The potential use of private trust companies for family offices

We are launching a series of technical articles in conjunction with some partners that we hope are of interest to family offices. Here, Simon Briggs, Consultant, Whitmill Trust Company, looks at Private Trust Companies and their potential application.

Most family offices will have experience of working with an offshore trustee. They may have inherited an existing relationship from their principal who set up an offshore trust prior to establishing a family office or perhaps they have helped create a new structure for the family.

The trustee may well have been selected via a beauty parade or perhaps because of a personal relationship. A number of trustees may have been interviewed by the principal or the family office with them selecting the one best suited to their requirements and objectives at that time. 

If that exercise was undertaken a while ago, circumstances may well have changed. Increased cost and regulation have meant that a number of offshore, and indeed onshore, trust companies have merged or been sold. Some banks have strategically decided not to offer a trustee service selling their trust businesses to management, private equity or another trustee service provider. These pronounced changes in the industry may mean that the family office find themselves working with a trustee they would not have originally selected.

It is also possible that over time the trustee’s view of risk has changed, and the family office find that what was once straightforward in terms of day-to-day administrative matters and decisions has now become much more complicated and onerous.  Some trustees may take the view that they are no longer comfortable holding anything other than conventional and bankable assets. Others may be happy to hold a wider range of assets but draw the line at activities considered higher risk such as holding a controlling interest in the shares of an operating business. Transactions which the family office considers routine, perhaps because of familiarity or greater understanding of the rationale or risk associated with the transaction, often become challenging as the trustee works through a very long list of due diligence requirements so that it gains the understanding the principal and family office already has.

If these experiences are familiar, then perhaps it is time to consider establishing a Private Trust Company (“PTC”).

A PTC is simply a company incorporated to act as trustee of one or more trusts established by, or for, the same family. A PTC does not provide trust services to, or solicit business from, the general public.

Most offshore jurisdictions have PTC friendly legislation with comparatively limited regulation and licensing requirements and only minimal capital requirements. However, to benefit from this type of regime it is invariably necessary to work with a local licensed trustee service provider (the “licensed trust provider”) who is responsible for incorporating the PTC and providing the requisite local administration services.

It will of course be necessary for the PTC to be owned by somebody. This could be the family principal but then a succession plan will need to be put in place to deal with the transfer of ownership on his or her death and that is usually best avoided in terms of structuring. As a consequence, it is far more usual to own the PTC through a purpose trust (a trust with no beneficiaries), perhaps a simple family foundation or by incorporating the PTC as a company limited by guarantee (a company without shares).

It will be for the board of the PTC to determine its policies, procedures and risk appetite having regard to the needs and circumstances of the beneficiaries and the nature of the assets to be held in the trusts of which the PTC acts as trustee (the “underlying trusts”). As a result, a PTC is often used to hold assets which a fully licensed offshore trustee may find challenging or be reluctant to deal with.

Typical Family Office Private Trust Company Structure

Irrespective of the way in which the PTC is owned, it would be usual to put in place arrangements which enables the principal to have some influence as to who acts as a director of the PTC. Although this provides additional peace of mind, it is important that the power is exercised responsibly and in such a way that it does not undermine the integrity of the structure and the benefits flowing from it.

As the board will determine what the PTC does and how it operates and thus ultimately how the underlying trusts are managed, it important to ensure that each board member is appropriately qualified to act in that role. It is a good idea for at least one professional trustee to be appointed so that they may bring their expertise to bear and the licensed trust provider will normally be able to provide a senior member of their staff to act. It would also be usual to have at least one or two members from the family office, typically the CEO and perhaps the CFO which will provide continuity and a deep understanding of the family’s requirements and circumstances which is fundamental to trustee decision making.

Additional directors may be appointed reflecting the activities of the underlying trusts and this can be informed by the principal so that trusted advisors and family members might act. The appointment of family members can be a good way to introduce adult children to the wider planning which has been undertaken, to facilitate understanding of objectives and to involve them with the management of the assets held in the underlying trusts. It is important though to address any conflicts of interest which may arise where, for example, the board of the PTC is considering distributions or payments from the underlying trusts to other beneficiaries. This can usually be accomplished by restricting or limiting family director voting rights or by means of third-party consent such as that of a protector.

While a PTC means that the family office will be working with a trustee focused exclusively on the needs of the beneficiaries and to carry out the settlor’s objectives in creating the trust, it is still important to avoid taking short-cuts and it is essential to ensure that the underlying trusts are administered properly, that fiduciary obligations and duties are respected and that local regulatory requirements (such as anti-money laundering obligations) are followed.

The board of the PTC will usually appoint the licensed trust provider to deal with the day-to-day administration of the underlying trusts on either a fixed or open administration agreement which sets out the nature and extent of the work required together with appropriate service standards. The licensed trust provider will be responsible for ensuring that appropriate trust records are maintained, that information required to enable the trustee decisions to be informed is presented to the board in the correct way and is properly documented. The licensed trust provider will also usually be tasked with dealing with all regulatory and taxation reporting and, ordinarily, will provide a money laundering reporting officer if one is required.

The cost of establishing and running a PTC structure varies by jurisdiction and of course complexity.  The nature of the assets held in trust also has a large bearing on pricing. As a starting point, a licensed trust provider in one of the lower cost jurisdictions will probably be looking to charge a minimum £25,000 for the set-up and a minimum of £35,000 for the annual administration. This would usually include the provision of one professional director to the board of the PTC and the administration of one underlying trust. 

This level of fees mean that a PTC may not be the right solution for everybody. However, for a client with the critical mass to justify a family office and who values the continuity a PTC will provide and who has complex or difficult assets or a complex family situation requiring multiple trusts, it is a smart and effective solution and certainly something to consider.

For technical queries or further information regarding this article, please contact Simon Briggs at Simon.briggs@whitmill.com or +44 (0)7385 784 125.

Established in Jersey in 1992 and regulated in by the Jersey Financial Services Commission, Whitmill provides a full range of private client offshore fiduciary services including the formation and administration of private trust companies.

Whitmill does not provide legal or tax advice and the above content is provided for information purposes only and does not constitute advice or a recommendation.

True House Partners is a recruitment specialist for family offices. Based in London, we work with family offices in the UK and in many overseas jurisdictions. For a discreet discussion about any potential hiring project, please contact Paul Avon on +44 (0)207 846 0025 or contact@truehousepartners.com. We also benefit from well established reputation as an expert recruitment specialist for trust & corporate services providers.