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What is a Trust Company?

Updated on May 2, 2011

A trust company is a corporation whose function is to act as trustee under a contract known as a trust agreement. A trust arises when one party receives property to hold and protect for the benefit of another in accordance with such a contract. Except in unusual situations, legal title and absolute dominion of the property is vested in the trustee, but for the benefit of another, called the beneficiary, who has an equitable interest. History. The modern concept of a trust agreement has ancient roots in English law, but the trust company as such is considered an American innovation. In 1822 the New York Legislature incorporated the first company chartered with specific power to perform trust business. This was the Farmers' Fire Insurance and Loan Company in New York City-later the City Bank Farmers Trust Company, and eventually, through mergers, a part of the First National City Bank of New York. At the time of this incorporation, the Massachusetts Hospital and Life Insurance Company in Boston, formed in 1818, was engaged in Some trust business. Its charter was revised in 1823 to confirm it in the exercise of this power.

In 1830 the New York Life Insurance and Trust Company was founded, and by 1836 two more trust companies were in operation in Philadelphia. The early companies were formed in conjunction with insurance companies, but the trust business proved so successful that most trust companies abandoned their insurance business by the late 1800's. The United States Trust Company of New York City (1853) was the first formed to conduct business exclusively as a trust company. At the time of the Civil War there were only about half a dozen trust companies in the United States. There was a spectacular growth in their number after 1880, due to a great rise in the number of corporations and their need for trustees. In 1880 there were about 50 companies; in 1900, 300; and in 1913, 1,700.

In their capacity as trustees, trust companies performed such functions as depositing cash in a trust, issuing checks, and making temporary loans to a trust. It was natural, therefore, that trust companies begin banking activities as a supplement to their work. Subsequently, the Federal Reserve Act of 1913 authorized national banks to serve in a fiduciary capacity, and the banks entered the trust business. Today, most large banks have trust departments or separate affiliated trust companies, and there are few large trust companies that do not operate a complete banking business.

Responsibilities and Advantages

When a trust is established with a trust company as trustee, the trust company takes entire charge of the property, both real and personal. It collects interest, dividends, and rents; pays taxes; and executes contracts, leases, and deeds. It accumulates the income and pays it to the beneficiary or reinvests it according to the terms of the trust agreement.

The trust company offers several advantages over the individual as a trustee. It is perpetual, not being subject to death or incapacitation. It has an established office and is always there. It offers a staff of legal, financial and administrative experts. And it is subject to governmental audit and examination.

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