Primarily due to the increased use of Trusts for estate planning purposes, a common issue faced daily in community banks is the opening of Trust Accounts. Community banks typically lack internal legal staff to assist as customers come in to open those type accounts. Risks to the bank can be significant in such areas as authorization to open the account and account proceeds distribution upon death. With such risks out there, what steps should the typical community bank take to protect itself should it choose to open accounts in the Name of a Trust?
Account Terms
Before beginning this discussion, it may be beneficial to cover a few of the most common basic Trust terms.
- Settlor – the individual establishing the Trust
- Trustee/s – party’s given authority to administer the Trust.
- Beneficiary/s – those who will benefit from the Trust
- Living Trust – becomes effective during lifetime
- Revocable Trust – can be revoked during lifetime of Settlor
Background
Your state’s general statutes govern the establishment of Trusts. Therefore, as a first step in the process, financial institution officials should meet with trust legal counsel proficient in the state/s in which your financial institution does business. The objective of this meeting is to discuss Trust accounts, the type of Trust accounts your financial institution is willing to open, and steps to mitigate the risk for the types of Trust accounts you will open.
Account Terms
Before beginning this discussion, it may be beneficial to cover a few of the most common basic Trust terms.
- Settlor – the individual establishing the Trust
- Trustee/s – party’s given authority to administer the Trust.
- Beneficiary/s – those who will benefit from the Trust
- Living Trust – becomes effective during lifetime
- Revocable Trust – can be revoked during lifetime of Settlor
Background
Your state’s general statutes govern the establishment of Trusts. Therefore, as a first step in the process, financial institution officials should meet with trust legal counsel proficient in the state/s in which your financial institution does business. The objective of this meeting is to discuss Trust accounts, the type of Trust accounts your financial institution is willing to open, and steps to mitigate the risk for the types of Trust accounts you will open.
As part of this process, your counsel may suggest usage of a Trust Authorization Certification and Indemnity Agreement (from the Trustee/s claiming authorization to open the account) and/or an Attorney Opinion Regarding Trust Authorization (assuming the Trust was prepared by an attorney). The attorney opinion form of the attorney who drew up the Trust initially may also be accepted if those same references points are covered as referenced in the Attorney Opinion form prepared/approved by your legal counsel.
Your account opening software vendors often have a version/s of these documents; however, even software documents need to be reviewed by your financial institution’s legal counsel prior to usage. Your legal counsel may desire to either develop his own document/s for your institution’s utilization or amend those of your software vendor.
The process of using Certification/Authorization forms is an attempt to shift the interpretation and authorization burden away from your financial institution. This also negates the prior practice of requiring a complete Trust copy, which often resulted in Privacy Complaints. The process provides confirmation of the powers granted to the Trustee/s by the Trust. These powers might including opening and closing of accounts with the financial institution, transaction of business relative to accounts, entering into agreements for utilizing services, redemption authorization etc. Should there exist refusal on the part of the Trustee/s to provide Authorization/Certification documentation, it is perfectly acceptable for a community financial institution to refer the customer to another financial institution to service the customer’s needs.
These forms also specify the handling of such issues as “payable on death provisions.”
The Customer Identification Process (CIP)/Miscellaneous
Remember, just like any account opened in your financial institution, the CIP process applies. The Trust may use an EIN number or the SSN of the Settlor.
A physical address must be obtained and customer identification documentation to comply with your CIP Policy must be obtained. OFAC applies just as opening any other account.
Generally, a Trustee cannot exercise their trust granted authority through someone using a Power of Attorney (POA). If this rare situation arises, a consultation call to your institution’s attorney may be necessary.
During the handling of these type accounts, financial institution personnel should, as always, maintain awareness of your institution’s Compliant Policy and SAR reporting of Suspected Elder Financial Abuse.
Conclusion
Hopefully this discussion will allow your community financial institution to evaluate its risk for Opening Trust accounts and mitigate risk accordingly. Remember though, handle your methodology “hand in hand” with your legal counsel.
