One of the more interesting ways that some wealthy families are addressing certain financial needs and concerns is through the use of private trust companies.

A private trust company is set up specifically to work with and serve a single family—somewhat similar to how a single-family office operates. Not surprisingly, the costs of creating and running a private trust company can be large, and the families that opt for this route are typically extremely wealthy.

The idea behind a private trust company is generally to help a wealthy family with estate planning and, often, business succession concerns (if there’s a family-run business involved). Private trust companies can also help with wealth and investment management as well as fostering shared financial values across multiple generations of a family. What’s more, a growing number of states have enacted legislation supportive of private trust companies, so they are gaining in popularity among wealthy families.

Reasons to go the private route

Of course, there are professional, non-private trust companies that aim to address the same issues for the wealthy. And an individual can also act as a family’s trustee. So what’s the appeal of going the private route?

There are several reasons that we see among families that create private trust companies.

1. Investment performance issues. If a family is unsatisfied with the returns that are being generated by the public trust company they’re working with, they may decide it’s worth it to them to pursue potentially better results via a private trust company.

2. Consolidation and coordination. A private trust company allows a family to combine its various trust assets in one place. This can make it easier for the family to coordinate the administration of the trusts across generations. It can also help the family as a whole be better aware of new developments in members’ lives that could impact the family’s financial situation—and respond more quickly if changes to existing strategies need to be made.

3. Trustee consistency and permanence. By setting up a private trust company, the family creates a permanent trustee capable of adjusting to changing family relationships. Without such an arrangement, the wealthy family may need to rely on individual trustees—who may die or become unable to do the job of a trustee—or on corporate trustees that run the risk of being merged into other financial institutions, changing business models or simply going out of business.

In contrast, a private trust company’s board of directors is composed of trusted professionals of different ages and tenures who have a very deep understanding of the family and what matters to its members. The result is a form of “institutional memory” that can better ensure that decisions made reflect the intent, objectives and values of the family.

4. Greater flexibility. With a private trust company, a wealthy family can have additional flexibility and control over decision-making. This occurs because the wealthy family can choose who is on the board of directors of the private trust company. Policies and procedures can be drafted to meet the needs and wishes of the family members.

5. Better decision-making. When there are meaningful family-owned assets—such as privately held business interests—held in trusts, a private trust company may be able to make decisions that are highly attuned to the family’s best interests at any given moment. And if the board includes various technical specialists (such as lawyers, accountants and wealth managers) who know the family members and their assets extremely well, better decisions may be made than would be if a corporate trust company were involved. 

6. Influence over family investments. Often, family members are on the investment committee of the private trust company. This gives them some influence over the ways the family money is allocated. This level of involvement is often significantly greater than the level of involvement possible with traditional trustees.

7. Multigenerational engagement and education. A major concern of many wealthy families is how to empower younger generations. Private trust companies provide a multitude of possibilities for family members to be involved in the management of the trusts. This ties into perpetuating the wealthy family’s mission and values. With a private trust company, future inheritors can be educated on the workings of the family by participating in activities such as board meetings. The degree to which future heirs are involved can be determined by each family. This is often not the case with institutional trustees.

8. Enhanced privacy. Privacy may also be enhanced with a private trust company, as the wealthy family can often control the flow of information. For example, there are likely to be fewer people aware of what is happening with the wealthy family than there would be if the family used a corporate trustee. The people chosen to be on the board, for instance, are likely to have strong loyalty to the wealthy family.

Additionally, using a private trust company may make it more difficult to pierce the corporate veil in regulated states. In some cases, private trust companies are not dealing with the same reporting requirements as public trust companies. Thus, the wealthy family might better maintain the confidentiality of information. Note: Each state that permits private trust companies has its own governing statutes.

Cost considerations

Perhaps the most obvious issue that families notice when thinking about a private trust company is cost. Setting up a private trust company could potentially require an upfront infusion of capital that might add up to several hundred thousand dollars or more. There are also legal costs and registration fees that might hit tens of thousands of dollars. Ongoing costs (such as office space, salaries of any staff, regulatory reviews and so on) will also be constant expenses. The upshot is that a levelheaded look at costs—and a comparison between the costs of a private company and the costs of hiring a non-private company—should be key parts of the evaluation process for any family considering this route.

Important: Keep in mind that it may be possible to reduce some costs. A well-organized, streamlined private trust company that focuses on a family’s key needs may be run with a lower cost structure. If professionals are outsourced or hired only when needed, staff and payroll costs may also be mitigated somewhat.

Conclusion

Clearly, private trust companies aren’t for everyone—not even for every family that is wealthy enough to set up and maintain one. That said, they offer intriguing benefits and potential advantages over the more common approach of using a non-private professional trust company. It’s an option that some wealthy families should have on their radar screens as they seek to make smart financial decisions.

---

This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
© Copyright 2021 by AES Nation, LLC. All rights reserved.

No part of this publication may be reproduced or retransmitted in any form or by any means, includ- ing, but not limited to, electronic, mechanical, photocopying, recording or any information storage retrieval system, without the prior written permission of the publisher. Unauthorized copying may subject violators to criminal penalties as well as liabilities for substantial monetary damages up to $100,000 per infringement, costs and attorneys’ fees.

This publication should not be utilized as a substitute for professional advice in specific situations. If legal, medical, accounting, financial, consulting, coaching or other professional advice is required, the services of the appropriate professional should be sought. Neither the authors nor the publisher may be held liable in any way for any interpretation or use of the information in this publication.

The authors will make recommendations for solutions for you to explore that are not our own. Any recommendation is always based on the authors’ research and experience.

The information contained herein is accurate to the best of the publisher’s and authors’ knowledge; however, the publisher and authors can accept no responsibility for the accuracy or completeness of such information or for loss or damage caused by any use thereof.

Unless otherwise noted, the source for all data cited regarding financial advisors in this report is CEG Worldwide, LLC. The source for all data cited regarding business owners and other professionals is AES Nation, LLC.

---