Private high-net-worth families seeking flexibility, control and privacy on fiduciary matters may benefit from forming a trust company. Unlike fiduciary services offered by other professional nonprivate trust companies or individuals, a private family trust company (PFTC) is created to serve as a trustee for just that one family. Additionally, private trust companies are subject to less stringent reporting requirements and regulations than trusts managed by public trust companies, allowing for more confidentiality. PFTCs also offer minimized liability for family members or trusted advisors acting as trustees of your trusts.
While a PFTC may be beneficial, clients need to be aware of the key regulatory and operational provisions, as well as the costs and expenses associated with it.
Top Jurisdictions
Those states that practitioners often use as the situs for trusts are also some of the best states to form a trust company. Practitioners have traditionally looked to Nevada, South Dakota and Wyoming as the top jurisdictions. In addition, Tennessee and New Hampshire have also recently enacted legislation to make their respective jurisdictions desirable. Delaware is often used by large institutions.
PFTCs can be either regulated or unregulated. Nevada, New Hampshire, South Dakota, Tennessee and Wyoming all permit regulated PFTCs. Wyoming and Nevada also allow unregulated PTFCs. Both regulated and unregulated trust companies are required to complete corporate formation through the secretary of state. There are advantages associated with both types of PFTCs; for example, unregulated trust companies typically have fewer operating costs than regulated trust companies, while regulated PFTCs offer family offices a potential exclusion from the need to register as an investment advisor with the SEC.
State regulators typically examine regulated trust companies through a review of the management, operations, earnings, compliance and asset management components.
As of Jan. 1, 2021, South Dakota leads the nation in the number of regulated public trust companies and PFTCs. Wyoming and Nevada are used frequently for unregulated PFTCs.
Capital Requirements
Another requirement to be aware of is that, generally, regulated PFTCs should anticipate a minimum capital requirement of between $200,000 and $500,000. Regulated public/retail trust companies should generally anticipate a minimum capital requirement of between $400,000 and $2 million.
Capitalization will vary based on the proposed trust company’s overall risk profile, pro forma income, and expense projections and state jurisdiction selected. For example, South Dakota public trust companies serving as trustees of foreign trusts or as custodians of cryptocurrency have been required to contribute and maintain higher capital.
Expenses
In addition to capitalization requirements, prospective trust companies should consider the costs to establish and operate a trust company. Generally, the costs for a PFTC are less than for a public trust company. Most applicants hire legal counsel or consult with an expert who understands the requirements for trust company formation. There’s also an application fee that’s due to the state.
Traditional expenses include: directors’ and officers’ insurance; financial institution bond; annual fees due to the state of charter; board memberships; trust accounting software; and employees/third-party service providers for account administration. Expenses will also vary based on how much of the responsibilities the family members will take on themselves.
License/Charter Process
A regulated trust company can be formed through proper application to a state banking authority. The formation process will vary based on the type of application and state where the application is filed. After the application is filed with the state authorities, regulators will conduct a thorough review of the application and its corresponding business plan. In addition, regulators will conduct background checks on the proposed owners, board members, officers and employees. An in-person or virtual meeting between the board members and regulators is typically required prior to approval.
Approval Process
The approval process and the length of time needed to receive approval varies from state to state. Generally, it takes approximately five to nine months to receive a private or public trust company charter/license. Time frames will vary based on the trust company designation (private or public), the complexity of the business model, the quality of the application submitted and the number of applications currently pending in the state selected.
Ongoing Requirements
The requirements for regulated trust companies will vary based on the jurisdiction and designation as either a public/retail or PFTC. In addition to periodic examinations, regulated trust companies should plan to have a physical office in the jurisdiction of charter/license where original or trust copies, including electronic copies, of all material business records and accounts of the trust company may be accessed and readily available for examination by the commissioner.
Some states require PFTCs to have a minimum of three board members. Regulators will likely review the backgrounds and complete criminal background checks of prospective board members, officers, employees and principal owners. No individual who’s been convicted of any felony or any crime involving fraud, dishonesty or a breach of trust may serve as a board member, officer or key employee of a trust company. Trust companies that have non-U.S. citizens serving in a trust company capacity likely will be required to complete enhanced due diligence with state regulators. In addition, state regulators may also complete a background check with FINRA on those applicants who are registered with the SEC.
Regulated trust companies are also often required to hold quarterly board meetings. In addition, regulated trust companies are often required to maintain a bank account with a state or nationally chartered bank having a principal branch in the state of charter/license.
*This article is an abbreviated summary of “Trust Company Requirements in Top U.S. Jurisdictions,” which appeared in the March 2021 issue of Trusts & Estates.
