Understanding a Private Trust Company for Estate Planning

Key Takeaways

• A private trust company (PTC) is an entity formed by high-net-worth families to manage and administer trusts, allowing for greater control and confidentiality.
• PTCs can be regulated or unregulated, and the state of incorporation affects compliance obligations.
• Families benefit from tailored governance, risk mitigation, and intergenerational continuity through PTCs.
• Ownership structures vary and may include direct family ownership, foundations, or purpose trusts.
• Establishing a PTC requires careful legal, tax, and administrative planning—often involving multi-jurisdictional expertise.
• UpCounsel can connect you with experienced attorneys to help set up or evaluate a private trust company.

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.

Common Use Cases for Private Trust Companies

Private trust companies serve several important functions for families looking to retain control over wealth management and succession planning. Common use cases include:

• Multi-generational wealth planning: PTCs help ensure consistent trust administration across generations, with family values and legacy goals embedded in governance structures.
• Holding complex or non-traditional assets: These may include family businesses, art collections, private equity interests, or real estate portfolios, which require bespoke management strategies.
• Philanthropy coordination: When aligned with family charitable goals, a PTC can oversee charitable trusts or foundations while keeping decisions within the family.
• Jurisdictional efficiency: By forming the PTC in a favorable jurisdiction, families can access tax, privacy, or regulatory benefits while centralizing trust administration.
• Family governance and cohesion: Formalizing roles and processes through a PTC can help reduce conflict, ensure informed oversight, and educate younger generations about fiduciary responsibilities.

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.

Governance and Board Composition of a Private Trust Company

A defining feature of a private trust company is its flexible governance framework. While family members often play a prominent role, it’s advisable to incorporate experienced independent professionals. Typical board composition considerations include:

• Family Members: Often involved in strategic decisions, trust distributions, and preserving family values.
• Independent Directors: Offer objectivity, fiduciary best practices, and help the PTC meet regulatory or tax residency requirements.
• Legal and Financial Advisors: Including lawyers, CPAs, or wealth managers, who provide technical guidance on compliance and risk.

By establishing clear governance policies, the PTC enhances accountability and operational efficiency, minimizing exposure to mismanagement or legal disputes.

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.

Private Trust Company vs. Corporate Trustee

A private trust company offers a compelling alternative to appointing a third-party corporate trustee, such as a bank or trust company. Here's how they compare:

While corporate trustees offer reliability and experience, families seeking discretion, customization, and continuity often prefer private trust companies.

Key Regulatory and Tax Considerations

Whether regulated or unregulated, private trust companies must navigate a host of legal and tax issues:

• SEC Exemption: PTCs generally avoid registration as investment advisors if they meet the Family Office Exemption under the Investment Advisers Act of 1940.
• FATCA and CRS Compliance: If the PTC manages non-U.S. assets or beneficiaries, it may have reporting obligations under global tax transparency regimes.
• Corporate Taxation: The PTC itself may be subject to corporate tax depending on how it is structured and where it is domiciled.
• Substance Requirements: In jurisdictions like the Cayman Islands or BVI, maintaining physical offices or board presence may be required to satisfy economic substance rules.

Proper structuring can help minimize tax exposure and ensure the PTC remains compliant across jurisdictions.

Establishing a Private Trust Company

Forming a private trust company involves several strategic and administrative steps. These generally include:

1. Choosing a Jurisdiction: Factors include privacy laws, regulatory regime (regulated or unregulated), capital requirements, and tax considerations. South Dakota, Wyoming, and Nevada are popular U.S. jurisdictions.
2. Forming the Legal Entity: Often set up as a corporation or LLC, depending on state law and tax preferences.
3. Drafting Governing Documents: Includes bylaws, operating agreements, board policies, and any family governance charters.
4. Appointing the Board and Officers: Ensuring proper mix of family and independent members.
5. Applying for Licenses (if regulated): This includes meeting minimum capital thresholds, submitting compliance documents, and sometimes background checks for board members.
6. Ongoing Compliance: Includes annual filings, audits (if required), and adherence to fiduciary standards.

Given the complexity, working with legal counsel early in the process is critical to avoid regulatory pitfalls or tax inefficiencies. 

Frequently Asked Questions

1. What is a private trust company used for?
   It is primarily used by wealthy families to manage and administer family trusts, especially when handling complex or intergenerational wealth.
2. Are private trust companies regulated?
   They can be either regulated or unregulated, depending on the jurisdiction. Regulated PTCs follow stricter oversight, while unregulated ones offer more privacy.
3. Who typically owns a private trust company?
   Ownership may rest with individual family members, a family trust, or a purpose-driven entity like a foundation, depending on the desired governance and tax structure.
4. How do you set up a private trust company?
   You must choose a jurisdiction, form a legal entity, establish governance structures, and comply with relevant regulations. Legal guidance is essential.
5. What are the tax benefits of a private trust company?
   PTCs can be structured to minimize estate and income tax liabilities, especially when formed in tax-favorable states or offshore jurisdictions.

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