Thanks to this week’s contributor Laurent Roux of Gallatin Wealth Management for his thoughtful and informative article on the Private Trust Company (PTC). Laurent is one of the original authors of the FFI Global Education course (GEN 202) entitled “Families of Wealth: A multidisciplinary approach” and his expertise in this area further extends the learnings covered in this course.
Much has been written about the Family and the Private Trust Company (PTC). But do families appreciate and understand the relevance, and added value of this ownership structure?
The general perception of family members is often one of legal and fiscal convenience. The PTC is seen as a means to an end, much like financial capital – as long as it is there all will be well. Families who view their financial assets without regard for the other family wealth capitals (family, human and intellectual, etc.) miss the point and could well fail through the generations. It’s not just about the money! Similarly, the PTC is one building block of a family’s structural capital which enhances ownership and control. Indeed, it’s not just about fiscal planning and management.
The PTC is a company, either an LLC or a corporation, owned by the family and which serves as its trustee. It can be the sole or co-Trustee. There are now a number of states which allow the creation of such an entity – notably Wyoming, South Dakota, Tennessee, New Hampshire, Alaska and Nevada. There are varying levels of registration and compliance which need to be understood and respected.
Family enterprise and wealth are not self-perpetuating, they require planning and stewardship. Both transactional and transformational thinking is needed. There are structural architects for the transactional, such as attorneys and fiscal experts. There are “culturalists” (in the words of my friend Matt Wesley) who focus on the transformational. And then there is the family, and the evolution of the wealth management process. The latter historically revolved around “control from the grave,” and/or “control without ownership,” and created a static, imposing and often unacceptable or unappreciated approach to intergenerational estate planning. Result: limited family inclusion, intended and unintended consequences such as the “entitlement syndrome,” rebellion, poor resilience. Tax efficient indeed, but family deficient.
The focus is changing. Inter-generational planning and strategic thinking are becoming new norms. Family stewardship and the responsible ownership of wealth are seen by many families as invaluable; inclusion and communications take on a new role and function, families and their members take greater ownership of their futures. Intended consequences look to take precedence over the unintended.
As families reflect on all matters legal and fiscal relative to their wealth, the notion of control and ownership comes to the fore. From China to the USA, Europe to Latin America and South East Asia, families dislike losing control over their assets. The creation, use, need and challenges of the Trust itself are not easily understood but the increasingly intermingled web of a family’s ownership structures both domestically and/or on a multi-jurisdictional level make them indispensable. Families are presented with the challenge of who shall be Trustee. The risks relative to an individual serving as a trustee are well known, but often seen as the solution for reasons of confidence, relationship, even affinity. Financial institutions are often considered as a better solution, but the compliance, rules and regulations, and often slow reaction time, have caused families to think twice. Non-financial corporate trustees have blossomed thanks to a more flexible and user-friendly approach. Their relationship with families is more cooperative, inclusive, communicative, and families feel as though they are more involved. Taken one step further, the PTC enables families to be “involved.” And as for PTC trustee fees, guess who keeps them – the family, through their PTC. Why? Because they own the PTC.
Some of the key family motivations in establishing a PTC are: dynasty trust legislation allowing for perpetual or near-perpetual trusts, an important component of intergenerational T&E planning; highly favorable tax regimes (e.g., WY and SD 0%); asset protection from creditors (e.g., WY charging order protection for LLC’s); privacy and confidentiality; cost efficiency; effective administration; succession planning; and potential exemption from US SEC registration as an RIA.
The PTC comes with boundaries. Ownership does not mean a free reign, and control does not imply manipulation. As the family trustee in perpetuity with limited liability, dedication to the family exists as long as the family wishes to use it. It can enhance privacy and confidentiality since its operations are not public. It has a governance function through its organization and decision-making process, and the family can be involved through committees, e.g., investment, distribution. These committees enable family members to participate, learn, and contribute; such engagement fosters greater family affinity in its structural capital – as long as properly structured, organized, and administered.
There is a need to understand their legal structure — regulated, unregulated, chartered -costs, regulatory compliance, and exemptions, and appreciate the jurisdictions (e.g., WY, TN, SD) which support them. Administration services and providers vary, so homework and due diligence matter.
