Choosing between a private trust company and a corporate trustee What you should know before you decide

Deciding between using a private trust company (PTC) or a corporate trustee is like pairing a wine to the main course. Many objective factors inform the decision but it is always determined by the diner’s personal taste. Similarly, certain legalities and realities direct the structure and management of private and corporate trust companies but choosing between them will be based on preference.

Corporate trustees are for-profit organizations providing fiduciary services to third-parties. A corporate structure provides families with independence and professionalism through an enduring business entity. Furthermore, corporate trustees are highly regulated by both State and Federal agencies to assure that the company performs properly and safely secures assets. Using an independent body to make important trust decisions, such as if, when, and in what amount to distribute to beneficiaries, ensures that the decision is made fairly, without bias or neglect. They are generally staffed by experienced attorneys, CPAs, and professional investment managers. For these reasons, and others, many families select a corporate trustee to protect their family, their wealth, and their legacy.

Unfortunately, some corporate trustees are sluggish, impersonal, inflexible and unnecessarily risk-adverse. These traits appear more often, and more severe, in larger organizations, thus ultra-high net worth families look for nimble, cooperative, yet safe alternatives. The two most common substitutes are boutique, corporate trust companies and PTCs.

A PTC is an organization permitted by a select few States to provide trustee services to a single family of related trust entities. Most of the time it is an LLC and operates at-cost instead of for-profit. It is organized and implemented to service the family’s trustee needs and, in general, is staffed by members of the family. The organization is regulated by the State but subject to less scrutiny and, therefore, less safety-measures. Also, PTCs are subject to certain Federal regulation and IRS guidelines, the violation of which incurs the wrath of fines and penalties and can jeopardize your entire estate plan.

Many trusts provide tax and asset protection advantages that are obtained only if the trust is administered properly. The IRS provides guidelines for proper administration, which require unrelated and disinterested third parties to hold relevant powers, possess private information, and be paid reasonable rates for these services. In short, the IRS requires the PTC to bear similar formalities as a corporate trustee or you will lose the benefits of your estate plan.

Additionally, if the PTC performs securities-related investment management it must be registered with the SEC. Registration with the SEC is expensive and onerous, which prompts many to seek an exemption from registration. Unfortunately, to comply for the SEC family office exemption and satisfy the IRS guidelines you need to walk a very, very fine line. Consequently, much of the convenience and simplicity desired from a PTC is lost when put into practice.

Another often-overlooked and extreme cost to a PTC is the change to family dynamics and relationships. Creating and managing a PTC may precipitate stress, anxiety, demand time, or instill intra-family conflict. It forces you to make judgments about your family and have those judgments publicized, at least amongst those members you select to participate in the PTC. For example, the IRS requires you to select some family members to make discretionary distribution decisions for other family members, hence one group dictates both modest decisions (e.g. what car to buy) and major decisions (e.g. funding a beneficiary’s business) for others. You also lose much privacy, as both family members and independent third-parties end up with considerable information regarding your wealth and wishes.

Notwithstanding, the benefits of a PTC cannot be ignored and, therefore, when is it the right choice for you?

1. You need the resources and stomach to fund an expensive start-up and the on-going maintenance, understanding that if you abandon the organization those items will be sunk costs.
2. Your family should be large enough to provide sufficient diversity to properly staff and administer the company but not so diverse that you disapprove of extended family member’s involvement. For example, how many family members would you trust (i) with information regarding your wealth, (ii) the power to make discretionary decisions, and (iii) to work well and for your beneficiaries?
3. You must accept that these family members will have considerable access to information regarding your estate plan, gifts, wealth, and property.
4. You must accept that compliance with the IRS safeguards necessarily prohibits certain tax-advantageous strategies and, therefore, you are willing to forego those benefits.

Most families that turn to a PTC hope to tailor the trustee experience to their situation, solve problems arising from unique assets and concentrations, fulfill State income tax planning goals, harvest additional deductions, and take advantage of historic personal connections. This tailor-made experience is noticeably more expensive than a boutique, corporate trust company, from which several ultra-high net worth families find the same benefits but share the financial costs.

Boutique, corporate trust companies, which are often regulated by the State, provide the same safeguards and professionalism as corporate trustees without the bulky bureaucracy and inefficiency of large institutions. Using these specialized companies avoids the heavy financial and non-financial costs and burdens of owning a PTC. Moreover, they focus on a narrowed subset of families or trusts to gain expertise in that area. For example, the institution behind this article provides services to a limited group of ultra-high net worth families, which allows it to maintain a high level of individualized service, take on unique asset classes or concentrations and mitigate the risk associated therewith, work with non-residents, and/or administer difficult and complex trust structures.

Each family has different needs and desires and, for that reason, there is no universal option. Large institutions provide secure and standardized services but tend to be inflexible and unaccommodating. PTCs seem to provide the upmost in flexibility but have surprising legal restrictions that create significant costs and destroy privacy. If you find the right fit, a boutique, corporate trust company can provide the best of both worlds.

About wealthgate trust

Wealthgate Trust is a client-founded, Nevada-based, multi-family boutique trust company. Born from the founder’s own experiences searching for an ideal trustee solution for his family, Wealthgate Trust partners with ultra high net worth families and their advisory team to create, implement, and administer bespoke trust strategies.

Wealthgate Trust is licensed and regulated by the Nevada Financial Insurance Division (NFID), and audited separately by the NFID and two national CPA firms.

About the author

Aaron is a Wealth Strategist assisting Wealthgate Trust families and their advisors in developing and implementing bespoke estate planning strategies. He’s an attorney licensed to practice in California and Nevada, with over a decade of trust and tax planning experience, and presents on a variety of topics including wealth preservation and private trust companies.

Aaron previously served as the primary tax planning counsel for Lobb & Plewe LLP. He has represented several major trust companies and sits on the board of the Coalition for American Retirement. Aaron earned his JD from the University of Nevada, Las Vegas.