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The
Private Trust company:
Has Come of Age
Legal cost barriers have
dropped, making the PTC an option more wealthy families can chose. And
they are
In the late 1980's, not long after I took my traditional
bank-and-trust-companies practice to the new Chicago office of a mega
law firm, Jay Hughes, generations-bridging counsel to wealthy families
and one of my new partners, payed me a visit. "You know trust companies
and I know the wealth-management needs of the extraordinarily wealthy
American families," he said, "I believe that in the next decade
there will be a great deal of interest in the private trust companies,
like the one the Rockefeller family just chartered. With our combined
expertise, we may be able to respond to that interest." Jay was
prescient. But neither of us could know then how strong the interest
in private trust companies would prove to be – nor how many legal
obstacles would have to be overcome to attain his vision.
Statistics are hard to come by – after all, these are private trust
companies. The available evidence, though, suggests that formation of
private trust companies accelerated through the 1990's to what is now
a rather rapid rate. Based on fata from family Office Exchange, Inc.,
a Chicago-based association of wealthy families and family offices,
the 10 private trust companies I helped form from 1997 through 2001
represented at least a quarter of the private trust companies chartered
in that period. Our two-per-year pace has increased since 2001 to more
then five-per-year. The large number of client families now considering
the private trust company suggests this pace could double again during
the next two years. My discussion during the last year and a half with
state banking regulators in 20 key states reveal our experience to be
representative of a wider trend.
What has led to this geometric growth? Many of the most attractive elements
of private trust companies (PTC's) were already in place when I last
reported on PTC's, in August 1997 issue of Trust & Estates. But
back then, no private trust company charter was recognizable distinct
from those of public trust companies or bank trust departments. In addition,
most states that offered attractive environments for private trust companies
were geographically remote from most wealthy families' homes. This combination
of legal and geographic barriers discouraged all but the wealthiest
most committed families from considering the PTC alternative to individual
and institutional trustees.
Just six years later, a distinctive state PTC charter has emerged, dramatically
reducing the cost of forming and operating private trust companies while
enhancing their attractiveness. In key states, regulatory skepticism
and legal barriers have been replaced with familiarity and formal support.
The new private trust company charters crafted in those states are characterized
by:
* Modest capital and other charter requirements;
* Flexible to charter in one state while maintaining a full-service
office in another;
* Risk-appropriate levels of regulatory supervision and support for
fiduciary policies tailored to the clientele of a private trust company;
* Substantial protection for family and company privacy; and
* Reasonable staffing, space and activities requirements for both charter
state and family offices.
These developments make the PTC charter
more attractive and affordable. Coupled with a rapidly spreading awareness
of the PTC's many advantages, they may have propelled the concept past
the "tipping point," to use the phrase popularized by author
Malcolm Gladwell. At a minimum, it is a concept that strategic advisors
should discuss with any wealthy clients.
HOW WE GOT HERE
In the past, there was no identifiable PTC charter. Even if state law
recognized a private trust company, it was usually only for the limited
purpose of exempting the PTC from burdensome requirements that would
otherwise make it impossible for a family to obtain a charter. In my
1997 article, I cited two major legal disincentives to forming private
trust companies.
* Minimal understanding and acceptance of the concept among banking
regulators; and
* The inconvenience of chartering and operating a private trust company
in a state assistant from were the family lived.
This historic lack of accommodation had serious implications for the
cost structures and privacy of early adapters such as the Rockefeller
family. First, most state required PTC's to be capitalized at levels
comparable to banks, usually in the millions of dollars, even though
the working capital needs of private trust companies have always been
minimal. Second, burdensome regulatory regimes – designed for banks
with federal insured deposit, but ill-suited to trust companies serving
only the families of their owners – were applied indiscriminately
to private trust companies. Third , most states required all trust company
charter applicants to show they would meet the "convenience and
needs" of a wide public, as opposed to a wealthy family. Finally,
the privacy of private trust companies and their owners was generally
granted no more consideration then that of a state-chartered commercial
banks – even though revealing PTC ownership or assets under management
could expose wealthy family members and PTC employees to identity theft
and physical harm.
These financial burdens, regulatory requirements and privacy concerns
sharply limited the number of families able and willing to form private
trust companies well into the 1990's. Of course, some families were
motivated to form them anyway. But the financial burdens undoubtedly
induced many of these pioneers to admit unrelated families as clients,
thereby allowing them to spread their high mandatory cost over a larger
client base. In fact, almost every regulated private trust company chartered
before 1996 – including the Rockefellers' PTC that inspired Jay
Hughes to predict the trend – has now admitted unrelated families.
