Private Trust Companies

Scope of the chapter. A private trust company is a corporation or limited liability company formed to act as trustee, and often in other fiduciary capacities, for the trusts of a single family, without offering fiduciary services to the public. Chapter 1 described its place among the institutions of the modern trust (see supra ¶ 170.02). This chapter examines the institution in full. It covers the reasons families form such companies and the reasons many should not; the choice between a regulated company and an unregulated one; the statutes of South Dakota, Nevada, Wyoming, New Hampshire, Delaware and Tennessee; the internal governance that makes a family-owned trustee workable, with particular attention to the distribution committee; the federal transfer and income tax analysis, which still rests on a proposed revenue ruling published in 2008; the securities, banking and anti-money-laundering rules that touch the company; the offshore regimes of the Cayman Islands, the British Virgin Islands and Nevis; the ownership of the company, including ownership by a noncharitable purpose trust; and liability, insurance, conflicts of interest and drafting.

Terminology. The statutes use different names for overlapping things. South Dakota distinguishes a "public trust company" from a "private trust company," leaving the definition of the latter to administrative rule. S.D. Codified Laws § 51A-6A-1(12A); S.D. Admin. R. 20:07:22:03. Nevada, New Hampshire and Delaware speak of a "family trust company." Nev. Rev. Stat. § 669A.080; N.H. Rev. Stat. Ann. § 383-D:1-101; Del. Code Ann. tit. 5, § 797. Wyoming has two kinds of "family trust company," a "chartered family trust company" and a "private family trust company." Wyo. Stat. Ann. § 13-5-301(a)(ii), (viii), (xiii). Offshore regulations use "private trust company" and its abbreviation "PTC." This chapter uses "private trust company" for the institution in general and the statutory name when discussing a particular regime. It uses "regulated" for a company that holds a charter or licence and is examined by a banking regulator, and "unregulated" for a company that operates without a charter or licence under a statutory exemption or because no licence is required.

The central problem. Every question in this chapter returns to one tension. A family forms a private trust company so that people who know the family and its assets will make trustee decisions. Those people are often the family members themselves, who are also settlors and beneficiaries of the trusts the company administers. The law of trusts requires a trustee to act in the interests of the beneficiaries and not for the settlor's own ends (see supra ch. 5). The tax law includes trust property in a person's estate when that person holds powers over it (see infra ch. 40). Creditors argue that a trustee the family controls is the family itself (see infra ch. 36). A private trust company is useful only to the extent that its structure lets the family participate without holding, in law or in fact, the powers that would defeat these rules. The distribution committee, the amendment committee, the independent director and the purpose-trust owner are the devices by which that is achieved.

Organization of the chapter. Paragraph 2810 examines why families form private trust companies and when they should not. Paragraph 2820 explains the difference between regulated and unregulated companies. Paragraph 2830 examines the state statutes and compares them in Table 28-1. Paragraph 2840 addresses governance. Paragraph 2850 examines the federal tax analysis in Notice 2008-63. Paragraph 2860 addresses securities, banking and anti-money-laundering regulation. Paragraph 2870 examines offshore companies and compares them in Table 28-2. Paragraph 2880 addresses ownership. Paragraph 2890 addresses liability, insurance, conflicts and drafting and closes with a checklist in Table 28-3.

Relationship to other chapters. The directed trust is the principal alternative to a private trust company and is examined in chapters 6 through 10. The trust protector, which some families use alongside a private trust company, is examined in Part III. The noncharitable purpose trust, the usual owner of an offshore private trust company and an increasingly common owner of a domestic one, is examined in chapter 27 (see supra ¶ 2780). The family office, which often operates beside the private trust company and sometimes inside it, is examined in chapter 29. The asset protection consequences of a family-controlled trustee are examined in the companion volume, Lighthouse on Asset Protection, ch. 19, and are summarized here only where they bear on design.