Date: May 22 2014
The private family trust company (PFTC) has become a popular and useful vehicle to provide trust administration to ultra high net worth families. There are many issues to consider when deciding whether to create a PFTC. These include:
Many states have enacted laws specifically designed to apply to private trust companies. These laws vary by state, but each provides statutory guidance on such things as the application process, capital requirements, operational requirements, fees, taxes, and regulatory procedures.
Some states provide "regulated" private trust companies, while others only offer an "unregulated" option. Regulated trust companies undergo a periodic examination, and are exempt from registration as an investment advisor with the SEC. Unregulated private trust companies are not subject to regulatory oversight, but face other limitations on their activities and may be required to register with the SEC.
When considering a PFTC, it is important for a family to review a state’s private trust company laws, trust laws, investment standards, rule against perpetuities, taxes, asset protection laws, property laws, experience of banking authorities, and corporate filing requirements.
Ownership and Governance
PFTCs are organized as either corporations or limited liability companies. They are owned directly (outright ownership) or indirectly (LLC) by family members. More recently, many PFTCs are owned by an "Owners Trust" or "Purpose Trust."
PFTCs are structured like any other business entity. They have a board of directors, officers, and committees. The board of directors is responsible for appointing the officers and committee members. The most common committees include an investment committee, a distribution committee, and an audit committee.
It is important that a family considering a private family trust company give significant thought to who will serve in these capacities and on these committees. Family members may participate in many of the decisions made by the PFTC, subject to certain limitations necessary to avoid adverse income, estate, and gift tax consequences.
Some other things to consider when deciding whether to start or how to structure a PFTC include:
- The start-up and operational expenses
- Family tolerance for independent parties to participate with family members in the decision-making process
- Intra-family privacy concerns (although these are usually addressed in the PFTC’s operating structure and policies)
- Although the IRS has issued several Private Letter Rulings and Notices with regard to PFTCs, the IRS has not yet issued final guidance with respect to the formation and operation of a PFTC
- Consideration of the removal of existing trustees in order to move family trusts into the PFTC.
Remember, once the decision to create a private family trust company has been made, it is important that it be properly structured to avoid adverse tax and estate consequences. Once operational, however, the PFTC has proven to be an accepted and valuable alternative to an institutional bank.
About Matt Tobin
Matthew Tobin is the Managing Director of the South Dakota Trust Company, LLC. His primary responsibilities include legislation management, special projects administration, new client/business development, general office administration, and development and management of the Private Family Trust Company business.
About Tom Cota
Tom Cota is a Staff Associate with South Dakota Trust Company, LLC (SDTC) in Sioux Falls, South Dakota. His primary responsibilities include assisting with legal and regulatory compliance for SDTC’s private/public trust company clients, assisting with administrative work, and working on a variety of special projects.