How to Start a Trust Company

Are you interested in setting up a trust company but don’t know where to begin? Starting a trust company requires careful planning and attention to detail. Let AFS guide you through the steps of how to start a trust company.

It is important to determine if you have a specific need for a trust charter/license. The two primary uses for a trust company charter/license is to serve as a trustee or as a custodian. If you or your company has a need for the ability to serve as a trustee or a custodian through a corporate entity, you are in the right place.

AFS will work to understand your specific objectives in starting a trust company and AFS work with you to draft a business plan that is consistent with those objectives. AFS will discuss capital requirements and key regulations that must be adhered to when starting and operating a trust company. AFS will provide the information needed to help you to choose the right jurisdiction for your trust company. AFS will help you understand the application process, complete the application, serve as liaison with regulators during the application review process, and receive approval for your trust company. AFS can also provide a board member and provide ongoing guidance to help your trust company succeed after the receipt of your trust company charter/license.

How to Start a Trust Company: Choose a Trust Company Jurisdiction

Choosing a trust company jurisdiction is an important decision when learning how to start a trust company. Fortunately, there are several US state jurisdictions that have demonstrated a commitment to attracting trust company business. There are several strong jurisdictions to form a state-chartered de novo trust company. A complete analysis of state jurisdictions can be found here. If you have any questions about what state may best suit your needs, please contact AFS.

Here are some of the key factors which are often considered when choosing the best jurisdiction for your trust company.

Public or Private

The first step in choosing a trust company jurisdiction is to determine the type of business you want to start. Trust companies can be either public/retail trust company or private family trust company (PFTC). Several top state jurisdictions have passed legislation differentiating between a public/retail trust company and a PFTC. Public/retail trust companies are permitted to serve as a fiduciary with the public and market their services to the public. In South Dakota, a “public trust company” is defined as: a trust company that engages in trust company business with the general public by advertising, solicitation or other means; or a trust company that engages in trust company business but doesn’t fall within the definition of a PFTC1.

A PFTC is one that doesn’t engage in trust company business with the general public or otherwise hold itself out as a trustee or fiduciary for hire by advertising, solicitation or other means and instead operates for the benefit of a family or families, regardless of whether compensation is received or anticipated2. Many states define who qualifies as a “family member” for purposes of the PFTC based on kinship to a designated relative. State law can vary regarding these definitions. However, state law consistently dictates that PFTCs shouldn’t transact business with the general public3.

Regulated or Unregulated

What’s the difference between a regulated trust company and an unregulated trust company? Regulated trust companies include both public/retail trust companies and PFTCs. Public/retail trust companies are regulated by state banking authorities because they interact with the general public. PFTCs can be either regulated or unregulated. Nevada, New Hampshire, South Dakota, Tennessee and Wyoming all permit regulated PFTCs. Wyoming and Nevada also allow unregulated PFTCs4.

Both regulated and unregulated trust companies are required to complete corporate formation through the Secretary of State. Regulated trust companies are required to submit an application and complete a formal approval process by state banking authorities. They are also subject to examination by state banking authorities in the state where the trust company was chartered/licensed. The timing and frequency of examinations as well as the cost of examinations will vary based on the state. Unregulated trust companies are not subject to capital and examination requirements. In addition, unregulated trust companies typically have fewer operating costs than regulated trust companies.

Capital Requirements

Generally, regulated PFTCs should anticipate a minimum capital requirement of between $200,000 and $500,000. Regulated public/retail trust companies should generally anticipate a minimum capital requirement of between $400,000 and $2 million. Capitalization will vary based on the proposed trust company’s business model, overall risk profile, pro forma income and expense projections, and state jurisdiction selected. For example, South Dakota public trust companies serving as trustees of foreign trusts or as custodians of digital assets have been required to contribute and maintain higher capital requirements. South Dakota has historically maintained the lowest capital requirement compared to its peers. Applicants should be mindful that state regulators often impose a higher minimum capital requirement than statutory minimums. For additional information on state capital requirements, please contact AFS.

Expenses and Employees

Annual operating costs will vary based on the state selected, trust company designation (private vs. public), business model, and number of accounts. Traditional expenses for public/retail trust companies include: directors’ and officers’ insurance; financial institution bond; annual fees due to the state of charter; board memberships; trust accounting software; and employees/third-party service providers for account administration. As part of the application process, trust company applicants will need to prepare detailed pro forma financials that outline anticipated income and expenses.

Requirements for trust company employees vary from state to state. For example, Nevada requires each retail and licensed trust company to have an employee who is a resident of Nevada in the principal office who has experience that’s deemed satisfactory to the commissioner in accepting and administering trusts5. South Dakota requires public trust companies to employ, engage or contract with at least one trust officer or key employee to provide services for the trust company in South Dakota related to the powers of the company and to facilitate examinations6. In addition, South Dakota trust companies are required to perform trust administration in South Dakota7. It is important to have an understanding of your preferred state’s jurisdictional requirements. To discuss anticipated expenses for operating your trust company, please contact AFS.

How to Start a Trust Company: Complete the Trust Company Application

How to Start a Trust Company

After deciding which state jurisdiction is best suited for your proposed trust company to achieve your objective, the next step is to begin the application process by drafting the proposed trust company’s business plan. AFS can serve as your guide in helping you to develop a business plan which will serve as the foundation for a successful application for a state trust company.

