1. Advantages and Disadvantages of a Private Trust Company
2. Ownership Structures
3. Regulated and Unregulated Private Trust Companies

Updated November 3, 2020:

What is a private trust company? It is a vehicle wealthy families use for the planning and establishment of a trust. Establishing a private trust company is based on a variety of factors, including:

  • The need to maintain a level of control on how the trust is created.
  • The ability to preserve confidentiality.
  • The benefit of a trustee having a working knowledge of assets and how they are managed within the family business.
  • Trustees can respond quickly when commercial decisions must be made.

As a legal document, a trust is established to document fully how the management of all or a portion of the company should be handled. This may include:

  • How assets will be managed.
  • How assets will be distributed.
  • Beneficiaries of assets now and in the future.
  • The name of the person responsible for carrying out the trust instructions.

Advantages and Disadvantages of a Private Trust Company

When considering creating a private trust company, the advantages and disadvantages should be weighed. The advantages include:

  • Family control of the company is allowed.
  • A greater level of privacy is given.
  • Liability protection is supplied.
  • Trusts can be established in states with tax advantages specific to trusts, such as no income or capital gains taxes.
  • Exemption from investment adviser registration with the Securities and Exchange Commission (SEC) when the trust is regulated by state law and meets the requirements of regulatory oversight.
  • Provides more management flexibility for the investment of assets.

The disadvantages include:

  • Private trust companies are seen as entities that are untested.
  • When trustees are family members, there is an increased potential for conflict among family members.
  • Private trust companies have high costs related to startup and initial capitalization.
  • A continual outlay of money for administration costs.
  • In the case of mismanagement or a breach of the trustee, there is limited recourse in comparison to a corporate trustee such as a bank or trust company.
  • There are additional requirements when it comes to regulations, oversights, and financial reporting.

Ownership Structures

The ownership structure of a private trust company varies based on circumstances, including family dynamics and tax considerations. The structure may be held by the client directly, other family members, a trust, or a foundation. The structure should be evaluated for both the pros and cons related to each option.

  • Direct ownership by the client and family members is the easiest to put in place but may not be the best option because of taxation and confidentiality concerns. If there is an existing family discourse, this will escalate if there are issues with the trust.
  • A charitable or noncharitable purpose trust may be established to control the shares of the private company's trust. With this structure, a person must be appointed who is not a trustee. A known professional advisor to the family is a recommended choice.
  • A foundation may be established, which can exist in perpetuity and does not require shareholders.

Regulated and Unregulated Private Trust Companies

Regulated private trust companies are regulated under state or federal law and offer trust services. Unregulated private trust companies can be incorporated in states that allow limited purpose corporations. It is important to check the state regulations where the trust will be formed. Most states have requirements including:

  • Meeting full regulations.
  • Have formal capital and policy requirements.
  • Maintain all reporting requirements.
  • Meet all regulatory requirements.

Registration as an investment advisor with the SEC is not required for regulated private trust companies. The regulated private trust company is supervised by state or federal authorities and is seen as a bank and not as an investment. Unregulated private trust companies are not supervised despite providing some fiduciary services, offer increased privacy, and are less expensive to form and operate than a regulated trust company. Unregulated trusts must meet the family office exemption rule to avoid the SEC's registration requirement.

Practically speaking, the location of the trust affects how a trust can be formed and what regulations are expected. States that recognize regulated private trust companies include:

  • Alabama
  • Colorado
  • Delaware
  • Massachusetts
  • Nevada
  • New Hampshire
  • Pennsylvania
  • South Dakota
  • Tennessee
  • Virginia.

States that allow for unregulated private trust companies by administrative exemption are Wyoming and Nevada, while Massachusetts, Pennsylvania, and Nevada recognize unregulated private trust companies by statute.

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