If you are considering adding a trust to your estate plan, one of the most important decisions you can make is who should be the trustee, that is, the person who is responsible for carrying out the terms of the trust. While many people name an individual trustee such as a family member or friend, you have the option of naming a bank or trust company to administer the trust. Here is everything you need to know about naming a bank as a trustee.
What Is a Trust?
A trust is a legal arrangement in which a person names a third party to hold assets on behalf of beneficiaries. A trust is created through a trust document that outlines the terms of the trust, its purpose, the important parties, and directions on what happens to the trust assets if the grantor passes away or becomes incapacitated.
There are many different purposes that people may create trusts, including:
- Wealth management – A primary purpose of many trusts is to manage a person’s wealth to support their family members. A trust can allow a grantor to retain control and access to assets during their lifetime and then provide a clear plan for what happens to the remaining assets after they die.
- Avoid probate– Because trust assets are managed by the trustee and held in the trust, the grantor does not own them at death. Therefore, the grantor may be able to avoid the probate process with a properly structured trust.
- Qualify for benefits – If a beneficiary receives benefits from a federal government agency, such as SSI or Medicaid, a trust may allow the beneficiary to benefit from the trust assets while retaining eligibility for the government program.
- Reduce tax liability – Certain types of trusts can provide tax savings and reduce tax liability.
- Creditor protection – A trust may help protect an estate from creditors or legal claims.
- Benefit charities – A trust can allow you to leave a legacy for a charitable cause the grantor supports.
| Type of Trust | What It Does |
| Revocable Living Trust | A living trust, revocable trust, or revocable living trust allows the grantor to change or revoke the trust at any time during their lifetime, assuming they maintain mental capacity. |
| Irrevocable Trust | Irrevocable trusts cannot easily be revoked. Once the trust assets are deposited into an irrevocable trust, the grantor introduces significant complexity with respect to their access to or control over the assets in the trust. Irrevocable trusts are often used for a specific purpose, such as to hold life insurance, reduce estate taxes, qualify for certain benefits, and more. |
| Testamentary Trust | A testamentary trust is incorporated in a will. It does not become effective until after the testator dies and the will is probated. The probate court may oversee the trust administration. |
| Special Needs Trust | Special needs trusts help a beneficiary benefit from trust assets while ensuring they remain eligible for public benefits like SSI or Medicaid. |
| Marital Trust | This type of trust is designed to benefit a surviving spouse while lowering estate taxes, when applicable. |
| Bypass Trust | A bypass trust or credit shelter trust bypasses the surviving spouse’s estate in effort to max out the estate tax exemption amount, further reducing estate taxes. The Bypass Trust is often used in conjunction with a Marital Trust and is often designed as a part of a revocable living trust. |
| Charitable Lead Trust | A charitable lead trust provides annual donations to charities for a fixed period of time. All remaining assets not donated upon the expiration of the charitable lead trust revert back to the grantor or the grantor’s beneficiaries. Charitable lead trusts may reduce the taxable income of the grantor while providing charities with a donation stream they can rely on for a number of years. |
| Charitable Remainder Trust | A charitable remainder trust provides income to the grantor or their beneficiaries for a fixed period of time, then passes the remaining assets to a charity of the grantor’s choice. Charitable Remainder Trusts may provide tax benefits to the grantor while benefiting charitable causes. |
| Generation Skipping Trust | This type of trust is made to benefit grandchildren or later generations without being subject to the generation-skipping tax. |
| Qualified Terminable Interest Property Trust (QTIP) | This type of trust is used to provide income to a surviving spouse while simultaneously selecting beneficiaries that will inherit the house after the surviving spouse’s death. This is often used when a grantor does not want their surviving spouse to control who ultimately inherits the house. Qualified Terminable Interest Property Trusts are also used for asset protection purposes |
| Grantor Retained Annuity Trust (GRAT) | This is an irrevocable trust that helps shift future appreciation on assets to the next generation during the lifetime of the grantor so they can minimize taxes on financial gifts. The grantor receives an income stream from an annuity. |
| Qualified Personal Residence Trust (QPRT) | This type of trust helps to transfer real estate to beneficiaries while minimizing taxes. |
| Domestic Asset Protection Trust (DAPT) | A domestic asset protection trust protects assets from future creditors. |
Roles Involved in a Trust
It is important you understand the various roles involved in a trust. Here is a breakdown of the parties that may apply to your trust:
| Role | Responsibility or Duty |
| Grantor | The grantor is the person for whom the trust is made. This is sometimes called a settlor. |
| Trustee | The trustee is the person who manages the trust assets. The trustee has a fiduciary duty, meaning that the trustee must put the trust beneficiaries’ interests ahead of their own. |
| Beneficiary | Beneficiaries are those who benefit from the trust. Beneficiaries can be individuals, such as family members, charitable organizations, businesses, or other entities. |
| Contingent beneficiary | Contingent beneficiaries only receive the trust assets if a condition is met, such as another beneficiary predeceases the grantor. |
| Co-trustee | A co-trustee applies when more than one trustee serves as a time. |
| Successor trustee | A successor trustee assumes the responsibility of the trustee if they resign, become incapacitated, or die. |
Some of the parties may fulfill multiple roles. For example, the grantor may be the trustee and/or a beneficiary.
