Choosing trustees — not just initial trustees but successors — can be a complex and consequential task for families. To create a more sustainable future for their trusts, families are increasingly turning to private trust companies.
That was the case in 2014 when the family behind Briar Hall, a full-service single-family office providing services to four generations of one of Chicago’s founding families, was considering who could serve as successors for the individual family members who were serving as trustees at that time.
The family decided to establish a private trust company (PTC), which was chartered in 2016. The PTC provides the structure and professionalism of an institutional trustee, including preparation of financial statements and oversight of tax returns, says Gillian Nagler, head of trust services for Briar Hall. “The administrative piece of being a trustee is a pretty heavy lift, and we’re able to take that off of family members’ plates so they can focus on the things that are more important to them: investments, distributions and overall thinking about strategy and goals and objectives for the trusts,” Nagler says.
A private trust company (which can also be called a family trust company or a private family trust company, depending on the state) is a corporate trustee set up by a family to act as trustee of their family trust or trusts. A family trust is set up to benefit a defined group of people related to a specific person: lineal descendants, for example.
Establishing a PTC requires both time and money, but many families find that it’s worth it, says Eric L. Johnson, U.S. family office tax leader for Deloitte Tax LLP. “We’ve seen an increase in the number of private trust companies established. The barriers to entry and the related costs have dropped dramatically,” Johnson says. “Like any other transaction, I think the longer it’s around and the more people who are familiar with executing it, the lower the costs simply because it becomes more mainstream. There’s more of an industry around creating private trust companies now than perhaps there was in years past. And because of that, I think the time frame to set one up and the cost to establish one have decreased.”
Customized Governance
Trustee succession is a common reason families consider a PTC, but families may also benefit from being able to fine-tune the governance structure to meet their needs. In Briar Hall’s case, a number of the family’s legacy trusts were the initial clients of the private trust company. “Today, we are gradually bringing more and more trusts on as clients of the PTC, which means we have more and more people getting involved,” Nagler says.
Governance includes a family-wide distribution committee, as well as more tailored investment committees for specific trusts. This increased engagement of family members has been one of the primary benefits of the PTC for Briar Hall. “One of our evolutions over time has been to have more flexibility and tailoring in our committee structure and who is populating those committees,” Nagler says.
The trust company has also helped streamline some of the paperwork involved with trusts. When a trust has a single trustee, there is a lot of paperwork involved every time the trustee changes. When the PTC is the trustee, there is continuity in the trustee, with the benefit of flexibility in naming the underlying decision makers.
The relationship between a private trust company and the family office likewise can be flexible. Some PTCs also act as the family office. For Briar Hall, the family office provides a range of services to family members, including financial planning and private equity investments. The trust company is a separate entity — with its own board and officers — that receives services from financial reporting to technology and operating support from the family office.
The board of the trust company decides whether to take on a particular trust. When a new trust is accepted, the company becomes the trustee. Decisions are made through the trust company’s committees and board, whose members are currently all family members. “Our family members are still very much in the decision-making roles as members of committees or members of our board,” Nagler says. “We handle the administrative side.”
Weighing the Pros and Cons of PTCs
In addition to making trustee transitions smoother, a private trust company can help streamline the many voices that can be involved in decisions about trusts’ assets. Because most trusts are set up to split with each generational transition, multigenerational families can have a lot of individual trusts. A private trust company may manage multiple trusts — potentially hundreds — for one family.
If a family has a lot of trusts and each one has a different trustee, there can be a lot of different voices involved in decisions about the trusts’ assets — which can include a family-owned business, says Cindy Steeb, CEO and founder of CLS Legacy Team. Trust companies — whether they are private for one family or corporate trustees that oversee trusts for many clients — have a board and/or committees that make decisions. “The great thing about private family trust companies is you now have a consolidated voice that can speak as a shareholder for family-owned businesses,” Steeb says.
Still, a private trust company may not be the right answer for every family, says Abbey Flaum, partner and family wealth strategist at HB Wealth. “Because of dynamics, expense, hassle and the fiduciary standards required, families considering the establishment of a private trust company should do so with caution,” Flaum says. “We work a lot with outside trust companies, and oftentimes they’ll do a great job, so whether to work with them or establish a private trust company is a decision that hinges on a family’s particular desires and needs.”
The main reason for establishing a private trust company is to establish long-term governance and a framework for trustee succession, Johnson says. “In the past, when deciding as to who would serve as the trustee of your trust, you could look to an individual that you knew — a family friend or family member,” Johnson says. “There, you’re getting the familiarity with the beneficiaries, but you might not have someone who has fiduciary experience or experience serving as a trustee. Or you might have a corporate fiduciary, who understands how a trustee should operate but may not be as familiar with the family members, so they might seem a little distant or cold.”
Private trust companies are becoming increasingly popular because they are in the middle, Johnson says: “You have the aspect of being an independent trustee and having the governance and the succession framework in place, but because you are staffing the committees of that private trust company with family members and/or family friends, you get the familiarity that you might have with an individual trustee. It kind of balances both those needs into one entity.”