Corporate Trustee

A corporate trustee is a bank or trust company acting as trustee of a trust, as opposed to an individual such as a family member or an attorney. The distinction is not only about size. An institution may serve only if a banking regulator has granted it fiduciary powers, and once it does, its conduct is governed by banking regulation as well as by trust law and by the trust document. A national bank obtains the grant from the Comptroller of the Currency; a state-chartered trust company obtains it under the law of its chartering state.

The permission is a regulatory grant, and the statute lists what it covers. Under 12 U.S.C. 92a(a), the Comptroller of the Currency is "authorized and empowered to grant by special permit to national banks applying therefor, when not in contravention of State or local law, the right to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, or in any other fiduciary capacity in which State banks, trust companies, or other corporations which come into competition with national banks are permitted to act under the laws of the State in which the national bank is located." The regulation carries the same list forward: 12 CFR 9.2(e) defines "fiduciary capacity" to mean trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gifts to minors act, plus investment adviser where the bank is paid for the advice, plus "any capacity in which the bank possesses investment discretion on behalf of another." Section 9.2(g) then defines "fiduciary powers" as "the authority the OCC permits a national bank to exercise pursuant to 12 U.S.C. 92a."

So the question "is this institution allowed to be my trustee" has a documentary answer, which is not true of an individual. It also means the institution answers to a bank examiner for how it runs the trust department, in addition to answering to the beneficiaries.

The segregation rule is the sharpest practical difference, and it is statutory. 12 U.S.C. 92a(c) requires that national banks exercising these powers "shall segregate all assets held in any fiduciary capacity from the general assets of the bank and shall keep a separate set of books and records showing in proper detail all transactions engaged in under authority of this section." The regulation adds operational detail at 12 CFR 9.13: assets of fiduciary accounts go into "the joint custody or control of not fewer than two of the fiduciary officers or employees designated for that purpose by the board of directors," and the bank must keep the assets of each fiduciary account separate from all other accounts or identify the investments as the property of a particular account.

The consequence a family actually wants is that trust assets are not the bank's assets. They are not available to the bank's creditors, and the bank's own failure is not the beneficiaries' loss. That is a different answer from the deposit insurance answer people expect, because deposit insurance is about deposits and this is about property held in trust.

Cash is the exception, and the statute handles it separately. Uninvested trust cash can end up as a deposit, which is the one place trust money touches the bank's balance sheet. 12 U.S.C. 92a(d) bars a national bank from taking demand deposits into its trust department and requires that funds held in trust awaiting investment be carried in a separate account, not used in the bank's business unless the bank first sets aside approved securities in the trust department. Section 92a(e) then gives the trust a remedy: "In the event of the failure of such bank the owners of the funds held in trust for investment shall have a lien on the bonds or other securities so set apart in addition to their claim against the estate of the bank." The regulation states the sizing rule at 12 CFR 9.10(b)(1): where a bank deposits fiduciary funds awaiting investment with itself, "to the extent that the funds are not insured by the Federal Deposit Insurance Corporation, the bank shall set aside collateral as security ... The market value of the collateral set aside must at all times equal or exceed the amount of the uninsured fiduciary funds." Section 9.10(a) separately requires that funds not sit uninvested or undistributed longer than is reasonable.

What the institution is actually being paid for. Four things, and none of them is investment skill in particular. Continuity, because an institution does not die, become ill or move abroad, which is why a trust meant to run for generations usually has one. Recordkeeping and accounting, produced as a matter of routine rather than as a favor. Impartiality among beneficiaries whose interests conflict, which is the duty an individual trustee finds hardest when the beneficiaries are relatives. And an entity with assets and insurance behind its own liability, so a breach has a remedy that is worth pursuing.

What it costs, beyond the fee. An institution applies its own policies to discretionary decisions, and those policies are designed to be defensible rather than responsive. A distribution request that a family member trustee would approve in a phone call becomes a documented request with a standard of review. The fee comes from the institution's own fee schedule and runs for the life of the trust rather than for the work of a particular year, so the right question when comparing institutions is what each schedule says at the size of the trust actually being established. The institution also has no knowledge of the family and no memory of what the settlor meant. Modern instruments answer that by naming someone with power to remove and replace the corporate trustee, which is the subject of the trust protector entry.

1. The institution obtains fiduciary powers. For a national bank that is a special permit from the Comptroller of the Currency under 12 U.S.C. 92a(a); a state trust company obtains an equivalent authority from its chartering state. Without it the institution cannot serve.

2. It accepts the trusteeship the same way any trustee does, under the trust document and the governing state's trust code. The banking permission does not create the office; it only makes the institution eligible to hold it.

3. Assets are segregated on arrival. Under 12 U.S.C. 92a(c) and 12 CFR 9.13 the property goes into fiduciary custody under at least two designated officers, kept separate from the bank's own assets and identified to the particular account.

4. Cash awaiting investment is handled under a different rule. If the bank holds it as a deposit with itself, 12 CFR 9.10(b)(1) requires collateral at least equal to the uninsured portion, held under the control of fiduciary officers.

5. The trust is administered, accounted for and reported on under the trust code and the document, and examined by the bank's regulator as part of the trust department.

6. The institution can be replaced where the document gives someone that power, or through the removal routes the state trust code provides.

A hypothetical to make step 4 concrete. A trust holds $400,000 of cash from a property sale while the trustee decides how to invest it, and the bank deposits the cash with its own commercial department. Suppose $150,000 of that deposit is not covered by deposit insurance. Under 12 CFR 9.10(b)(1) the bank must set aside collateral whose market value is at all times at least $150,000, held under the control of fiduciary officers. If the bank then failed, 12 U.S.C. 92a(e) gives the trust a lien on that collateral, plus an ordinary claim against the bank's estate for anything the collateral did not cover. The investments the trust already owns are not part of this analysis at all, because segregated fiduciary property was never the bank's to lose.

What an institution brings

• Continuity across decades, which is the reason a multi-generation trust almost always has one.
• Fiduciary powers granted and supervised by a banking regulator, so eligibility is documented rather than assumed.
• Statutory segregation of trust assets from the institution's own, with a separate set of books required by federal law.
• Collateral and a statutory lien standing behind uninvested trust cash the bank deposits with itself.
• Routine accountings and records, produced as a matter of policy rather than depending on one person's diligence.
• Impartiality among beneficiaries with conflicting interests, which is the duty a relative finds hardest to discharge.
• An institution with assets behind its own liability, so a breach has a remedy worth pursuing.

What it costs

• A fee drawn from the institution's own fee schedule, running for the life of the trust rather than for a year's work.
• Discretionary decisions become documented requests reviewed against internal policy, which is slower and less responsive than a family trustee.
• No relationship with the family and no memory of what the settlor meant beyond what the document records.
• Many institutions decline accounts below a size they will not administer economically, and decline assets they will not hold, such as a closely held business or a family property.
• Replacing one is only as easy as the document makes it, which is why the power to remove and replace has to be drafted in rather than assumed.