Importantly, PTC’s are managed by a board of which family members should be in a minority position. Board members owe their fiduciary responsibility to the PTC, as pointed out by Jay Hughes, Keith Whittaker, and Hartley Goldstone in their book Family Trusts (Wiley 2016); they will consequently be less likely to act out of fear when dealing with “troublesome” beneficiaries. These persons are selected by the family, and the PTC is owned by a Family Trust (usually a so-called Purpose Trust).
Our colleagues (Hughes, Whittaker and Goldstone) have shared six best practices which are worthy of comment. First, the PTC should hold annual/biennial meetings of all concerned. Communications and reviews in this process should be well-received; transparency matters. Second, the PTC should incorporate the family’s values and “ethos” – this helps in the decision-making process. Third, the same should apply to the Trustee(s) of the Purpose Trust; the family as owner is important here. Fourth, family members should be engaged in the mission and vision of the PTC, and on an intergenerational basis. Periodic reviews should be undertaken and each generation allowed to share its thoughts. Fifth, family education can be promoted through the PTC’s activities. Sixth, the PTC should help guide beneficiaries as recipients, promote their thriving and resilience, and avoid the potentially destructive force of the gift – the risk of entropy.
One of the important issues faced by PTC’s and their directors, and of interest to family enterprises, concerns concentrated shareholdings, and the duty to diversify. Often, families own concentrated holdings in a private or public company, or real estate. The Settlor may instruct these assets be held in trust. It should be noted that since the PTC is a corporate entity, logic dictates it should be governed by the “business judgment rule” which allows for more flexibility in making investment decisions by its Directors. (See, Hughes, Family Wealth – Keeping It In The Family, Bloomberg, 2004). This is set against the “prudent investor rule” which would apply to individual trustees, and according to which such trustees would be more cautious and/or conservative in their diversification assessment and decisions. Christopher Armstrong, a friend and CA Attorney at Armstrong & Hastings LLP, in his paper “The PTC: Can it reconcile the competing imperatives of the prudent investor rule and the settlor’s direction to retain” (2006), presented at STEP San Francisco, argues that “where a trust… by its terms discourages diversification” trustees may not be completely protected in their decision-making unless the agreement itself discharges them of their duties under the prudent investor rule. Since family members are involved with the PTC, they may be at ease holding concentrated positions along with any risk, so as to respect the founder/settlor’s wishes. They should avoid self-interest issues and be ready to deal with unhappy family members if things go wrong. As Armstrong notes, suing family members in this case would be suing the family. This is not good for family relations, but still a possibility. Something to think about; another useful option – directed trusts.
Finally, what of the Family Office? The FO management team needs to understand and appreciate the role and function of the PTC, and how to work in conjunction with it to serve the family. Without going into detail about types and complexity, FO’s should be managed on the basis of well-aligned interests with the owner family. Family members should avoid micro-management of the office, staff turnover should be low, service levels to family members defined yet flexible, and good communications key. The PTC/FO relationship is dependent on the roles and functions of each being clear, and their collaboration efficient. For example, the avoidance of redundancies and duplification. The family itself should understand the two and how they differ; as well as how they complement one another.
As for investments, a couple of thoughts. First, the Family Office should oversee the asset allocation, managers, and risk in accordance with an Investment Policy Statement. Family, dynamics, needs, and services should really be the focus of the FO; Dodd-Frank certainly motivates a FO to outsource its investment needs. The protection of privacy can also be a real incentive. The PTC can have an Investment Committee, which works in conjunction with the FO, and allows for family member participation and financial education. The underlying theme here – the owners should focus on ownership not direct management of the financial assets. They should know and understand risk, focus on strategy, manager selection, and monitoring – all elements of financial stewardship.
In sum, the functionality of the PTC is founded in the family, by focusing on strategic and practical outcomes. Its value is its role in helping perpetuate the family through the generations as resilient and responsible owners of wealth.
About the contributor
Laurent Roux, CFBA, is the founder and CEO of Gallatin Wealth Management in Jackson, WY. He has over 30 years of extensive experience with family and family office related activities including strategic wealth management, family office planning, coordination, consulting, administration, and international asset management. Laurent is a former member of the FFI board and can be reached at [email protected].