More and more family offices are setting up Private Trust Companies to look after their increasingly complex affairs. So what exactly are they? and how can they help all family members from young to old?
The Covid pandemic led to many of us changing long-held habits, from how we worked and studied to where we live.
This period of reassessment, along with an ever-increasingly complex asset landscape, has also altered how wealthy families manage their money.
“The easiest form of holding family assets is via the use of a family investment holding company,” explains Richard Joynt, Head of Family Office at Highvern in Jersey.
“However, if the family consists of numerous people and they have a communal set of investments, a company is not ideal from an estate planning point of view because if one of them dies, the shares go into their estate.
"The rest of the family have to wait for that person’s estate to be settled before they know what is happening to their core shareholding.
“It is why many advisers will tell families to put a trust on top, holding the communal assets. If someone dies, it does not trigger anything on the estate side.”
When it comes to trusts, the traditional approach taken by family offices has been to appoint a professional trust company as the trustees. Family leaders have valued the administrative and financial management expertise that these organisations have built up from handling all different types and sizes of trust.
However, across the globe, in particular the US and jurisdictions such as Jersey and Guernsey – which provide the option – more family offices are embracing a rival structure: the private trust company (PTC).
The technical bit
A PTC is set up by families to house and provide bespoke trustee services for either a specific or a group of their trusts.
That is all it does. It is not commercial in the sense that it looks to attract business from other families, as is the case with professional trust businesses. It is a company limited by shares.
It can be owned by the head of the family outright. Alternatively – as is more often the case, to avoid issues around personal ownership, such as the death of that family member – it is run by an ‘orphan’ purpose trust. Its main purpose is to own the shares in the trust and provide trust services to underlying trusts in the structure.
A PTC must be administered by a licensed fiduciary, but it is generally exempt from the full licensing requirements applying to trust businesses in many jurisdictions.
So, for a Guernsey PTC, an exemption from licensing should be available provided it meets certain criteria, including being administered by a licensed fiduciary and not advertising or marketing its services to the public.
Since 2000, Jersey PTCs have been exempt from the requirement to register as a trust company business given that they meet criteria such as being administered by a registered person.
The board of the PTC making the key strategic decisions includes family members as well as trusted advisers and independent professionals such as lawyers and bankers.
Specialist control
“It allows families to have people on the board with more specialist capabilities,” says Alex Dean, UK Head of Private Wealth at IQ-EQ.
“You may, for example, want to invest in private equity in the future, so getting a PE investment expert on your board means that when opportunities arise they can be expertly analysed and scrutinised.”
Some PTC structures may also have a ‘protector’ role – someone who can appoint and remove trustees and even veto key decisions, such as capital distribution from the trust. There can also be an ‘appointor’, who can remove a protector and appoint successors.
The biggest benefit of the PTC structure is the control that it gives family offices relating to issues that affect their wealth and assets, such as investment and distribution decisions.
This is why PTCs are particularly popular with families from the Middle East and Asia. They are not as culturally comfortable with the trust concept, including ceding control to professional trustees based in often distant jurisdictions.
Henry Kierulf, Head of Active Wealth, Jersey at Zedra, explains: “With the engagement of a Channel Islands service provider to assist with administration and corporate governance, not to mention independent trustee expertise, a PTC provides the infrastructure from which clear processes and procedures can be implemented, providing the family with clarity and certainty over decision-making.
“Having your own trust company means you are dealing exclusively with your own assets. Control is a huge advantage, it is top of the list. If you don’t have a PTC then you don’t have control – the trustee has it.”
A PTC also allows segregation of family assets, but with a commonality of approach and governance. This means creating a diversified trust fund, which might include cash, private equity, operating businesses and luxury assets.
“What we see sometimes is that you have different pots within the PTC structure,” Kierulf adds.
“One division might be for liquid investments, one for property/real estate, and another that might be more direct investment, such as PE. Some families have their businesses as part of the structure as well. It boosts asset protection.”
Succession planning
Another benefit of a PTC is that by involving younger members of the family in the decision-making, maybe a board position, it helps with succession planning.
“The younger generation can get more involved in the family assets and how they are managed. More senior family members can pass on their expertise and experience to them,” says Kierulf.
