A private trust company or family trust company is an estate planning tool that can be used to preserve wealth. This type of trust entity is most often used by high net worth and ultra-high net worth individuals. For example, someone who runs a family-owned business and has $150 million in assets may choose to establish a private trust company versus a revocable living trust. Creating a private or family trust company can offer certain benefits for estate planning, though it’s important to consider the legal implications and costs of creating one.
A financial advisor can provide valuable guidance and insight as you develop and modify your estate plan.
What Is a Private Trust Company?
The terms private trust company, family trust company and private family trust company all refer to the same thing: A legal entity that offers fiduciary and trustee services to a single family group. Private trust companies are state-chartered, though state guidelines vary regarding their establishment and regulation.
A private trust company is similar to a family office, in terms of what it’s designed to do. For example, a private family trust company may:
- Manage investments
- Perform accounting or recordkeeping services
- Manage and distribute financial assets on behalf of beneficiaries
- Help with legacy planning
The difference is that the family members themselves may play a central role in decision-making. Additionally, a private trust company has fiduciary status, whereas a family office does not.
How a Private Trust Company Works
A private trust company is established to act as the trustee for one or more family trusts. State regulations typically require that the trust be administered by a licensed fiduciary. A board of directors is appointed, which may or may not include members of the family that established the trust company. Family members can also serve on various committees related to the company’s administration and management.
In terms of ownership structure, private trust companies may be held by the establishing family, another trust or a foundation. Private trust companies may be regulated or unregulated. A regulated private trust company offers trust services and is subject to state and/or federal laws. Unregulated private trust companies can be established in states that allow limited-purpose corporations.
Regulatory requirements vary from state to state and not all states recognize this type of trust entity. But it may be possible to establish a private family trust company in a jurisdiction other than where you live. Talking to a financial advisor can help you to evaluate your options for establishing a private trust company.
As with other types of trusts, a private trust company is created through a legal document. This document details how the company should be managed. Specifically, that includes:
- Who will be named as beneficiaries of the trust
- How assets will be managed
- How and when assets will be distributed to beneficiaries
Private trust companies are designed to preserve ownership of family wealth, which may include business assets, real estate, alternative assets such as hedge funds or private equity. These assets are managed by the trustee in accordance with the wishes of the family. Trustees must follow fiduciary standards and are personally liable for decisions made when acting in that capacity.
Family members can participate in the day-to-day trust management, though it’s more common for this to be handled by the trustee. That allows the family to focus on other activities related to wealth preservation, philanthropy or other financial goals.
Advantages of a Private Trust Company
Private trust companies can offer some unique advantages to families that may not be afforded by other trust structures. Some of the chief reasons for considering a private trust company include:
- Ability to maintain control of the trust company
- Enhanced privacy protection
- Potential tax advantages
- No need to meet SEC registration requirements
- Increased flexibility with regard to decision-making and asset management
Private family trust companies can also eliminate headaches surrounding succession planning. Since the trust company is designed to be a permanent trustee, there’s no need to name one or more successor trustees. Having the same trustee means there’s no learning curve to tackle with regard to understanding the family’s needs and objectives.
Overall, private trust companies allow families to leave most of the heavy lifting involved in estate planning to someone else while still having the ability to be involved in decision-making. This type of trust company can work in tandem with a family office or serve as a replacement for the family office structure if necessary.
Disadvantages of a Private Trust Company
Private trust companies are not always right for every family situation. Before moving ahead with one, it’s important to understand the potential drawbacks:
- Establishing a private trust company can carry high initial costs
- Maintaining a private family trust company over time can also be expensive
- They may not be suitable for families with net worth below $50 million or $100 million
- Potential for conflicts may arise when family members are involved in company management
- Meeting regulatory, oversight and financial reporting requirements can be burdensome
A private trust company requires a larger commitment of time and money from the family members. Even though the trust company may take responsibility for managing and distributing trust assets or maintaining records, the family members may still play a part in handling communications or hiring and supervising employees.
How to Establish a Private Trust Company
Organizing a private trust company requires the formation of a corporation or limited liability company. Regulatory guidelines can require a minimum amount of capital to be contributed at this stage, which can $200,000 or more. There are various legal and registration fees that must be paid, which can add another $20,000 or more to the total.
Setting up this type of trust entity is different from creating something like a revocable living trust or a simple testamentary trust. For that reason, it’s helpful to talk to a trust and estate planning expert and a financial advisor first. An estate planning attorney can walk you through the process of creating a private trust company while a financial advisor can analyze your situation to determine if a family trust company is suited to your needs.
The Bottom Line
A private trust company, also known as a family trust, is intended to meet estate planning needs for families with a high net worth. This type of trust structure offers more flexibility than a standard trust, though it does come with higher setup and management costs. If you have substantial wealth then you may consider this kind of entity as part of your financial plan.
Estate Planning Tips
- A private trust company may not be suitable for the everyday person. But you can still use trusts for estate planning even if you have a smaller net worth. There are many types of trusts that you can use to protect assets and pass on wealth to loved ones. Keep in mind, however, that a trust is not a substitute for a last will and testament. Having a legal will in place is important for ensuring that your assets are distributed according to your wishes. If you have a simple estate, you can draft a will yourself using online will-making software.
- Consider talking to a financial advisor about whether a private trust company is something you may need. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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