Private Trust Company Design Considerations for Family Wealth Planning

“Private Trust Company Design Considerations for Family Wealth Planning,” that is the subject of today’s ACTEC Trust and Estate Talk.

This is ACTEC Fellow Julia Meister of Cincinnati, Ohio.

What Is a Private Trust Company (PTC)?

For ultra-high net worth families, governance and long-term wealth management often extend beyond traditional trust structures. One structure that is increasingly considered in these situations is the private trust company, which can provide families with greater involvement in trust administration while maintaining professional oversight.

ACTEC Fellow Elise McGee from Chicago joins us today to discuss key considerations when designing a private trust company, including how this structure can fit within a family’s broader planning framework. Welcome, Elise.

Elise McGee:  Hello, thank you so much. And I want to just start off by saying what is a private trust company, or PTC for short. I think most of you probably know a PTC is an entity typically owned by a family that serves as a trustee of family trusts.

Should a Private Trust Company Also Be the Family Office?

And the question I get a lot from clients is this: should my private trust company be my family office? And the answer is typically “No.” Rather, the family office entity is typically separate and distinct from the private trust company and provides support to the private trust company pursuant to a management services agreement.

So, why do we generally recommend setting up separate structures for the private trust company and the family office? It is because of the regulatory and jurisdictional considerations that are unique to a private trust company because a private trust company is providing fiduciary services unlike a family office and what we  think of as a family office.

Regulated vs. Unregulated Private Trust Companies

Many states have dedicated legislation allowing for the creation of a state chartered private trust company or so-called regulated-PTC. Some states allow for unregulated private trust companies as well. So, when you’re thinking about the design of a private trust company, you want to be aware of the state level differences in selecting a jurisdiction. If you’re opting for a regulated private trust company, you’ll want to be mindful of the extent of the regulatory oversight.

Family offices typically provide services to families which you may or may not want under the purview of a state banking commissioner on audit. So, this is really one of the most compelling reasons to keep the family office separate from the private trust company. You’ll also want to take a look at who can receive services from the private trust company under the relevant state statutes. There’s generally a definition of family member that you look at and see: does this family’s trust; does this family in general; can it receive services under that definition of family member?

SEC Considerations and the Family Office Exemption

An unregulated-private trust company  trust company could be subject to registration with the SEC (U.S. Securities and Exchange Commission) under the Advisors Act if not structured properly under the family office exemption. The SEC family office exemption provides that family members should be involved in the governance of a family office or, by extension, a private trust company. If you are a regulated private trust company, you qualify from the bank exemption from SEC investment advisor registration and therefore do not need family members to participate in the governance of the private trust company. So again, a key consideration, if you want independent decision makers, you may be forced to be in a regulated private trust company structure.

It goes without saying that you also want to be aware of the applicable trust and property laws and the jurisdiction where your private trust company will be operating because core fiduciary decisions involving distributions and investments may need to be made outside of certain states for income tax or regulatory purposes. So make sure you’re not violating state banking laws by conducting unauthorized trust business in other states. And this is perhaps one of the most important considerations for when you’re designing a private trust company, but it’s important to select a jurisdiction that’s convenient and desirable for PTC decision makers to travel to. If you have family members being involved, obviously in the jurisdiction, they may have a strong jurisdictional preference for skiing or for sun. That is, if you’re required to bring people together at a jurisdiction, that is a very important consideration.

Choosing the Right Jurisdiction for a PTC

In some cases, the private trust company may need to register to do business in another jurisdiction, which may create an undesirable tax nexus to that state. This is true, for example, if a private trust company is named as an executor of an estate or needs to respond to litigation or otherwise file a court action in another state. And as we all probably know, some states severely restrict foreign fiduciary activity in their state so you need to review those reciprocity considerations carefully. When setting up a private trust company in a jurisdiction, you’ll want to be mindful of other filings such as workers’ compensation, local licensing, employment tax, things like that.

Finally, I wanted to just quickly talk about the design of the private trust company. We’ve talked about the regulatory and jurisdictional considerations. But when we’re thinking about design, one of the key considerations is the ownership of the private trust company. The private trust company typically needs to be funded with the state-required minimum regulatory capital — and that capital needs to come in through ownership of the private trust company.

Ownership Structures for a Private Trust Company

There are a few different options for ownership and which option you select will depend on the family’s preference, as well as available exemption amounts.

• Option one may be your typical completed gift dynastic style trust that could own the private trust company.
• Option two is an incomplete gift trust with the settlor as a beneficiary of that trust.
• Option three may be outright ownership of the private trust company. That typically goes hand in hand with an amendment committee at the private trust company, which would make decisions to amend the tax-sensitive decisions and provisions under the private trust company trust company operating agreement.
• Option four is an existing trust where you’re decanting from an existing trust or using an existing trust as a non-voting owner of the private trust company.
• And the last option that is really becoming more and more common, and that’s the use of a purpose trust to own the interest in the private trust company.

There is significant variation, and that’s really, as I mentioned, going to depend on the family’s goals and setting up the private trust company. There’s a lot we could discuss today with respect to private trust company design. However, I hope you’ve learned a little bit about the jurisdictional and regulatory considerations as well as some ideas about the ownership of the private trust company.

Julia Meister:  Thanks, Elise, for shedding light on private trust companies for us today.

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