Common Trust Funds

Trust funds are simply gifts of property and/or other assets in which individuals, known as the grantors or donors, establish benefits for other individuals or other entities, known as the beneficiaries. For example, parents will create a trust fund for their children in order to provide financial security for their future. People can also create trust funds to make provisions for a non-profit or charity organization. Property, stocks and bonds, and cash are all assets that can make up the trust fund. Trustees administer and manage the trust funds, ensuring the funds are dispersed prudently to the trust funds beneficiaries, following the desires of the grantors and the legal rules established by Federal Trust laws. At times, banks may combine the trust funds collectively into common trust funds and invest those funds according to the relating state law and the funds’ written plans. Originally, common trust funds were created by banks to successfully manage and invest assets from a collection of smaller groups of funds and fiduciary accounts which they were keeping in trust for bank customers.

Common trust funds are much like mutual funds as both manage many assets. They also have trustees which manage the funds. Common trust funds, however, have only the participating bank in complete charge with no other governing entities for managing common trust funds. Also, it is the bank that is held accountable for making all the decisions concerning the funds, but it can also delegate some fund management responsibilities to others as approved by bank regulations. Furthermore, with common trust funds the beneficiaries are not routinely asked to vote regarding any transactions. However, with mutual funds, shareholders have the opportunity and option to vote regarding any investment advisory contracts, adoptions of a Rule 12b-1 Plan, or choosing candidates as members of the board of trustees. After December 31, 1995, Federal law allowed non-taxable conversion of common trust funds into mutual funds. Some fund owners have been advised by their financial counsel to do so, believing mutual funds to be in the client’s best interests.

With common trust funds, banks can provide different fee options and each of the fund’s fees may vary accordingly; however, each of the fund accounts must have their proportional interest in all the cumulative assets of the funds. Some banks will acquire common trust funds in the acquisition of other bank groups. In this case, they must also treat these common trust funds in the same legal and regulatory manner as their other trust funds. Whatever the situation, clients should always know who is in charge of their common trust funds.