The Private Trust Company has become better known in the wealth management arena over the last few years.
It is essentially a company incorporated to act as trustee of one or more trusts for the benefit of the same family or of persons who are otherwise ‘connected’. It is a highly effective and flexible solution that can allow the affairs of the individual or family to be managed in a way that would not be easily achievable through a third party.
Like any company it is operated by a board of directors, who, in the case of a PTC, make the trustee decisions. But why consider a PTC as a solution to your structuring needs?
Since 2008, when a number of jurisdictions including Cayman made slight amendments to their fiduciary regulations, PTCs have become increasingly popular as a means by which clients can settle their global assets into trust and enjoy the resultant benefits whilst retaining a large measure of influence over their subsequent management and administration.
The main benefits of a trust structure generally include tax efficiency, succession planning, streamlined administration and asset protection. These benefits may also be achieved in a PTC arrangement.
However, whereas in a conventional trust arrangement a sole institutional trustee would normally be appointed to administer the trust, when using a PTC, the trustee function is discharged by the board of the PTC. As the composition of this board is selected by the client family, a PTC affords the family a greater degree of involvement in the trust administration than they would ordinarily enjoy.
A PTC is often used as the first step towards creating a broader family office for the administration of the family’s global asset base. PTCs are also often adopted in the context of an operating business which is to be settled upon trust for tax and estate planning purposes but where the patriarch of the family and other trusted advisers are to remain involved in terms of the ongoing administration of the business.
While an institutional trustee will often be reluctant to assume fiduciary responsibility for a family-owned operating company or other ‘high risk’ assets such as aircraft and yachts, these assets may readily be settled into trust beneath a PTC.
Furthermore, as family members are permitted to sit on the board, a PTC structure allows representatives of different generations of the family to participate directly in the management of the assets, thus increasing the likelihood of those future generations taking an active interest in the stewardship of the wealth.
Complications can arise at this point as there may be tax or other consequences to appointing persons of certain residence or domicile to the board, and such considerations should be borne in mind when populating the board. It is also worth noting that a PTC is not permitted to offer its services to the general public.
Differing asset classes, for example real estate and aircraft, may also be ring-fenced for liability purposes in separate holding vehicles or even within separate trusts as part of the PTC structure.
The incorporation and establishment of a PTC is relatively simple and several of the leading offshore financial centres have introduced specific legislation governing the incorporation and administration of PTCs. In some jurisdictions a PTC can be established in 24 hours. The costs involved with setting up a PTC may be higher than those associated with a traditional trust, however the benefits the structure can deliver will validate this.
As the trustee of one or more trusts, the PTC and its board are legally bound to act in a fiduciary capacity and to make decisions which are in the best interests of the beneficiaries. For this reason it is usually recommended, and may be required by law, that there be at least one person appointed to the board who has relevant trust expertise.
This is often found to be an effective way of ensuring that the requisite level of objectivity is maintained in the PTC’s decision making as trustee. The trust professional appointed to the board can give advice on the manner in which trustee powers may be exercised and the matters that must be taken into account when making trustee decisions.
The presence of family members or ‘trusted advisers’ on the board allows the family direct access to the decision-making process, and an increased measure of governance over the affairs of the trust(s). Furthermore, family representatives on the board will have a clearer and more intimate understanding of the family’s needs and circumstances. It is important for board members to recognise, however, that they may not act in conflict of interest or in breach of their fiduciary duties.
As for the day-to-day operation of the PTC, this is carried out just like a normal company, with decisions taken at regular board meetings. These board meetings may often be held in any location which is geographically convenient, although the possibility of taxation consequences should be borne in mind when choosing the location of meetings.
Directors are usually appointed and removed by board resolution at a board meeting, in accordance with the PTC’s articles of association or bye-laws. This is particularly attractive from a client’s perspective as, if a representative from an institutional trust company is appointed to the board to lend the benefit of his or her professional trust expertise, and the client decides that they no longer wish to work with that particular institution, all that is required is the removal of that individual from the board of the PTC.
In a conventional trust arrangement, the corporate trustee would either be removed or asked to retire entailing the execution of a deed of retirement and appointment, the provision of relevant indemnities and a change in the legal registered title to the underlying trust assets; this is potentially a lengthy and expensive exercise.
A typical PTC structure could resemble the one below. However, it should be borne in mind that this structure is very flexible and can be modified in a variety of ways to accommodate the particular needs of a client family. See figure 1
The shares of a PTC are often held by a purpose trust, for example the STAR Trust in Cayman. This is a particular type of trust which, unlike a conventional trust, can be formed to hold assets for a purpose rather than for the benefit of individual beneficiaries. In case the purpose trust is formed for the express purpose of holding the shares of the PTC, it is often referred to as an ‘orphan holding vehicle’.
The advantages of this are twofold: firstly the client need not be the shareholder of the PTC with potentially adverse tax or disclosure consequences arising; and secondly the shares of the PTC are held separately with the trust. There are also no registration or disclosure requirements surrounding the establishment of a purpose trust, which enjoys the same measure of confidentiality as a conventional trust arrangement.
In essence a PTC is an ideal corporate vehicle for an individual or family to set up a trust structure which can manage a wide variety of assets whilst retaining a large measure of control. Through this existing family members and future generations can take an active role in the management of their family’s wealth, increasing the likelihood that it will be preserved. They can be quick and simple to incorporate and the framework for such structures is available in many of the leading offshore trust jurisdictions.
A PTC offers considerable flexibility in modern asset structuring; taking advantage of the benefits of sophisticated trust arrangements, while reserving control and involvement in the administration of the assets for the client family which is especially important where operating businesses are concerned.