“A lot of families build up their wealth in a structured manner but in some cases the strategic objectives of the family are lost. Getting the next generation in early helps keep that identity. They understand how the wealth is created and how to take an active interest to sustain that for the future.
"The younger generation can also help evolve thinking such as advocating more ESG investment strategies.”
Other benefits include usually quicker decision-making than with a professional trust company and more privacy, given that ownership of the PTC can remain confidential when structured using a purpose trust. Existing family trusts can also be transferred to the PTC to further boost control.
Joynt says a PTC can also help families – and Jersey itself – manage the thorny issue of regulation and governance.
“There are some complications and fine lines that family offices need to navigate in Jersey around regulation. I’ve been on a couple of working groups discussing whether it would be helpful if there was a specific type of licence that family offices could get in Jersey so their status could be more easily found out,” he says.
“In its last visit, MONEYVAL raised the issue of the lack of family office regulation – because most are only performing services for one family – and how the Jersey government and the regulator managed that. How do they know that these families are not going to do something which is going to bring Jersey into disrepute?
“One of the advantages of a PTC is that it will have to have a relationship with a trust company provider. It will be able to point to that level of regulation. Providers such as us bring that regulatory comfort and oversight.”
Joynt says the attraction of PTCs reflects an increase in the level of knowledge and financial sophistication within families over the past 20 years.
“They are less likely to hand over their money to a JP Morgan and then ask for a report once a year to find out how their investments are doing,” he says. “Now, they want to take a more active interest in managing their own investments. If you are doing that then you really need some governance framework on top.”
Indeed, Dean says families are faced with an ever-increasing choice and complexity of assets. “It has made families want to have more control, analysis and decision-making power on individual assets,” he says. “So they want to have that expertise within their own PTC.”
Kierulf points to the impact of Covid-19 on PTC usage. “There are a number of families who were in the process of setting up PTCs but had not made them active. But after Covid-19, people started to become more aware of their mortality and to expect the unexpected. They wanted more control,” he says.
Not all plain sailing
There are challenges involved, of course – particularly in the cost of setting up a PTC, which involves creating the trusts and incorporating a company. However, the annual costs are often significantly lower than if a public trust company runs the trusts.
“The flipside of the PTC is the price,” agrees Kierulf. “The people you need to employ, the service providers – they all make it typically more expensive. Usually, you need to be an ultra-high-net-worth family with around £100m in assets before it becomes worthwhile.”
Joynt says another concern could be the emergence of conflict of interests if family members on the board also “wear other hats further down the structure” – such as being a beneficiary or having a role in a family business. “This could lead to family disputes,” he warns.
Kierulf says good governance is essential. “You need good guidelines and parameters on how the PTC will operate, including how to deal with disputes,” he says.
“You need to adhere to a set of rules, not just transactionally but also the philosophy of the strategy and asset management. How do you evolve with changes such as more ESG investing and avoid family disagreements?
"Those rules of engagement need to be well thought out, with no room for ambiguity – who is responsible for what and what are the change mechanisms if needed?”
Robert Moore, Director, UK, Jersey Finance, adds: “It is worth noting that having a PTC in place can also give rise to potential questions around ownership and control.
"So families need to work closely with their advisers to ensure the structure is established in a professional manner, adhering to the appropriate legal and tax advice in addition to ongoing health checks to ensure the structure remains fit for purpose. The required involvement of a regulated entity would also ensure this.”
One less expensive option open to cautious families is a private trust foundation. This acts as a trustee to one trust or a group of family trusts and is an ‘orphan entity’ with no members or shareholders. This therefore avoids the double-layered structure of a PTC with a purpose trust.
“Both are legal entities and bespoke trustees – and have similar advantages,” explains Elena Gogh, Guernsey-based Partner at Bedell Cristin: “A foundation avoids the complexity and cost associated with the double company structure. It is simpler and we’ve found that it has been a competitive and real alternative for families in Guernsey.”
Moore, however, adds: “A foundation must have one or more of its council members who is a regulated entity. A company acting as a PTC does not have this requirement – although it must be administered by a regulated entity.
“A foundation will also require a guardian, which may increase the complexity and cost.”
Dean expects the number of PTCs to keep growing, with Jersey and Guernsey seeing a good share of business.
“They are both well-established players with well-established legal frameworks,” he says. “You are dealing with very large families with varying and complex requirements, which are best served by centres of excellence.”