Another significant problem has been the distance between where wealthy
families tend to center their residences and activities – mostly
in populous states – and where the more favorable legal environments
for trust companies are found. Typically populous states make them unattractive
places to charter a private trust companies. This disparity has led
many families to charter PTC's hundreds, even thousands, of miles away
from were they lived their lives and managed their financial affairs,
creating operational challenges.
The difficulty of operating and office in a distant charter state was
exacerbated by strict limits on trust activities in the state where
the family office was located. In 1977, a PCT chartered in a state other
then the family state could not legally "do a trust business"
in the family state. This meant only administrative or back-office services
were permitted in the family state; all the discretionary trust decisions
hat to occur in the PTC's chartering state. Only families exceptionally
motivated to operate PTC's accepted the burdens of such and arrangement.
WHAT'S THE ATTRACTION?
Families are chartering PTC's at record levels. Here's why
The primary purpose of a PTC is to provide
fiduciary and other wealth management services to the family. It's attractiveness
therefore lies in how well it preforms based on the criteria by which
wealthy families judge there fiduciaries:
* Responsive and flexible – Networks with third-party providers;
offers choice of trustee contact personnel; welcomes settlors/beneficiary
involvement; willing to amend trust instruments.
* Loyal and independent – Helps avert conflicts; avoids sales culture.
* Multi Competent – Handles trust administration, investment management,
financial reporting and taxes; has specialized expertise.
* Efficient – Controls overhead costs; provides economies of scale;
has and uses leverage with third-party service providers.
* Convenient and Accessible – Puts information online; delivers
locally useful out-of-state trust/tax laws.
* Secure and private; Protects assets and family; provides quality fiduciary
risk management; has adequate capital; provides adequate regulation
and supervision; fosters a culture of privacy.
* supportive of Nonfinancial Objectives – Promotes families succession
planning and member development; has expertise in wealth issues; facilitates
charitable objectives.
In the chapter I contribute to the recently published book Wealth &
Wise, I describe these criteria in detail and apply them to the various
types of trustees available to wealthy families: individuals, institutions,
boutiques companies and private companies. But the most important are
the first two listed: responsiveness/flexibility and independence/loyalty.
And in these, private trust companies excel.
But they key to the private trust company's appeal is not just that
it meets families' short-term criteria, but also that it allows them
to respond to the changing needs and standards over the long term, even
for generations.
The PTC can meet several other important needs of wealthy families:
* Broad Powers – A PTC is the only form of family office can take
to provide fiduciary services directly to family members rather than
just supporting the family's individual trustees, private trust companies
can be unlimited in duration, substantially aiding the resolution of
trustee succession problems.
* Legal Protection of Family Members and Advisors or Family Office Managers
– Through both their corporate (or limited liability company) form
and formal risk management, PTC's may be expected to protect family
members and family office management from loss and personal liability
and obviate the need for a individual to bear the risk and burdens of
a trustee.
* Federal Securities Law Exemptions – PTC's are exempt from registration
as investment advisors with the Securities and Exchange Commission and
may offer common trust funds, pooling devices exempt from registration
under the Investment Company Act of 1940.
* Tax Management – If properly managed, PTC's can facilitate siting
trusts in states without state income or capital gains taxes and can
provide maximum deductibility of trust administration fees and expenses.
* Enhanced Family Governance – The governance process they require
of families is both a boon and a bane of private trust companies. Organizing
a PTC is a major step, usually requiring widespread support within a
family. But the case for a PTC is often compelling, especially for a
family already inclined to form or professionalize a family office.
In addition to all it's other benefits, a PTC ma fill a void left by
a departed family business, and I have seen families considering the
concept to develop a new cohesiveness. Ironically, because a PTC may
have significant capital and, more importantly, will play the vital
role of trustee of family trusts, the problem of keeping an asset within
family control for generations (previously solved with the sale of the
family business) may reassert itself around the PCT.
* Family Member Development – Like other family offices, the private
trust company can be locus of family member education and generation
succession planning. More uniquely, roles may be individually tailored
in the PTC to match the skill and interest of the family members as
well as trusted family advisors.
By John P.C. Duncan,
Principal, Duncan
Associates, LLC,
Chicago Ill.
From:
Trusts & Estates / trustsandestates.com August 2003
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