Trust Services

Fewer than 50 trust companies operating in the United States concentrate exclusively on trust and agency activities. All other "trust companies" are either commercial banks - national banks or state-chartered commercial banks-that have been authorized to operate trust departments, or state-chartered trust companies that have been authorized to engage in commercial (and savings) banking. Although almost all statechartered trust companies have commercial banking departments, a large majority of the nation's commercial banks, especially those in smaller cities and towns, do not have trust departments.

The trust institution plays a vital role in the American economic and social order. Serving both users and suppliers of capital, it has three broad economic functions:

- it conserves wealth and private property by safekeeping accumulated capital and preventing its wasteful use;

- it encourages the collective ownership of industry both by its handling of estates and by its services to corporations in connection with their securities issues; and

- it helps stabilize - investment and therefore stimulates enterprise by putting funds into productive uses.

Service to Individuals

Personal trust business includes performance of trust and agency functions for individuals. The trust functions include the settling of estates of deceased persons and the care and management of trusts created by either deceased or living persons.

An executor acts under the last will and testament of a deceased person; an administrator serves by appointment of the courts if the individual dies without leaving a will or naming an executor in his or her will. The duties of the two are similar: to collect the assets of the estate; pay debts, taxes, and other charges; and distribute the balance. The duties of an executor are usually temporary; otherwise, if the will sets up a trust it also names a testamentary trustee. Similar duties are performed by a guardian of the estate of a minor, whether appointed in the will or by the courts, and by a conservator of the estate of a legally incompetent person. The most important voluntary or living trusts are retirement trusts, life insurance trusts, and pension trusts. Although the source of funds in each of these trusts differs, they share the common purpose of providing beneficiaries with relief from problems of property management while at the same time sustaining the flow of income.

Other types of personal trusts include sheltering trusts, set up, for example, by parents to ensure the support of their children; spendthrift trust, to protect improvident beneficiaries from the consequences of their incompetence in money matters; and charitable trusts, for religious, educational, literary, or scientific purposes.

Most personal trusts call for active investment management by the trustee. Legal trust restrict investments to those designated by state law, but discretionary trusts leave the manner in which the trust estate is to be invested to the trustee.

In any event, diligence and prudence are reguired of a trustee, who may be surcharged by the courts for losses stemming from poor management of the entrusted assets.

Traditionally each trust was a separate unit with a separate portfolio; now, however, common trust funds are permitted. A number of small trusts may participate in both assets and income according to their relative sizes. The purpose of common trust funds is to achieve asset diversification, to facilitate efficiency in management, and to secure a higher yield on the investment of trust assets. Use of the device by the trust departments of national banks is regulated by Federal Reserve Regulation F, which recognizes three kinds of funds — for investment of small amounts, for general investment, and for mortgage investment. Common trust funds have become much more popular in recent years, and many commercial-bank trust departments now use them to attract trust invetsment accounts that were formely considered too small to handle economically.

Trust institutions offer various agency services to individuals. They act as agents for trustees and executors in handling the merchanical phases of their duties, as custodians in the physical care and handling of securities, and as escrow agents. The latter function involves safekeeping something of value that is to be delivered to another party upon the occurrence of some specified happening.

Services to Corporations

Trust departments, especially in large financial centers, perform important trust and agency services for corporations. The principal corporate function is to serve as trustee under an indenture or mortgage securing a bond issue. The trust department cooperates in drafting the indenture, the contract between the bond-issuing corporation and the bondholders. During the life of the bonds, acting on behalf of the bondholders, the trust department monitors the issuer's performance, servers notice on the issuer of any breach of the indenture, and, if the defect in performance is not remedied, may institute legal or other action to protect the bondholders.

The agency functions that corporate trustees perform for business takes several principal forms. A transfer agent arranges and keeps records of ownership transfers of corporate stock. When stock is transferred through a sale between individuals, the agent issues new certificates and cancels the old ones. registrar prevents overissue of shares by keeping a record of the issued and outstanding shares. The registrar's duty is primarily to the public; the transfer agent serves the corporation. For bonds, the trustee usually acts also as registrar, noting the holder's name and transfer date on the existing bond instead of countersigning a new certificate issued by the transfer agent.

A fiscal agent relieves a corporation of clerical work in keeping records and drawing checks. For example, trust companies and departments may act as agents for paying bond interest and the principal amounts of maturing obligations. They may also handle sinking funds when these exist behind bond and preferred-stock issues.

They may act as dividend-paying agents, as depositaries, and as exchange agents, issuing new securities for old. In some cases a trust institution has been appointed receiver of a bankrupt business by the courts. In such an event, the institution may operate the business on a temporary basis, pending either reorganization or appointment of a trustee or liquidator.

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