When A Bank Watches Your Nest Egg

If you're setting up a trust - for the children's education, say, or your wife's support in later years - you might look into the common trust funds run by banks and trust companies. What you get, in effect, is something close to a mutual fund: You name the bank trustee, and the bank, in turn, mixes your funds with other private accounts for investment in a single portfolio of securities.

The trend is for the common trust funds to pick up bigger accounts than in the past, with some customers who formerly would have started individual portfolio accounts. The range today for the common fund is mostly £10,000 to £50,000, but some people go up to £100,000 and more. One advantage, of course, is that your investments are spread far more widely than is practical with even a large individual account. Another is that cost is lower. At some big city banks, the minimum yearly fee for a common trust fund is £250 for accounts up to £50,000, against £375 and more for an individual trust.

Also, the common funds provide some attractive flexibility that was formerly available only with individual portfolios. For example, you often can name a co-trustee to serve with the bank, if you wish - when you want someone available for consultation who is closely acquainted with your family's needs. You can create the trust today (a "living" trust) or set it up in your will to be activated later (a "testamentary" trust). If you decide on a living trust, you would likely make it irrevocable; but it could be revocable - which means, of course, lopping off some tax advantages.

The banks offer several types of common trust funds. If you set up the trust without specifying the type of investment you want, the bank is required by law to put you into what is called a legal investments fund. This means a highly conservative type - possibly about 60% bonds, 40% stocks.

But if you give the bank full discretion as to the type of fund, you'll be letting bank experts decide where you belong, in view of such factors as family income needs and size of principal. Here you'll wind up in one of four types of funds: the balanced fund - today usually about 60% common stocks, 40% bonds; the 100% common stock fund; the tax-exempt bond fund (fastest growing type today); or, finally, the taxable (corporate) bond and preferred stock mix. When you establish the trust, you can name the type of fund you want. But this may or may not prove an advantage, depending on your property, income, and family situation.

The investment side, of course, needs to be studied carefully. Before going into any bank deal of this type, insist that the bank give you clearcut figures showing the investment track record of the trust department over the past five years.

As for the possibility of an individual portfolio account, in many cases the reasons for establishing one are now more limited than in the past. The decision usually hinges mainly on taxes. Here's one point that should be considered: Before you can get into a common fund, any securities put into it must first be liquidated. This, of course, can mean high capital gains tax. With an individual trust, however, your stocks can be turned over directly without first being sold.

Again, be reminded: Find out how the performance of the bank's various funds shapes up. Some may, indeed, be lagging behind top mutual funds.

The Indian Giver's Trust

An Umbrella Trust

The question of a single trust for two or more children - instead of frequently used separate trusts - is a point in planning you may want to review with your adviser. There are some pros and cons. London's Irving Trust Co. points to this example: Say you leave everything to your wife in trust for life, then to your three children. When you and she are gone, there's a net amount left of, say, £240,000. With an £80,000 trust for each of the three children, the annual trustee's fee runs roughly £1,000 - whereas a single £240,000 trust costs about 25% less.

And note: Besides this saving, a larger single trust gives the trustee more room to move in selecting investments.... see: An Umbrella Trust