Many wealthy families have found the family office structure an effective method by which to coordinate and optimize financial investment, accounting and recordkeeping functions for growing families. Recently, however, wealthy families have embraced the use of a private family trust company (a “PFTC”) as an enhancement to this concept. A PFTC is a state-chartered entity designed to provide fiduciary services exclusively to members of a family office – unlike a family office, however, a PFTC can serve as a fiduciary under state law, and frequently is a preferred alternative to individual or institutional fiduciaries. In recognition of this developing area and seeking to maintain its position in the world fiduciary services, Florida has enacted a law to permit the formation of Private Family Trust Companies which will become effective on October 1, 2015.
By definition a PFTC is permanent and thus addresses succession concerns commonly encountered with individual fiduciaries by reason of age and mobility. Its permanent nature affords a level of consistency and continuity with respect to knowledge and sensitivity to family dynamics and varying needs. Family ownership of a PFTC provides a greater control over fiduciary fees and opportunities to mitigate costs through efficiency.
The ability to have family members participate in the management of the PFTC allows for greater flexibility and control over fiduciary functions as compared to the use of institutional fiduciaries. In particular, families can now better direct investment decisions and distributions to family members without the constraints of restrictive institutional policies and procedures. Many families also have found that this level of direct involvement promotes the growth of family leadership and family harmony. Wealthy families typically have a need for privacy. The use of a PFTC is ideal for this purpose inasmuch as the number of individuals involved in routine but sensitive administrative matters is more limited and controlled, fewer individuals are privy to family issues and concerns, and in most jurisdictions the dispositive trust documents are shielded from public inspection.
The ownership and management of closely held business or concentrated stock positions by a trust is frequently a troublesome issue for institutional fiduciaries. The use of a PFTC eliminates many of these concerns and limitations. Moreover, unlike in the institutional fiduciary context, families are now better able to integrate the skills and services of trusted family advisors, such as attorneys, accountants and investment advisors, including increased liability protection by the use of errors/omissions insurance coverage.
Several issues need to be considered regarding the creation of a PFTC, including the choice of jurisdiction, ownership and governance structure. Many states have enacted laws specifically designed to apply to private trust companies – these laws vary, but all are intended to provide statutory guidance on such matters as the application process, capital requirements, operational requirements, fees, taxes and regulatory procedures. When selecting a jurisdiction, it is also important to review and understand applicable trust laws such as investment standards for fiduciaries, laws regarding various property interests, the applicable rule against perpetuities, income and wealth transfer taxes, and asset protection/creditor rights issues. Some jurisdictions provide for regulated private trust companies, which may be desirable as this provides an exemption from registration as investment advisor with the SEC. However, regulated private trust companies are subject to periodic examination by local banking authorities – thus, the relative sophistication and experience level of the state’s banking authorities becomes an important consideration. Private trust companies can be organized as either corporations or limited liability companies, and can be owned directly or indirectly by family members. Alternatively, some families are utilizing ownership trusts or special purpose entities in lieu of direct family ownership; the latter provides greater continuity in ownership and mitigates transfer of ownership issues. A PFTC is structured like most business entities – it has a governing board, officers and committees. Family members usually serve in these various capacities, but it is of critical importance that appropriate limitations on their authority to avoid adverse income and wealth transfer tax consequences.
Properly structured and implemented, a PFTC has proven to be a remarkably useful concept by which wealthy families are addressing their unique needs for fiduciary services.