What Is a Corporate Trustee?
Today’s banks offer many more financial services than allowing you to open checking or savings accounts. For example, many banks:
- Sell insurance products
- Provide investment management services
- Offer an investment advisor or brokerage firm to work with as part of their financial services
- Provide online banking services
- Offer trust services, including trust administration
A corporate trustee can be a bank trust department or trust company. Rather than having your surviving spouse or other family member serve as an individual trustee, you can name a private bank or other corporate trustee to manage your assets. Corporate trustees often have extensive experience managing and administering trusts, so you can benefit from their expertise.
A trust company may be FDIC insured, or it may not. Trust companies that are wholly owned subsidiaries of a member FDIC supervised bank are considered a separately-chartered and capitalized entity. Therefore, the trust powers are provided only through the chartering agency, so the trust company does not need to receive consent from the FDIC to exercise the trust powers.
Trustee Bank Responsibilities
The duties of the trustee will depend on the specific terms of the trust. However, an important principle is that the trustee has to maintain their fiduciary duty to the trust beneficiaries. Some of the common responsibilities that corporate trustees have include:
- Fully understand the terms and purpose of the trust document
- Inform beneficiaries of their appointment and fiduciary duty
- Become familiar with the needs and situation of each beneficiary
- Inventory assets and determine fair market value
- Act as a prudent investor in regards to trust assets
- Make mandatory or discretionary distributions according to the terms of the trust
- Collect benefits owed to the grantor from federal government agencies
- Ensure compliance with tax laws, prepare tax returns, and make necessary tax payments
- Coordinate annuities for grantors or beneficiaries
- Purchase necessary insurance products
- Maintain accurate accounting, provide necessary disclosures, and use record-keeping standards to properly account for the trust and their actions
- Open accounts in the name of the trust to carry out its requirements, including a checking, saving, investment, and/or credit card account
- Prepare annual accountancy and provide them to the trust beneficiaries
- Transfer assets to the trust or beneficiaries
- Regularly communicate with the beneficiaries
- Discharge their duties according to fiduciary standards
- Exercise care, skill, and diligence in trust administration and investment services
- Develop and document investment objectives to better manage trust assets
- Manage real estate, business interests, and other unique assets
- Make payments as directed by the trust document, including utilities, insurance, credit card, and other debts or services
- Separately account for principal and income balances in accounting records
- Provide regular statements and tax information to beneficiaries
- Manage third-party professionals
Pros of Using a Bank as a Trustee
There are several potential benefits of using a corporate trustee, including:
- Experience – A corporate trustee may have specialized experience working with a variety of assets and types of trusts. Banks may have specialized knowledge in various matters, including taxation, real estate, and accounting standards.
- Understanding – A corporate trustee may understand the fiduciary duty better than an individual trustee, thereby protecting your interests.
- Oversight – A trust company may provide oversight for the trust so that problems can be quickly identified and corrected. This may include having various security policies in place.
- Record keeping – As a business, banks are better at maintaining detailed records that show transactions, the result of investment strategies, and other information that affects beneficiaries.
- Objectivity – When a bank is the trustee, you do not have to worry about a close personal relationship interfering with their duty to other beneficiaries.
Often, the skill and capability needed from a trustee extends beyond the ability of family members, making a corporate trustee a good choice.
Cons of Using a Bank as a Trustee
However, there are some drawbacks of naming a bank as a trustee, including:
- Costs – Banks may charge large fees to provide trust services. These expenses can drain the trust so there are less assets for the beneficiaries.
- Impersonal – Working with a bank trustee may seem impersonal to the beneficiaries.
- Availability – Corporate trustees may be less available than an individual trustee. Additionally, some may not even agree to handle a trust account unless there are more than $1 million in trust assets.
Takeaway
A trust can be a powerful estate planning tool. The choice of trustee you make is an important one. A corporate trustee can offer many benefits, but also consider the potential downsides before making this decision.