Modern Family Offices and Private Trust Companies: A Creative Use of Purpose Trusts

“Modern Family Offices and Private Trust Companies: A Creative Use of Purpose Trusts,” that is the subject of today’s ACTEC Trust and Estate Talk.

I’m ACTEC Fellow Stacy Singer from Chicago.

The term family office has become increasingly common in conversations with ultra-high-net-worth families. But what does it actually mean? Families considering a family office have several structural options, each with its own tax and non-tax considerations. Advisors often play a critical role in helping families determine which design best aligns with their long-term goals, governance structure, and existing entities and trusts.

ACTEC Fellow Benetta Park of West Palm Beach, Florida will discuss a creative use of purpose trust as one of many creative approaches to modern family office and private trust company design. She will explore how purpose trust can be used within these structures to support a family’s broader planning objectives. Welcome, Benetta.

Benetta Park:  Thank you so much, Stacy. This is an area where technical planning meets something more enduring, how families define control, continuity, and purpose across generations. As we all know, there is no “typical” family office. They span a spectrum from virtual models to fully built-out single-family offices, and they often combine administrative, investment, strategic family and individual planning, and fiduciary functions.

Private Trust Companies Explained: How Families Retain Trustee Control

At the same time, many families are increasingly pairing these offices with Private Trust Companies, or PTCs, to internalize fiduciary control. A PTC is typically a family-owned entity that acts as a trustee for family trusts, allowing for continuity, governance, participation by the family, and management of complex or concentrated assets. But with that control comes the central question, who ultimately owns and governs these structures over time? And that’s where purpose trusts enter the conversation as one option for ownership of a family office or a private trust company.

Purpose Trusts: A Creative Ownership Structure for Family Offices and PTCs

So, what is a purpose trust and why do we care? A purpose trust is, at its core, a non-charitable trust without beneficiaries designed to carry out a defined purpose. Unlike traditional trusts which exist for people — for beneficiaries — purpose trusts exist to fulfill lawful and achievable objectives, a purpose. With Uniform Trust Code (UTC), purpose trusts,

1. must have a valid non-charitable purpose,
2. require an enforcer to ensure accountability and oversight in order for the purpose to be carried out, and
3. the property of the purpose trust needs to be applied only for its intended use and any excess funds in the trust could end up being distributed back to the settlor or the settlor’s successors and interests. This is referred to as the excessive funding rule.

Many states have adopted the UTC, but state laws vary considerably as to things like trust duration — ranging from 21 years to perpetual — the excessive funding rules, the ability to modify the purpose, the enforcer rules, reporting and information to be provided to beneficiaries regarding administration of the trust, and direct to trust provisions.

So, it’s important to understand the state differences and select the best jurisdiction that would best fit your particular client situation. A purpose trust can serve as the owner of a family office entity, or PTC, rather than having ownership fragmented across different family members or trusts because it fundamentally changes the governance dynamic. There are many purposes of purpose trusts, but in the context of family offices and private trust companies, the most relevant purpose is for the stewardship or perpetuation of ownership of the family office or private trust company.

Purpose Trust State Law Differences: Jurisdiction, Duration, and Governance Rules

Using a purpose trust can help preserve family harmony through ownership in a broader trust rather than particular family members or their trusts and entities. This creates a perception of maintaining fairness across family lines. In other words, the trust becomes a neutral stabilizing owner. This is particularly valuable in multi-generational families where ownership fragmentation can lead to conflict, voting control can become diluted, or diverging interest can threaten long-term strategy and family cohesion. The purpose trust solves for this by anchoring ownership to a mission, not to individuals or their trust.

Of course, these structures are not without complexity. We really need to take a look at the tax considerations. From an income tax perspective, there is uncertainty of whether a purpose trust should be taxed as a trust or as a business entity for federal income tax purposes.

• If the purpose trust is characterized as a business entity, it should be classified as an association, which is taxable as a corporation because the purpose trust has no beneficiaries to be taxed if a disregarded entity or a partnership pass-through.
• If the purpose trust is characterized as a trust for federal income tax purposes, it could be treated as either a grantor or non-grantor trust.
• If the purpose trust is actually drafted as a hybrid trust, which has a purpose but also includes ascertainable beneficiaries, then the purpose trust would be a trust for federal income tax purposes, which is why some purpose trusts are intentionally hybrid trusts so that there is more certainty around how it would be taxed.

Tax Considerations for Purpose Trusts: Income, Gift, and Estate Planning Issues

From a gift tax perspective, gratuitous transfers to a non-charitable purpose trust is a gift even though there are no ascertainable beneficiaries. You can use typical estate planning techniques to mitigate gift tax. You can, for example, use gift tax exemption, use grantor trusts, installment sales to grantor trusts — GRATs, valuation discounts, etc. — in order to fund the purpose trust. But note that transfers to non-charitable purpose trusts do not qualify for the gift tax and the exclusion. But given that there is some uncertainty around the taxation of purpose trusts, there have been requests for further guidance from Treasury and the IRS of particular note and for more information as a helpful reference on the tax uncertainties. I would refer you to the AICPA letter to Treasury and the IRS dated April 26, 2024.

So why are we seeing increased interest in these types of structures? Because families today are more complex and more focused on intentional governance and legacy. In some cases, purpose trusts may scale better across generations than traditional ownership models, individual or trust based. Purpose trusts offer something a little different. It’s a way to institutionalize family values and to create or support durable governance frameworks around a family office or private trust company structure for a family. In the right context, they can be very elegant solutions for aligning control, continuity, and mission across generations. Thank you so much.

Stacy Singer:  Benetta, thanks so much for really helping us understand the use of purpose trusts with family offices. Thanks everyone for listening and make sure you listen next week to hear the balance of Benita’s presentation on family office structures.

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