While gaining in popularity, private trust companies (PTCs) are not for everyone. Yes, they can give high net worth families more control than traditional trusts, but they can also bring added complexity.
We've seen more and more international wealth owners and families replicate specific parts of the wealth management service value chain to achieve autonomy and control.
Trends in private wealth management
Next to the increasing number of single family offices, in-house investment managers, and private label funds, setting up PTCs to act as trustees of their wealth structures confirms this trend.
Owning your private trust company sounds appealing, but there's the burden of running it to consider. The administration of trust companies comes with challenges and obligations that should not be underestimated.
Whether a PTC is a proper solution for you and your family depends on several factors. This post will address some of them and guide you through the evaluation process to make a more informed decision.
What is a private trust company?
PTCs act as a trustee for one or more trusts for one person, a specific group of persons, or family and do not offer trusteeship to the general public. They are usually structured as a company with a board of directors. The board members can be family members, professionals, and trusted advisors.
With a private trust company, you and your family maintain the oversight of the trustee's activities and ensure ongoing and consistent administration.
It's a powerful tool to enhance your wealth and estate planning strategy in a setup controlled to a certain extent by the family.
Why use a private trust company?
Being in control of your trust company allows you to tackle some of the professional trust industry's pain points outlined below. As mentioned above, autonomy and control in wealth planning and estate planning are the general drivers for establishing private trust companies.
Here are some more specific benefits to consider in your evaluation.
Continuity of trusteeship
Sound estate planning is not only a matter of strategy but also of execution. With PTCs, both aspects can be unified in the family wealth preservation framework. The most obvious benefit is that discussions about changing the trustee become obsolete.
To a certain extent, the family becomes part of the decision-making process and can build a closer relationship with the trustee simply because they own it. This may also prevent contentious situations where beneficiaries are not satisfied with a trustee's decision.
The professional trust industry is going through a transformation and consolidation process that impacts pricing, staff, and sometimes the trustee's location. Since private equity funds drive it, the ownership of professional trustees, often an essential element when choosing a trustee, may change over time.
With a private trust company, you don't need to consider these aspects anymore, and you achieve coherent and continuing administration of the family trusts over generations.
Individualized and flexible services
Trustee decisions are usually a lengthy process involving legal and compliance departments and their review levels. Over the past years, trustees' regulatory pressure has been constantly increased, leading to a strict policies and procedures framework.
Professional trustees are undoubtedly guided by the settlor's wishes but not always aware of all circumstances and relevant factors. So, they may seek court assistance in a procedure that takes time.
With a private trust company, the decision-making process can be streamlined and lead to faster results. Since it only administers trusts for a given family, it can focus on fewer scenarios than professional trustees and act more attentive to their specific needs.
Thus, flexibility can be another advantage over professional trustees. And it's not limited to administration but includes holding assets that professional trustees may be reluctant to.
In addition, the family has more control over the trustee's activities and the assets held under the trust structures.
You also have the option to transfer the PTC's administration to a professional trustee if things change over time and keep it separated from such professional trustee's other activities since trusteeship would remain with the PTC.
In some ways, you would share your own and its clients' destiny with a professional trustee if exposed to critical events such as data leaks, reputational incidents, or regulatory issues.
With a PTC, you only run your own risks and manage them without depending on externalities you cannot control.
Like with a single family office, you control who gets access to personal information. The family ultimately decides who is appointed at the PTC's board and administration level and may nominate family members for certain positions.
While you cannot control everything and everyone, you still have fewer people coming across sensitive information than an average-sized industry player.
Issues to consider
A thorough evaluation process is essential to determine whether a PTC is an ideal fit for your family's situation and requirements.
With clarity on the specific advantages over a professional trustee, it would be best to obtain transparency on how ongoing administration and compliance can be ensured and the taxation of the entire structure.
As well as on the involved parties, the private trust company jurisdiction, and if the costs align with achieving your particular goals.
Costs of private trust companies
Setting up PTCs can become costly. You have to create companies and trusts, compensate the board members, and eventually a service provider that assists you in the administration.
The implementation process can take time since a detailed assessment of the specific circumstances is required to design the framework that best suits your requirements.
The ongoing costs depend mainly on complexity. Even if they are higher than professional trustee fees, you still may want to bear them in light of the above benefits.
Administration of private trust companies
Running a trust company is not a straightforward business. That's why you want to have some professionals on the board of directors and, in many cases, a professional trust services provider assisting in administering the PTC.
In several jurisdictions, PTCs are entirely exempted from regulatory supervision or require the appointment of a licensed service provider.
In most cases, compliance with the Common Reporting Standard, its underlying exchange of information between countries, and Anti Money Laundering legislation are significant pain points and another reason to retain professional service providers.
While the tax efficiency of the PTC structure itself may not be a challenge, careful structuring and board of directors appointments mitigate the risk for PTCs to be considered managed and controlled by you and your family for tax purposes.
Furthermore, it requires a comprehensive review of the tax consequences for the settlor, beneficiaries, and eventual persons influencing the PTC's decision-making during and after their lifetime.
