TRUST & ESTATE PLANNING

Is a Private Trust Company Right for Your Family?

07.07.2020 - Leticia Hernandez

Creating a private trust company is a unique approach for ultra-high-net-worth families facing the challenges of inter-generational wealth transfer. But it comes with unique concerns requiring careful consideration both when creating a private trust company and evaluating its usefulness as the family’s life progresses.  

As the name implies, a private trust company is created to serve as a trustee. This is the same service offered by a professional, non-private trust company or individual who may serve as a fiduciary. But the private trust company serves just one family. Family members are often actively involved in the company’s management. Families that create private trust companies typically have a net worth of more than $200 million and trust assets of $100 million or more.

Some families find that the flexibility, control, and privacy offered by a private trust company are well worth the added costs and personal responsibilities. But other families discover that operating a private trust company is more expensive and troublesome than desired.

If you are thinking about creating a private trust company, or you already created one and are re-evaluating that decision, this brief overview will help you weigh the pros and cons.

A Significant Family Commitment

Creating and managing a private trust company allows a family to bring its trust assets together under one roof. This can make it easier to coordinate the administration of a panoply of multi-generational trusts. It also provides control and makes it easier to recognize changes in the family’s financial needs or goals and quickly make changes. Multiple generations often take part in the decision-making process, which can help with succession planning. A private trust company also provides continuity. And families typically are able to leverage the resources of their family offices and other professional relationships to provide support for their private trust companies.

But running a private trust company requires a significant, lasting commitment of time and energy, whether family members take on most of the responsibilities themselves or hire professionals.

For example, the trust company is responsible for overseeing and distributing trust assets, making investment decisions, and maintaining proper records. Family members and staff will also typically be involved in drafting investment policies and procedures, communicating with family members, and serving on various committees.

Family members can also be responsible for hiring and supervising employees like accountants, attorneys, investment advisors and estate-planning professionals.

This intense level of family interaction brings some families closer together and provides the control they desire. For others, it becomes a source of conflict and stress.

Considering the Upfront and Ongoing Costs

It is critical to understand the costs associated with creating and running a private trust company. Organizing a private trust company requires upfront capital to form a corporation or LLC. The required initial capital contributions can be upwards of $500,000 and legal/registration costs are typically in the $20,000 to $30,000 range. Ongoing expenses often include, at a minimum, office space, business insurance, salaries, travel expenses, filing fees and regulatory requirements.

While many services can be outsourced, it is important to put a value on family members’ personal commitments of time and energy. This may be captured to some degree in a salary. But like any other family business, there is usually a range of intangible commitments that also require consideration.

These total costs then should be evaluated in relation to the cost of relying on a non-private, professional trust company, like Fiduciary Trust, or individuals to serve as a trustee. Such fees would likely be less than 1% of the trust assets. And the potentially lower cost and more flexible arrangements offered by alternatives like directed trusts or employing a corporate agent as an individual trustee, should also be considered.

There are also legal issues to consider. For example, board members for private trust companies typically have limited legal liability. So, if a board member is suspected of mismanagement or breaching his or her duties, family members will have fewer legal options available to address the situation in a private trust company than they would with a professional trustee.

Privacy Depends on State Laws

In general, trusts administered by a private trust company are subject to less stringent reporting requirements and regulations than trusts managed by public trust companies in the US. As a result, families have more control over their confidential information.

However, only a handful of states allow private trust companies. They include Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee, and Wyoming. Each of these states has its own set of statutes to govern private trust companies. So, the degree of privacy varies from state to state.

Private trust companies can be regulated by state charter or unregulated, usually by receiving a state license. 

State laws also can dictate how many board members a private trust company must have, and whether it can manage dynasty trusts that continue for future generations. This lack of uniform regulations across different jurisdictions can make transferring your private trust company to another state a complicated process.

For individuals who are not US citizens, a private trust company can be a convenient way to maintain privacy and bring significant assets to the US. But some states impose more stringent staffing requirements and investing restrictions on foreign citizens who are living abroad.

Succession Planning

One benefit of a private trust company is continuity. A trust company does not die, move away or become disinterested in its responsibilities like an individual might.

On the other hand, a private trust company is a family business. Like all family businesses, a private trust company requires a succession plan that addresses both the ownership of the company and its management.

For some families, this presents another set of difficult decisions. For others, a succession plan may already be well established in other family businesses, allowing them to replicate their governance and asset-transfer plans within the private trust company.

In either case, the succession plan requires attention when creating the company. It also requires regular attention during the lifespan of the company. As circumstances change, these succession concerns, along with the cost and other commitments necessary to run a private trust company, often cause families to rethink their decision and question if is still right for them.

Making a Well-Informed Decision

Every family is unique. Your family’s financial circumstances, goals, and willingness to become active participants in a private trust company will determine whether such a commitment is right for you.

If you decide a private trust company is the right move, Fiduciary Trust has the experience and resources to help you run it efficiently. For example, we can serve as a corporate agent, providing administrative, investment management and custodial services.

If the commitment of a private trust company seems overwhelming, we can provide a turnkey solution to your family’s most complex estate-planning needs, including family trusts. Our wealth advisors, tax experts, portfolio managers and administrative professionals are here to help you preserve and grow your family’s wealth for generations.

For more information, please contact your Fiduciary Trust representative or call us at (877) 384-1111.

Written by Leticia Hernandez




This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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