Trust Companies vs. Banks

Distinctions between banks and trust firms are based on function. Trust companies can be owned by banks and vice versa, but their functions are quite different. If a commercial bank also functions as a trust company, these remain two different institutions doing two different things, though owned by a single firm.

A trust is any bundle of money or other assets that is put away for a specific purpose. For example, if you wish to place an inheritance in an account that disburses part of the proceeds to charitable institutions, you place this cash in a “charitable trust account” with a trust company specializing in these sorts of accounts. The trust company then pays all the bills on the money, manages the assets, oversees its distribution and consults with you about your wishes. When you die or become ill, the trust then has your blueprint to follow to continue to work with your assets.

Charitable trusts are only one type of account. There is the living revocable trust, which is an account you place with a trust company that helps you manage your money, then implements your financial wishes when you die. It is changeable while you are alive, and you can alter its terms at any time. The trust company will then disburse your assets to beneficiaries in accordance with your will when you die. On the other hand, an irrevocable trust cannot be touched by anyone once its terms have been signed. This is designed to protect assets from any greedy relatives looking to take advantage of you and your wealth if you are incapacitated. There also are testamentary trusts, which are specifically designed for money management after your death and deal only with the structure of the disbursement of property upon your death. The kinds of trust accounts listed here are normally the only services a trust firm offers.

Banks, strictly speaking, do none of these things. They do not deal with assets in the specialized way a trust firm will. They are two very different types of financial organization, though a commercial bank might own and operate a specific trust organization. Because trusts deal with large amounts of assets from those who need specialized assistance, like the elderly or ill, the temptations to “skim” this money can be irresistible. Hence, the trusts are tightly regulated by the federal government, and no assets from clients can be mixed with the specific income or asset base of the firm. Since trusts are regulated in this very strict, specific way, they must be operated differently from the typical bank.

The term “bank” usually refers to those institutions dealing strictly with deposits, savings, loans and accounts. Although there are more specialized forms of banks like investment banks, specializing in a specific field and serving the investment community in that field, no bank has any real “trust” style management experience. As there are credit unions serving a specific area of work, such as government employees, these too, have no trust management experience.