For families grappling with trustee succession issues, forming a private trust company (PTC) — a corporate trustee set up by a family to act as trustee of their family trust or trusts — can be an excellent solution. But the structure is not the best fit for every family.
Experts suggest that families considering setting up a private trust company (which can also be called a family trust company or a private family trust company, depending on the state) consider these variables to make sure it will be worth the expenditure of time and resources:
The goal
“Think through how this is going to benefit your family,” says Gillian Nagler, head of trust services for Briar Hall. “There is some red tape and administrative complexity to a PTC, so you’ve really got to think about what you’re trying to accomplish.”
What could a private trust company offer that other options do not?
“I think a private trust company can be great, provide for protection and choosing your team, and the kind of control that we like to see,” says Abbey Flaum, partner and family wealth strategist at HB Wealth. However, she notes that private trust companies must have robust policies and procedures to comply with fiduciary standards — something families need to consider.
The structure
For families that already have a family office, one consideration is what the relationship will be between the private trust company and the family office.
In some cases, the PTC may be the family office. In other cases, the family office and the family trust company are completely separate, usually with a service agreement that specifies that the family office will provide the employees and services in exchange for a fee.
“If a family has a lot of trusts, it makes sense for the family trust company to also be the family office, because they can pull some of the trustee fees to pay for the family office services,” says Cindy Steeb, CEO and founder of CLS Legacy Team. “But if you don’t have a ton of trusts, you really need to think about the family office structure and how you’re going to fund your family office.”
Setting up a private trust company involves a lot of decisions, starting with what state to base it in. Some states require the PTC to have physical office space and employees in that state, for example, whereas others do not.
Families often choose a state based on where the family members can easily travel. For example, Briar Hall found states that met their requirements, Nagler says, then chose among those states based on convenience.
Another choice — which can be tied to the choice of state — is whether the trust company will be regulated or unregulated.
“The unregulated route works for a lot of people for a lot of different reasons. One is that you want the corporate structure but you don’t want unnecessary government oversight,” Nagler says. On the other hand, some choose more regulation: “Being a trustee is hard and comes with risk. You want to know that there is someone with some oversight.”
The personnel
A private trust company will have a board and committees, as well as trustees and staff members. All these appointments require careful consideration.
Trusts can last for hundreds or even thousands of years, so grantors establishing trusts need to think about long-term trustee succession, Flaum notes. Some families look to a trust company or a private trust company as the successors to their initial trustees.
“The discussion of trustee is one of the most important discussions anyone in an estate planning role can have, because, with many trusts, a trustee has enormous discretion, and a grantor must be comfortable with whoever’s exercising that discretion,” Flaum says. “For all families — whether considering a private trust company or not — we spend a lot of time focusing on trustees: who might be a good candidate (including individuals, professional trust companies or private trust companies), how that trustee would perform its role, how the trustee might interact with the beneficiaries and various professionals, and how the appointment of such a trustee might affect family dynamics.”
Families also need to consider how they will staff the board and committees needed to run a private trust company.
“Do you have people who are going to be willing and able to serve in these various decision-making roles, or are you going to be looking for outside professionals?” Nagler says. This could be a way to get more people involved, or it could be the opposite: “Some people don’t really have anybody who is ready or willing or able to serve in a trustee role, but they don’t want to go to an outside corporate trustee. So they’re looking for that structure, and they’re looking to pick the professionals that they want involved.”
Finding and retaining staff members who are a good fit for the organization’s mission is another challenge.
“We’ve been successful over time building a good staff, but it takes a particular kind of person who is not as transactional and is more service-minded,” says John Seckman, president of Shoebox Private Trust Company.
The cost
The cost of a private trust company can mean it doesn’t make sense for some families.
“They can be expensive to maintain and cumbersome to administer,” Flaum says.
The number of trusts and the assets in the trusts are key factors in determining whether a private trust company will be cost effective.
“If there are not enough assets in trust, or if there is only a single trust, you may not have the economies of scale to make it make sense,” says Eric L. Johnson, U.S. family office tax leader for Deloitte Tax LLP. “There is a lot of administration and some cost involved, not only in setting it up but also in running it. And you have to weigh that against what it might cost to use, for example, some combination of a corporate trustee and an individual trustee.”
The family culture
The right family culture is a critical prerequisite to building a successful private trust company.
“The private trust company can move the needle for the family. That said, if the culture wasn’t already here, you can’t create it out of thin air,” Seckman says. “The family has to have a culture that allows you to do this.”
Creating a successful private trust company “may require healthier family dynamics than, unfortunately, exist within many families,” Flaum says.
To fulfill their role in serving multiple generations of a family, private trust companies need to engage the rising generation and make sure the trust company remains relevant to them.
“We don’t want to be their father’s trust company,” Seckman says. “We want to be their trusted advisor.”