Factors to consider to meet your clients’ long-term needs.

Attorneys should conduct due diligence before recommending an independent trust company (ITC)to their clients. Choosing the right ITC has become increasingly complicated due to a variety of factors. These include: (1) financial technology, which is advancing the disruption of traditional banking and legacy financial institution business models; (2) bank company consolidation, caused by economies of scale and competition from Internet banks, which will generate another round of bank company consolidation; and (3) doubt about institutional longevity, which is a factor in the minds of clients seeking a trust company relationship that can endure and serve multiple generations.

Traditional bank depository trust companies offering trust administrative services linked to captive investment supervision are realizing that client demands are changing. The non-depository trust company population has expanded in recent years to meet the needs of clients seeking trust administration services without obligatory investment management for trust assets. Demographic changes have created demand for ITC options. It’s thus helpful to review certain discovery questions with clients to determine whether the ITC’s business purpose, organizational design and operations are in alignment with clients’ long-term needs.

Demographic Changes

Increasing longevity makes the likelihood that an aging client and their peer or family-named appointed trustees will experience incapacity prior to a premature death. Maintaining relationships among family members is usually a high priority for clients. The naming of institutional fiduciaries is a strategy to minimize family conflict. Naming a local bank, a national trust company or an attorney was the historical go-to choice presented to clients when considering responsibilities related to beneficiary trusts in their estate distribution planning. Yet, clients weigh very carefully the decision to name a family member against the economics and the unknowns of hiring an institutional trustee.

Initial Screening

You’ll want to consider what kind of individual the trust officer gatekeeper will be, what unspoken controls the organization exercises when named as distribution trustee and what options exist to part ways if future disagreements arise. Historically, bank and trust company offerings solely provided a delegated solution that included trustee services when purchased with captive investment management services.

Diversified family wealth with many investment types and advisors makes consolidation under one house for trust administration and investment management limiting. Clients with existing investment advisory relationships may find an administrative trustee without an investment management offering as the best solution to avoid disrupting investment management continuity.

With younger beneficiaries having a likelihood of multiple professions and residence locations during their lifetimes, geographic proximity to the trust company may no longer be a priority in the selection of a trust administrative institution. COVID-19 accelerated the use of virtual meetings and will lessen future requests for in-person interactions.

Prior to considering trust company candidates, the initial screening should determine whether the trust company has experience in administering the type of trust in mind: special needs, dynasty or asset protection trusts. Confirm that the trust company can administer unique or non-investable assets if needed. Once those initial screens identify the appropriate trust company candidates, it’s time to use due diligence in selecting the best match.

Financial/Regulatory Disclosures

Most non-depository (not making loans) trust ITCs are chartered as ITCs or banks under various state laws or through the Office of the Comptroller of the Currency (OCC) or the Office of Thrift Supervision (OTS).1 Curiously, supervisory compliance information about nationally chartered ITCs isn’t publicly available through these agencies. Financial information about nationally chartered ITCs is available with the Federal Financial Institutions Examination Council through Reports of Condition and Income (known as “call reports”).2

Fewer ITCs are chartered through the OCC, and more are chartered at the state level. Nationally chartered ITCs can do business in any state. One advantage of nationally chartered trust companies in the past was the ability to offer FDIC insurance on accounts held on deposit.3 With Internet banks offering FDIC insurance on deposits, this isn’t a significant factor in the selection decision anymore. However, access to financial information on a nationally chartered trust company is valuable as part of the due diligence process. For those trust companies not nationally chartered, state regulation doesn’t provide a great deal of transparency. In general, states have few public disclosure requirements regarding the financial condition or supervisory violations of trust companies registered in their state.

States compete to attract non-depository ITC business. States update statutes to make trust situs more favorable toward a range of access, creditor and decanting options that grantors find favorable. Trust administration is a service business with a low carbon footprint having high paying jobs. This growing interstate competition and restricted financial disclosure requires a higher level of due diligence to ascertain the long-term sustainability of the ITC candidate.

Here are some examples of disclosure requirements in various states:

South Dakota: The South Dakota Division of Banking will provide a certificate of status (COS) that identifies that the ITC is a South Dakota-regulated trust company. Other than that, all information gathered during the application, examination and annual report process is deemed confidential.4 Periodic examination of ITCs by the division of banking occurs at least once every 36 months.5 Each ITC is required to file an annual report with the Division of Banking.6 This report isn’t publicly available.

Delaware. The Office of the State Bank Commissioner is responsible for regulating and examining state-chartered banks and ITCs. Every bank and ITC is required to file financial reports quarterly.7 Publicly available information about ITCs and banks registered in the state are listed on the state website.8 The submission of call reports provides the office with the ability to note any negative findings, but these aren’t public. The statement of annual condition for each bank, ITC and other registered financial institution is published annually in the State of Delaware Office of the State Bank Commissioner Annual Report.9 This statement provides very limited balance sheet and annual income information.