As part of developing the business plan, you will need to identify prospective board members. For public/retail trust companies, there is typically a minimum of five board members required. For regulated PFTCs, a minimum of three board members may be acceptable. In South Dakota, there is a requirement that at least one board member is a South Dakota resident and at least half of the board are US citizens8. AFS can provide a board member to fulfill the South Dakota resident board member requirement. Proposed applicants that have non-U.S. citizens serving in a trust company capacity likely will be required to complete enhanced due diligence with state regulators. In addition, state regulators may also complete a background check with FINRA on those applicants who are registered with the SEC. The business plan should also identity key officer positions and outline the persons proposed for those appointments.

Most states require an application fee to be paid at the time the application is submitted. The application fee can vary from state to state, but in most instances, the fee will range between $5,000 and $15,000.

AFS understands the key regulatory requirements in completing a trust company application to achieve regulatory approval. If you have any questions about how to complete the trust company application, please contact AFS.

Application Review Process

After the application has been submitted to state regulators, the application will be reviewed by the regulatory body to ensure that you meet all of the statutory requirements to start a trust company.

The regulatory body will review your application which includes business plan and financial projections. There may be follow-up questions from the regulators as part of the review process. After successfully resolving any questions or concerns, regulators will often request an in-person meeting with the applicants. Typically, the meeting will be held with the Director of Banking or equivalent for the state in which you have applied along with key members of the regulatory staff. The board should be prepared to attend this meeting where the regulators will outline the expectations and key requirements for starting and operating a trust company. In some instances, there may be a formal publication period which provides notice to the public of the pending application.

After any final outstanding matters with the regulators, the trust company may file its organizational documents to create the trust company with the Secretary of State. In addition, the proposed trust company will want to provide to the regulators proof of capitalization and proof of the necessary insurance coverages (D & O, Financial Institution Bond), along with any other documents needed to secure the trust charter/license.

Although the application review process and its procedures can vary from state to state, applicants should anticipate at least six to nine months to complete the application review process. However, some states like Wyoming provide a statutory timeframe for the completion of the application review process.

AFS will work with you to help answer any questions the regulators may have with the trust company application. AFS will also serve as a liaison with any regulatory meetings. If you have any questions about the application review process, please contact AFS.

Receipt of Trust Charter/License

Once your application is approved, you will be issued a trust charter or license. The trust charter or license will allow you to legally operate your trust company and execute the trust powers as authorized in your jurisdiction and in a manner consistent to your business plan as submitted in the application to the regulators.

AFS has helped many state trust company applicants successfully receive their approvals. From creating the business plan through applicant meetings with state regulators, AFS is your partner in helping you achieve a successful result.

Operating a Trust Company and Examinations

Operating a regulated trust company and meeting trust company best practices and ongoing legal requirements can be a difficult responsibility. State jurisdictions require regulated trust companies to hold quarterly board meetings. The meetings should be structured in a manner which document the trust company’s fiduciary and/or custodial oversight of accounts under management/administration. In addition, state regulators will require the trust company to develop and adopt policies and procedures which are specific to the trust company. The policies and procedures should provide a framework for corporate governance, administration, and operations. Account administration should be consistent with state law and governing instruments (trust document, custodial agreement). Furthermore, the trust company should also develop and maintain a comprehensive Bank Secrecy Act and Anti Money Laundering program.

State regulators typically examine regulated trust companies through a review of the management, operations, earnings, compliance, and asset management (MOECA) components. A full review of the components can be found by reviewing the FDIC Trust Examination Manual. Although state regulators aren’t specifically bound by the FDIC Trust Examination Manual, it is a very helpful resource for those looking to understand examination criteria and fiduciary best practices. For public/retail trust companies, state regulators often will rate each of the MOECA components. Based on those individual ratings, regulators will then assign a composite rating for the trust company, with “1” being the best and “5” being the worst. Each state has its own areas in which examiners will focus. It is recommended trust company applicants learn examiner expectations.

The frequency of examinations is often mandated by state law and previous examination results. Some states complete an initial review that amounts to a “practice examination” of the trust company prior to the first full examination. Wyoming and Tennessee are among the states that will complete an initial review within the first 12 months of chartering/licensing. The frequency of examinations varies from state to state. However, most states will complete an examination once every twelve to thirty-six months. Although the examination process can create anxiety for those who are not used to operating in a regulated environment, state regulators are often willing to outline items that will be reviewed well in advance of the examination. AFS also provides ongoing services to help your trust company achieve successful examinations.

AFS can provide board member(s), provide a certified BSA/AML compliance officer, assist in finding office space, provide ongoing consulting and advocacy concerning the trust company best practices and updates in local law, prepare agendas and meeting minutes, assist in the development of a trust company specific policies and procedures manual and provide updates as needed, and provide guidance and support to the proposed trust company with regulatory examinations conducted by local regulators.

If you have any questions about how to start a trust company, operating a trust company, and the ongoing requirements, please contact AFS.

[1] South Dakota Codified Law 51A-6A-1(12A).
[2] See South Dakota Administrative Rule 20:07:22:03
[3] New Hampshire Revised Statutes Annotated 383-D:4-402; Nevada Revised Statutes 669.042; Wyoming Statutes Annotated 13-5-204(a)(VI); Tennessee Code Annotated 45-2-2001.
[4] Wyoming Statutes Annotated 13-5 Article 7; Nevada Revised Statutes 669A.110.
[5] Nevada Revised Statutes 669.083
[6] South Dakota Codified Law 51A-6A-11.1
[7] South Dakota Codified Law 51A-6A-11.1; South Dakota Administrative Rule 20:07:22:04
[8] South Dakota Codified Law 51A-6A-13