Last week, the Wall Street Journal published a piece on private trust companies (PTCs).
I strongly agree with the author that setting up a PTC can be a great idea for some ultra-high-net-worth families. Doing so can facilitate the management of their trusts in a more personalized and potentially cost effective way for the long term, while potentially reducing personal liability for individual family members. Additionally, a PTC can make investment decisions in ways that reflect the family’s personal investment philosophy whereas corporate fiduciaries may focus on using their own investment solutions and mitigating their own risks.
When to Use
In my experience as an estate-planning attorney who started researching PTCs for some of the country’s largest families in 1998, PTCs are often most appropriate for families with at least $500 million of trust assets across multiple trusts, and we explored them for those with more than $1 billion of total assets. I also believe that a discussion of PTCs should include guidance that a PTC: (1) often makes the most sense for clients who already have a fully functional family office, (2) will rarely make sense for clients with only $100 million in total assets, and (3) generally won’t make sense for clients with less than at least $250 million in total assets.
Sometimes clients with $100 to $250 million in total assets have advisors convince them to create a full-blown family office structure and/or a PTC. Creating these entities can generate significant attorney fees (often well above $100,000), but doing so can be a mistake for the family. The costs of creating and maintaining these entities, particularly when they’re not located in the state where the family is headquartered (even with support from outsourced service providers) and the challenges of hiring and retaining talent to help run the entities can be a much larger undertaking than the families understand at inception or can afford long term. In fact, we’re seeing some less wealthy families with smaller family offices deciding to shut down their operations and seek other solutions, such as using the services of a well-resourced multi-family office.
Governance Structures
A carefully drafted trust instrument can put in place appropriate governance structures that entirely replace the need for a trust company at all. For example, a trust distribution committee (with a thoughtfully constructed succession plan) can be structured within the trust instrument. To address liability concerns, individual fiduciaries can obtain fiduciary liability insurance, and the trust can clarify that such costs be paid as an expense from trust assets. On the investment side, a directed trust approach contained in a trust instrument can shift investment decision-making from a corporate fiduciary to family members serving on a trust investment committee or investment advisors they select. For many wealthy families, working with a multi-family office experienced with arrangements like these can be much more cost-effective and provide better results than establishing and managing their own stand-alone family entities.
Proceed Cautiously
Ryan Harding of McDermott Will & Emery in Chicago has set up dozens of PTCs and echoes my word of caution in determining when such entities are appropriate. Harding explains that whether a PTC is appropriate for a particular family has less to do with the size of their assets and more to do with their family governance objectives, the number and complexity of trusts involved, and the family’s other options for accomplishing their goals. As Harding said to me: “Each family needs to carefully consider why they would want a PTC and what it would do. The PTC will be a real fiduciary company with real regulatory (even if reduced) obligations. There are some exceptions, of course, but generally the costs and complexity make sense for families with well north of $100 million.”
What do you think about Private Trust Companies? Panacea or hype?