As we outline below, complete control may trigger total taxation of the trust assets with you and your family.
The trust administered by PTCs can also have a protector or a protector company. A protector has specific control powers to assist and direct the trustee in matters defined in the trust documentation.
These powers to protect the trust's beneficiaries and ensure the trust's administration is in line with its purpose can include removing and replacing the trustee and a veto regarding distributions, amendments of the trust, and its termination.
In general terms, a protector should not have the powers of a trustee but ensure control over it. A family office or protector company owned by the family can be a good fit for such a function, always considering the above tax aspects.
Private trust company jurisdictions
Next to common law trust jurisdictions, Liechtenstein and Switzerland offer a specific regulatory framework for PTCs. In addition, Liechtenstein has codified trust instruments, and Switzerland is currently discussing the implementation of local trust law.
We believe in simplifying wealth structuring to reduce complexity and enable compliance with an ever-evolving regulatory framework.
Thus, we recommend considering locations where you get high-quality professional support for the administration and to which you already have exposure, e.g., due to wealth management.
Liechtenstein and Switzerland exempt PTCs from licensing and regulatory supervision otherwise applicable to professional trustees, although compliance with the Common Report Standard and Anti Money Laundering regulation remains to be tackled.
Who owns the private trust company?
This really depends on what you want to achieve. If you wish to retain complete control, then you can directly hold the PTC shares.
However, full control comes at a toll since your taxman may not consider the PTC as a separate legal owner of the assets and continue to tax the assets with you and your family.
Also, from a wealth protection perspective, eventual creditors may have straightforward access to the trust fund in legal procedures.
You may further challenge the solution against lasting estate planning considerations since directly owned PTC shares may be part of your estate and would allow for liquidation of the setup by the succeeding owner.
In light of these considerations, the PTC shares are usually owned by a trust or a foundation to achieve lasting results.
Often the PTC shares are held by a trust. A non-charitable purpose trust is a specific type of trust used for PTCs. Several jurisdictions foresee such purpose trusts that are not limited by a perpetuity period.
Purpose trusts often need an enforcer to control that the trust administration is in line with its purpose. This role can be covered by a trusted person to retain some control over private trust companies.
As an alternative, a foundation can own the PTC shares. Foundations are legal entities without shareholders, members, or stakeholders and are administered to fulfill their purpose.
The foundation is represented by the foundation council, which can include family members, to fulfill its purpose and conduct the business.
In our view, Liechtenstein sets the benchmark for foundations as flexible estate planning vehicles that can last in perpetuity. Liechtenstein foundations have a long tradition and offer straightforward formation and administration.
Liechtenstein foundation as trustee
To further simplify things, a Liechtenstein Foundation can directly act as the trustee of the family trusts. This eliminates the need for the PTC and enables cost efficiency.
Like the PTC, the foundation would not be considered a professional service provider and be exempt from regulatory supervision as long as services are provided only to a closed circle of persons or the same family, the foundation statutes limit the purpose of such a foundation, and there is no profit-making intent.
All you will need is one member of the foundation council with a professional trustee license in Liechtenstein.
The single family office and the private trust company
Combining a single family office with a PTC offers many advantages in administration, service excellence, and efficiency.
The single family office can act as the headquarter of the family's financial operations overseeing governance, connected services, and the risk management framework.
Such a setup enables control, truly differentiated and individualized services and assists in unifying the family to preserve wealth over generations.
The alternatives to a private trust company
With a professional trustee, you will receive state-of-the-art administration and regulatory compliance at predictable costs for your family trusts.
Still, you may want to control such trustee with a protector or protector company of which your family owns the shares.
A Liechtenstein foundation can be a solid alternative to trusts, and you can appoint additional foundation council members or a protector to control the professional service provider.
Single family office
Single family offices offer an extra level of control and can be integrated into professional arrangements and execute control functions at various levels.
In particular, when it comes to investment management oversight, it can enhance the monitoring and control framework since professional trustees usually limit their responsibilities and liabilities for investment decisions.
Professional trustee companies
Also, with professional service providers, the structure needs to coherently fit into your overall wealth and estate planning strategy to achieve harmonious and lasting results.
Thus, the assessment should focus on a consistent services framework rather than the isolated evaluation of available options.
Let's recap on private trust companies
Private trust companies are powerful tools to execute and control a significant part of the wealth and estate planning process. However, due to their challenges and complexities, they are not for everyone.
The importance of an individual assessment
Only a detailed analysis of the individual circumstances and requirements will lead to the basis for an informed decision.
The private trust company structure should integrate into your overall wealth and estate planning framework to ensure consistent results over generations.
Collaboration with professional service providers
If you set up your PTC, you don't need to solve everything in-house right from the beginning. You can collaborate with a professional service provider for compliance and administration of the private trust company structure and enable in-house learning and capabilities growth over time.
Our preferred PTC jurisdictions
Although we have a home bias, in our view, Switzerland and Liechtenstein offer an ideal environment to integrate PTCs into individualized wealth and estate planning strategies.
Contact us to schedule a free consultation to learn more about leaving a lasting legacy and ensuring that your estate is distributed according to your wishes.