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Wealth Strategies: Private Trust Companies

Wealth Strategies: Private Trust Companies

Mr FamilyOffice
November 03, 2023

Wealth Strategies: Private Trust Companies

When wealthy families want to create a lasting legacy for future generations, it’s essential they have a clear set of values and goals

But values and goals are not enough on their own. You need to design an enduring legal structure or framework that can act with flexibility and discretion to support the family’s objectives

Private Trust Companies are a popular structure used by family offices to address the complexity and risks associated with generational wealth.

To state the obvious - families are not perfect

There are all kinds of threats to the legacy of a family; reckless spenders, untrustworthy spouses, heirs who simply lack the experience to manage generational wealth

PTCs help families combat these risks

What is a Private Trust Company?

PTCs are perpetual entities that act as a trustee for one or more family trusts.

In contrast to Commercial Trust Companies, PTCs are geared towards serving a family (or specific group of people). They do not offer services to the general public

PTCs are designed to exercise judgment and discretion in alignment with the stated family values

PTCs have the following characteristics:

> the family retains a high degree of control over the trust's management, operations, governance, investment decisions and distribution policies

> the setup can be flexible and customizable to the family’s requirements

> high level of expertise and understanding of the family's needs

> provides a level of privacy and confidentiality that may not be available with other trust service providers

PTCs rely on similar structures to commercial trusts - there is usually a board of directors, trust committee and audit committee

They often serve as legal infrastructure for a family office

The trustees of a PTC manage two critical areas:

1) the management and investment of family capital

2) the distribution of family capital to beneficiaries

A typical PTC structure:

Operating much like commercial trust companies, PTCs are run by a board of directors

Family members often sit on or advise the board of PTCs and participate in decision-making

Professional trustees are often involved operationally, sitting on the board etc. These professionals support regulatory, legal and tax compliance

The board of managing directors – oversees operations, ensuring trustee objectives are being fulfilled and ensures discretionary distributions are handled in a tax-efficient way

Why set up a Private Trust Company?

Fundamentally, PTCs help protect younger generations when their parents are no longer around. PTCs support the smooth transition of wealth while protecting beneficiaries

PTCs help establish a clear governance system so that younger generations can take over as stewards of family wealth

Disputes around succession can be eliminated in advance through the rules set out within the PTC. This can alleviate one of the most difficult challenges faced by wealthy families

They can also help achieve certain other goals, such as the protection of assets such as properties or heirlooms. They can also be structured to help foster the personal development of beneficiaries, nurturing their skills and knowledge. Furthermore, they can help safeguard beneficiaries from potentially detrimental behavior

PTCs can help families maintain control of a family business, holding the shares of the company in trust means that younger generations can benefit from the company while retaining the business for future generations

One key benefit is that PTCs help families retain the best advisors and trustees between generations. While family office employees can often be fired on a whim, PTCs offer a more stable and continuous platform for retaining expertise and guidance, helping a seamless transfer of knowledge and continuity in wealth management

The structure of PTCs provides considerable flexibility and fast decision-making (in contrast to commercial trust companies)

At a practical level, PTCs can help families change income tax state or legal jurisdiction

The Cost 💵

PTCs require time, effort and cost. So, the 64 million dollar question... how much is it going to cost?

The legal costs to establish a PTC are can be at least six-figures and up to $500,000

Annual running costs can be around $150,000 + the cost of retaining advisors

So, the rule of thumb is that wealth of at least $500 million is needed to justify a PTC

It can be done with less, but it’s unusual

The costs include:

Legal and Advisory Fees
Regulatory and Compliance Costs
Governance and Administration; costs for board of directors, office space, and administrative services.
License and Registration
Insurance; premiums for liability and fidelity insurance.
Operational Expenses; Ongoing expenses like staff salaries, technology, and office maintenance
Tax Planning and Reporting
Audit and Accounting
Compliance Monitoring

Other options

When the cost of the PTC is too high, more cost-effective structures such as Commercial Trust Companies or individual trustees can be used

Commercial Trust Companies come at the price of relinquishing a significant degree of control. Whereas a reliance on individual trustees introduces new risks. If individual trustees are used, a distinct succession plan for advisors must be established. Increasingly, professional trustees will shy away from assuming the role due to potential legal liabilities

Update

Some great feedback on this newsletter - a good example:

Disclaimer

My lawyer has given me one of his looks 👀

So - this newsletter offers a general introduction to private trust companies (PTCs) and is not a substitute for professional advice. PTCs involve complex legal and financial matters, and their regulatory environment varies. Consult experts and conduct research tailored to your unique situation. I disclaim responsibility for decisions made based on this information. Happy now?

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