees, investment approach and how it deals with conflicts of interest.
The key nuance is that a trust company is not always a bank, so deposits held there may not carry the same insurance, and it is worth asking how client assets are held and protected. In some countries a trust company may also provide corporate services, such as company formation, registered offices and fund administration.
These offshore and onshore businesses are regulated differently, so the rules that apply depend on where the company is licensed.
In practice
Real-world examples.
Example
A widow asks a trust company to serve as executor of her husband's estate. The company collects his assets, pays his debts and taxes, and distributes the rest to the heirs according to his will.
Example
A manufacturer issues $100,000,000 of bonds and appoints a trust company as the bond trustee. The company monitors the issuer's compliance with the bond terms and acts for the investors if there is a default.
Example
A wealthy family sets up a private trust company to manage the family's assets across three generations. The trust company keeps records, pays beneficiaries and holds family meetings on investment policy. A licensed adviser sits on its board to keep the process professional.
Formula
Calculation
Annual fee = Assets under management x Fee rate
A trust company manages a family trust with $20,000,000 of assets and charges a fee of 0.75% a year. Annual fee = 20,000,000 x 0.0075 = $150,000, or $12,500 a month.
If the trust's investments earn 6% before fees, they produce 20,000,000 x 0.06 = $1,200,000. After the fee the net return is 1,200,000 - 150,000 = $1,050,000, which is 1,050,000 / 20,000,000 = 5.25% of the assets.Case study
Seen in the real world.
Ashgrove Trust is an illustrative, fictional trust company that was asked to look after a $6,000,000 trust for a young beneficiary. The trust deed required it to pay for her education and release the remainder at age 30.
The company's team set an investment policy with a mix of shares and bonds, and a cash reserve for the next two years of school fees. Each year it sent a report to the beneficiary's guardian showing the value, income, fees and distributions.
The illustrative lesson is that the company's value was in discipline and continuity, which is difficult for an individual to match over many years. When the original guardian moved abroad, the trust carried on unchanged, and the beneficiary received her capital at 30 with the education bills paid. The board of Ashgrove reviewed the file annually to confirm that every distribution matched the deed.
Watch out
Common mistakes.
- Assuming a trust company is the same as a bank, when it may not take deposits or offer deposit insurance.
- Not asking how the company charges, when fees can include asset-based, transaction and administration charges.
- Handing over control without reading the trust document, when its terms decide what the company can and cannot do.
Questions
People also ask.
What does a trust company do?
It acts as a trustee, executor, custodian or agent, holding and managing assets for the benefit of others.
How is a trust company paid?
Usually through a percentage fee on assets, with extra fees for specific services such as tax returns.
Why use a trust company rather than a family member?
A company offers continuity, professional skill and independence, which can help avoid family disputes, though it costs more and may be less flexible about personal circumstances.
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