Tennessee. The Tennessee Department of Financial Institutions requires an audited financial statement from each registered ITC at least once in every 15 months.10 This information isn’t available to the public. The Annual Report from the Department provides limited balance sheet and income information on all registered ITCs.11 Listed are total assets under administration and assets in common funds.

Nevada. Nevada has statutes governing various character and board composition requirements.12 Statutes also impose bond and insurance requirements on all active officers, managers and employees.13 The Office of the Commissioner of Financial Institutions requires audited financial statements annually.14 Nevada also requires ITCs to maintain at least $1 million in capital at a bank with a Nevada presence.15

Factors to Consider

Here are various factors to review with your clients and questions to ask before they select an ITC:

Financial structure. Historically, whether bank deposit and lending operations, trust administration or investment management were self-supporting in a large institution made little difference, so long as the overall organization was profitable. With investment management experiencing fee compression and traditional bank deposit business gasping for breath, investors now want management to nurture business lines that will be profitable and growing. Consolidation of local banks merging into regional banks and regional banks merging to create a national footprint have changed the predictability of long-term bank and trust officer relationships.

ITCs solely focused on administering trust assets don’t have multiple business lines with diversified revenue streams that can subsidize a struggling business unit. ITCs organized solely to deliver administrative and distribution trust services may experience consolidation in the future as the business becomes more competitive for talent acquisition and technology.

For the reasons above, understanding the stakeholders in the financial structure of any trust company is crucial in assessing long-term viability. Entity organization provides insight into the business purpose and alignment of long-term interests with clients. For example, ask: Who are the named equity holders, and what are their ages and percentages of equity held? What amount of debt or equity, as a percentage of total capitalization, is owned by a venture capital or private equity firm? What percentage of total capitalization is debt?

Succession planning. Does the ITC have a history of shareholder stability? If the ITC was recently formed, what were its founders’ motivations? ITCs with a broader ownership structure are less likely to have a near-term monetization event transitioning the ITC to new ownership and culture. Is there a written continuity plan in place for equity owners? Is there life insurance to finance a sudden death of a major shareholder?

What’s the succession plan to continue the business into perpetuity? What’s the succession plan to remain independent? Is there a succession plan in place to transfer ownership to minority partners? Is there a career track that allows management ranks of the company to purchase ownership interests?

Management experience. Is the ITC’s management seasoned? Does management offer a specialized skill set to the entity? What incentive plan is in place to meet their career aspirations? What has management turnover been historically?

Growth plan. What’s the business plan for the ITC, and are the purposes of its founding being fulfilled and updated regularly? Is the ITC in business to capture wallet share or provide specialized services with a unique offering to the community? Practically, these questions about the growth plan are more purposefully answered in a candid round of discussions. A sudden windfall of trust business in an ITC that was geared for a lower level of activity or different purposes can crush its responsiveness and fiduciary oversight capabilities.

With expected growth, what’s the plan to scale with people and processes? The COVID-19 pandemic has provided a reason to probe how the company maintained services in a challenging environment. What service personnel changes took place in the last year? How many hires? How many reductions?

What’s been the growth rate of new personal trust client assets for the last three and five years? What’s been the change in the number of client relationships? What’s been the client attrition rate during the same period exclusive of deaths?

Regulatory enforcement. Have there been any reported regulatory compliance violations or enforcement actions since inception? If so, what remediation efforts were made? These would likely be rare with a non-depository trust company, but any of the above will be cause for a deeper dive into the organization’s culture and what changes were implemented to meet their compliance requirements.

Data exchange. What platform is used to exchange data with accounting, legal or financial advisory professionals? What technology enables visibility to beneficiaries and grantors? What’s the plan and budget to keep technology up to date? What means does this ITC use to provide timely data to supporting professionals?

Fiduciary disclosures to ITC customers. Does the ITC require trust assets to be invested in internal or proprietary products in any way? This could be money market or other cash management options.

Compliance. What safeguards are in place to monitor vendor data security, as well as the data of their management and client systems?

Contractual fiduciary obligations. A directed trust statute generally provides that an administrative or directed trustee be appointed and permits bifurcating (delegating) the fiduciary responsibility among different trust advisors. This relieves the directed or administrative trustee from the duty and liability to manage the trust assets. What are the provisions in the engagement agreements regarding supervision of the advisor, risk indemnification and risk sharing of the fiduciary liability?

Oversight. What reports will be required from the investment or financial advisors to satisfy the ITC or internal audit functions?

