The popularity of private trust companies (PTCs) is increasing. This is because PTCs offer privacy to families, more flexibility, and potential cost savings when compared to a family office or a corporate trustee.
It is difficult to provide an exact number of private trust companies in the United States because of the confidential nature of the structure and lack of central tracking or reporting. However, it is estimated that there are thousands in existence today, either independently operated or operating under the umbrella of larger institutions.
While many states allow for the formation of PTCs, certain states have more favorable trust laws, taxation rates, and business-friendly environments. Some of the more popular states are Delaware, South Dakota, Wyoming, Nevada, and Alaska.
What Is a Private Trust Company?
|A private trust company is a limited liability company or corporation with the specific purpose of serving as trustee for a trust or a select number of trusts of only one family.|
The PTC can be formed either as a regulated or unregulated entity. While an unregulated trust company has fewer requirements to become active, over the long term, it is important that it implements similar governance standards as a regulated PTC. The PTC can serve as trustee for only one family, rather than being open to the public (serving multiple families).
PTCs create a permanent trustee that can adapt to changing family structures. In other words, this is a way to institutionalize the role of trustee and provide a fluid successor trustee—rather than continually having to make amendments as the participants change.
PTCs are organized under a separate corporate structure, with the individuals serving on the board, as managers of an LLC, and/or serving on various committees. The most common committees are established to provide recommendations regarding investments, distributions, audits, and philanthropy. PTCs will often use an administrative trust company to establish situs and to provide additional administrative functions. Additionally, they may hire professionals, such as an investment advisor, lawyers, and certified public accountants, to perform specific services, or have a family office execute on these decisions.
Risk Management Techniques for Private Trust Companies
The sole purpose of PTCs is to provide trust administration. It also handles certain other duties such as managing estates through the probate process, acting as a personal representative/guardian for a family member who may need additional oversight, and serving as a trust protector.
|Because there is a corporate structure and managerial fiduciary duties are similar to that of a corporate entity, individuals have personal liability for breach of their fiduciary duties for their decisions.|
Just like any corporate environment, members of the board, managers of the LLC, and members of various committees can implement corporate governance protocols to reduce—but not eliminate—risk.
It is important for a family to dedicate the time and resources to their PTC, in order to implement risk management techniques such as:
- Implementing good corporate governance, including defining roles and responsibilities, ensuring integrating reporting procedures with timely decision-making, communicating effectively with decision makers and stakeholders, and ensuring regulatory compliance and accountability.
- Conducting and monitoring risk assessment plans that outline risks specific to the PTC and emerging risks such as economic, counter party, and cyber liability.
- Providing beneficiary education, with the goals to empower the next generation, prevent disputes, encourage better relationships, and work on succession planning.
Insurance May Be Mandatory
In addition to risk management techniques, risk transfer opportunities are sometimes mandatory, such as directors’ and officers’ liability and fidelity bonds. State regulatory requirements vary significantly, so it’s important to review state regulations for mandatory versus recommended insurance.
The policies often referenced are:
- D&O liability insurance, which covers management for a breach of fiduciary duty for operational decisions such as regulatory obligations.
- Errors and omissions insurance, mostly applicable to negligence and providing trust administration.
- Fidelity bonds that protect PTC against losses caused by employee theft or dishonesty.
- Surety bond that replaces the need for depositing regulatory capital in an approved bank account.
Additional Considerations Regarding PTC Risk
Not all PTCs are the same from a structural and risk management perspective. Below are some issues for discussion:
- Is the PTC structured for a first-generation or multigenerational family? Usually, first-generation trusts are simpler, but not always.
- What are the underlying assets? There is a difference between marketable securities and alternative asset classes, such as real estate, family businesses, private equity, direct investments, and cryptocurrencies.
- Services outsourced and to whom, whether to professional organizations, professionals, or family offices.
- Size matters. Is it a $100 million or multi-billion-dollar trust?
- Domestic versus global families
Securing insurance coverage for these policies can be challenging because of historical underwriting matrixes. An insurance expert who understands how PTCs are structured can explain to underwriters the risk characteristics and navigate specific policy terms—helping you eliminate unnecessary pricing structures and avoid coverage surprises in the future.
Contact our trustee liability specialists at Woodruff Sawyer to learn more about risk management for private trust companies.
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