What is the Difference Between a Bank and a Trust Company
A bank and a trust company are financial institutions, but there are some critical differences between them.
A bank is a commercial institution that accepts deposits from the public and makes loans.
A trust company such as this firm is a financial institution specializing in trust services, such as administering estates, guardianships, and conservatorships.
Although commercial banks own many trust companies, they function independently of commercial banks. The services offered by trust companies include trust administration, investment management, and fiduciary services.
Understanding the differences between them can help investors and other interested parties determine which institution is best to use for their needs.
What is a Bank?
A bank is a financial institution that accepts deposits and makes loans. Banks are essential because they provide a way for people to save money and borrow money. Banks also offer a way for companies to borrow money to finance their operations.
Banks make money by charging interest on loans and earning dividends on investments. Banks are regulated by the government and must follow specific rules, such as keeping a certain percentage of their assets in reserve.
Banks are essential because they provide liquidity to the economy. Liquidity is the ability of firms to borrow money when they need it. When banks are healthy, they provide liquidity to the economy and allow businesses to grow.
What is a Trust Company?
A trust company is a legal arrangement in which a grantor transfers assets to a fiduciary responsible for managing and distributing the assets per the grantor’s wishes. Trust companies frequently manage estate assets, as they provide a secure and tax-advantaged way to pass on wealth to future generations.
Fiduciaries must always act in the best interests of their clients and are held to a high standard of care. Custodianship is another critical role of trust companies, as they are responsible for safeguarding the assets under their supervision.
Trust companies also act as agents for their clients, facilitating transactions and communications between them and other parties.
The Difference Between a Bank and a Trust Company
Even though a bank can own a trust company, the two businesses have different functions. A trust company provides investment management and asset preservation services, while a bank provides safekeeping and safe exchange of funds. Below are more differences:
- In many cases, trust companies function as the trust department of a larger bank that provides specialized services.
- Trust companies generate income by acting as trustees for real estate, investments, etc. The banks profit from keeping money, processing transactions, and offering loans.
- Trust companies cannot make loans to their members. A bank cannot act as a trustee for an individual or entity unless it has the appropriate license.
- A bank provides services typically offered by trust companies. This is because they either own one or rely on one for third-party services.
A bank and a trust company are financial institutions, but they have different purposes.
A bank is mainly a place to deposit and withdraw money, while a trust company offers more services, such as estate planning and investment advice.
If you are looking for a more comprehensive financial solution, a trust company may be better.