Getting Into The Trust Business

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Over the past three decades, the range of financial services that credit unions offer has grown in complexity and sophistication to keep pace with members' needs. The next logical step in expanding that continuum of financial products may be providing trust services.

Personal trust services are typically employed to help middle-aged and older adults manage their accumulated assets and get their estates in order for transfer to their children, grandchildren, other loved ones and/or charitable organizations. This generational transfer of wealth is the driving force behind growing interest in trust services. According to a recent study by Cornell University and Boston College, $40 trillion in assets will be transferred from generation to generation over the next 40 years. In the middle of this transfer are America's 37.7-million baby boomers, who are inheriting their parents' estates even as they begin planning to pass their own legacies on to their children.

Business trust services are another potential growth area for credit unions, especially those that have already begun offering business lending and cash-management services to members who own small and mid-sized businesses. Employee benefits services-the management of retirement plans for small businesses-is just one example of the type of service a credit union trust operation might offer.

As relative newcomers to this field, credit unions can fill the niche of providing trust services for smaller accounts that fall under the radar of established trust companies. The minimum account sizes some of those operations will accept are $1 million, $3 million, even $5 million. That leaves a ready market of trust accounts in the range up to $1 million that credit unions and their affiliates can serve and help their member and nonmember clients grow.

The first step in understanding trust services and determining whether your credit union should be in this business is defining the basics of trust accounts and the relationship between those who create trusts, those who benefit from them and those who manage these accounts.

Trust Basics

In its simplest terms, a trust is an account of money, securities and/or other property managed by one individual or group for the benefit of another. A trust comprises at least three parties:

* The grantor-the individual, couple or group of people who creates the trust.

The trustee-the individual or group that manages the trust.

* The beneficiary-the individual(s) who benefits from the proceeds and/or principal of the trust.

A trust involves the transfer of legal title of property to the trustee, while the beneficial interest in the property belongs to the beneficiaries. The trustee pledges to act in good faith and fairness on behalf of beneficiaries, putting the beneficiaries' interests before his or her own in managing the trust.

The concept of trusts as a way to protect property for the benefit of family members dates back to the 13th century, but laws allowing corporations to exercise trust powers were not passed until 500 years later. In the United States today, people forming personal trusts have many options in appointing the trustees of those accounts. They may choose a close friend or family member to serve as trustee. Increasingly, however, people with accumulated assets worth hundreds of thousands of dollars and/or property and business interests that have appreciated significantly over the years select trust companies as their trustees.

Launching a Trust Operation

Instead of sending members to a bank when they need trust services, credit unions can offer them as part of their suite of products and maintain those valuable member relationships. In keeping with the trend toward life stages marketing, trust services allow credit unions to continue serving members throughout their life cycle and to form deep relationships with future generations of members.

Most credit unions that now offer trust services do so through a credit union service organization (CUSO), which allows them to serve nonmembers as well. Decisions about whether to offer trust services and in what form to offer them entail a great deal of market research. Credit unions must assess the number of potential prospects within their membership, based on such issues as age of members, income levels, net worth, and even ratios of men to women and married couples to single members. A member survey on interest in trust services might provide valuable information.

Credit unions should also research the existing trust services marketplace in their region. Which banks, trust companies and other institutions currently offer these services and to whom? Do they set limits on the size of trust accounts they will handle, and do those limits offer a niche market to your credit union?

As you decide to get into the trust business, you need to determine what products and services your organization will offer and which segments of your membership base will be most interested in those services. Identifying the appropriate products and services for your members will help define the structure of your trust organization.

The value propositions you make available will need to be market competitive. Your staff members will need to be subject matter experts with a firm grasp of fiduciary terminology and a capacity to communicate information in a professional and confidential manner.

James R. Devine is the chairman and CEO of Hipereon Inc., Redmond, Wash. He can be reached at 425-702-9200 or jim.devine hipereon.com.

About This Article:

This is an excerpt from "Members Trust: A Guide to Building Trust Services" published by CUES. For info: www.cues.org.

For reprint and licensing requests for this article, click here.
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