What is a Trust Company?

Trust companies benefit affluent investors who do not have the time or experience to manage their assets. They will handle equities, funds, real estate, and tangible assetsTangible AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read more, 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?

Trust companies have existed for many decades, and their popularity has grown. 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.

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 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. read more, 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.read more 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 fundTrust FundA trust fund is a legal entity formed as part of an estate planning tool which holds a grantor’s assets and duly distributes them to the inheritors after the grantor passes away.read more unless the grantor has a certain amount of capital. Similarly, entities may refuse to administer trusts if the grantorGrantorA grantor refers to a person who has created a trust to manage his/her assets and legally transfer them to the beneficiary to avoid inheritance issues. For instance, a grantor could be a father who has created a trust to control and manage his real estate property, money, and investments and transfer them to his family upon his demise. Since it is a legal process, management, taxation, and transfer terms are specified in the agreement or a deed.read more 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 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.

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 strategiesInvestment StrategiesInvestment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus amount, holding period, retirement age, industry of choice, and so on.read more, 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.read more 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.

Example

A man named Joe inherited 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.read more. 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.

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 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 trusteesTrusteesA trustee is an individual or institution with legal authority to manage the trust property and assets on behalf of the settlor to benefit the beneficiary. They have complete control over the trust assets until they get transferred to the beneficiary. The administration of assets goes as per the directions of the trust.
  • read more 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 a trusted company is & its Definition. Here we discuss how it works along with an example, charges, services, and differences. You can learn more about it from the following articles –

  • Trust BankTrust BankTrust 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.read moreTrust AccountTrust AccountThe purpose of a trust account is to encapsulate a specific asset or set of assets held in a separate capacity to be managed accordingly for specified beneficiaries. This account can be used for a variety of purposes, ranging from paying off mortgages and insurance premiums on behalf of customers to handling an inherited real estate property.read moreInvestment TrustInvestment TrustAn investment trust is a publicly traded financial institution that operates as a closed-end fund (CEF) and invests in shares or financial assets on behalf of its investors or other organizations. The value of the amount of money invested in an investment trust is dependent by the demand and supply for the invested share or financial asset, as well as the underlying value of the assets owned.read more