A trustee manages assets for the beneficiaries of a trust, estate or other party. A custodian is the organization that actually holds the assets. A trustee can leave the assets in the custody of a bank or other institution. The bank secures the assets, but as a custodian it does not receive authority to make management decisions, such as which stocks or bonds to purchase with the money in the trust.
Fiduciary Responsibility
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The trustee must make investment decisions that are in the best interest of the beneficiaries. The beneficiaries can sue the trustee if the trustee makes an irresponsible decision. A custodian has to protect the assets from theft, but the custodian does not have fiduciary responsibilities to the beneficiaries. This means that a custodian must conduct a financial transaction for the trustee even if the custodian believes it is a bad decision.
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Authorization
A trust agreement lists the trustee and gives the trustee authority over the trust assets. The trustee can select another organization, such as a bank, to act as the custodian for the stocks, bonds or other instruments in the trust. The trustee can also withdraw the assets from one bank and place them in another bank, which changes the custodian of the assets.
Types of Trustees and Custodians
A trustee can be an individual, a stockbroker, a bank or any other organization that has the right to govern a trust. The custodian is usually a bank, but can be a credit union, a stock brokerage or another organization that stores money or financial instruments for its account holders. A trustee can also be the custodian of the trust accounts, such as a bank that serves as a trustee and holds the funds in a checking account.
Conflict of Interest
A bank that serves as a trustee may not be able to place the trust assets in certain accounts that it controls. If the bank receives a commission when a customer purchases shares of a mutual fund, or buys an insurance policy, then the bank has a conflict of interest if it uses the money in the trust to buy its own financial products. The Employee Retirement Income Security Act prevents a bank from placing money in its own proprietary mutual funds when it is the trustee of an employee benefit plan. If these types of investments would provide the best return for the beneficiaries of the trust, then the bank can purchase similar products from a different bank, which becomes the custodian.