Definitions of roles in trust operation. Does the trust company define its role with advisors and trust beneficiaries in clear, understandable terms? What interface will take place and how frequently when planning for non-discretionary or discretionary distributions? Will the ITC act as co-trustee or only as sole trustee in any capacity? Will the ITC act as distribution trustee as well as administrative trustee? Will the ITC permit a trust protector as part of the arrangement if the trust document permits one?

Investment policy. Does the ITC have any oversight on investment policy development? What input will it require on investment policy statements for each beneficiary?

Accounting and reporting. Are internal or third-party vendors used for trust accounting?

Are third-party vendors used for middle or back office functions? What’s provided by the ITC to beneficiaries, tax professionals and to other advisors regularly? What can be customized for each beneficiary?

Association/industry best practices. What does the ITC do to maintain industry best practices? What associations are they members of? For example, do its trust officers attend American Bankers Association industry conferences for training? What certifications do they require of their trust officers? What participation do they have in state regulatory matters?

Staffing and workload management. How many client-facing employees are there as a percentage of total full-time employees? How many trust accounts per trust officer employee? How many clients per trust officer employee? How does the number of clients per trust officer employee change with account size? How many accounts in total is the trust company acting for as administrative and distribution trustee? Trust officers with more than 75 accounts may find it challenging to develop a meaningful relationship with their account beneficiaries. Your assessment of the attention required by the trust beneficiaries may suggest an ITC best fit with a lower client-to- trust officer ratio.

Trust officer responsibilities. What percentage of time is spent on: (1) trust administrative matters; (2) investments; and (3) distribution requests and decision making? A higher percentage of time on distribution requests favors the beneficiary relationship and is a positive indicator of the organization’s culture and staffing strategy. What resources are internally available when working with special needs or other trusts requiring regulatory expertise?

Distribution requests. What distribution requests are approved by an individual trust officer? What distribution requests are approved by a committee? How many members are on any given committee? What methods are acceptable when submitting a discretionary distribution request?

Corporate culture. This is difficult to discern without the benefit of financial organization discovery. What’s the character of employees the ITC is trying to attract? How does it describe its client-facing style? What kind of training and education support is offered to employees of the organization?

Education of younger beneficiaries. Is there a beneficiary relations committee established to help educate younger beneficiaries and support positive outcomes for all parties? What’s being done to measure whether the next generation is receiving the benefits intended by the purposes of the trust? What guidance do trust officers provide to help craft personal and career development plans? What engagement is used to develop stronger relationships with beneficiaries?

Regional staffing resources. A shortage of experienced trust officers will influence customer service responsiveness. States with smaller cities such as South Dakota, New Hampshire and Alaska could find staffing more challenging. Is there a higher ratio of supply to demand in Nashville, Tenn. than Rapid City, S.D.? One promising development is that the South Dakota Trust Association is working with the state Office of Economic Development to create new course curricula at local and state universities as a means to attract students who will join the industry.16 Perhaps other states will follow.

Predictions for Future

The hometown bias on client ITC choices and professional referrals will diminish. Professionals can be accessed from any location as needed. This widens the opportunity for ITCs to work with a family’s long-standing trusted advisors while servicing beneficiaries in multiple states or countries.

The footprint of future trust company infrastructure will likely be centralized and smaller. Relationship building across the country can be executed without higher overhead. This provides the opportunity for forward-thinking trust companies to devote resources building out client support interfaces that families and their advisors will seek. The demand for ownership of predictable fee-generating trust company businesses from entrepreneurial investors will hasten consolidation in the bank and trust industry. The informed professional will be in a better position to recommend ITCs that have a higher probability of longevity, talent succession and sufficient capitalization to deliver a superior lifetime trust administration experience.


  1. Office of Thrift Supervision, occ.treas.gov/about/contact-us/public-information/public- information.html .
  2. Federal Financial Institutions Examination Council,

https://cdr.ffiec.gov/public/ManagerFacsimiles.aspx .

  1. See supra note
  2. South Dakota Codified Laws 51A-6A-2
  3. South Dakota Codified Laws 51A-6A-31.
  4. South Dakota Codified Laws 51A-6A-34.
  5. Delaware Code Title Five Section 904
  6. https://banking.delaware.gov/wp-content/uploads/sites/73/2020/10/Banks-Trust- Companies-and-Building-and-Loan-Associations-October-2020.pdf .
  7. https://banking.delaware.gov/annual-reports/ .
  8. Tennessee Code 45-2-2108 (h).
  9. tn.gov/tdfi/tdfi-info/tdfi-annual-report.html .
  10. Nevada Revised Statutes 669.116 and 669.117.
  11. Nevada Revised Statutes 669.240.
  12. Nevada Revised Statutes 669.275.
  13. Nevada Revised Statutes 669.100.
  14. “South Dakota Trust Association Initiatives,” https://sdtrustassociation.org/initiatives/ .Source  URL:  https://www.wealthmanagement.com/estate-planning/selecting-independent-trust-companies