The complex wealth and succession planning needs of our UHNW clients require innovative and bespoke solutions. At the core of many of these solutions is often the concept of a trust. For centuries, families have used trusts to maintain their assets and provide security and peace of mind for future generations.
While trusts come in many shapes and sizes, every trust requires a trustee and the selection of the right trustee is vital. A competent trustee possesses a variety of skills and expertise to be capable of successfully stewarding a settlor’s material legacy.
What is a PTC?
There are certain types of assets that settlors wish to place into trusts which are highly specialised in nature or which they, their associates, or their family may still play an important role in managing and operating.
While there are particular options available to allow settlors and their families to stay involved, or retain certain powers over the administration of their trusts, one of the more popular tools to achieve this is a Private Trust Company or “PTC”. A PTC, where the magnitude of the trust assets justifies it, can be established to exclusively serve as trustee of a settlor’s trust or indeed their family’s trusts.
The idea of a PTC is not new and many jurisdictions have their own versions where the basic concept is quite similar.
PTCs, to the extent allowable under the relevant laws and regulations of a given jurisdiction, are usually structured as a company or other corporate entity, which is then often owned by a purpose trust created for the sole purpose of acting as shareholder and prescribing the appointment of the PTC’s board of directors. This helps to ensure longevity and a certain degree of control over the PTC as long as it is required.
Some jurisdictions such as the Cayman Islands offer innovative new vehicles like Foundation Companies which can make these aspects of the PTC’s ownership and corporate structuring more customisable and simpler to achieve. The appointment of the PTC’s board of directors can be influenced by the settlor, their wishes, or their family; and it is the PTC’s board of directors that is responsible for all decisions and administration of its trust or trusts in the PTC’s capacity as trustee.
The Cayman Islands has been a leading jurisdiction for the creation of PTCs by wealthy families for many years. The Islands have allowed, and continue to allow, such companies to be licensed under its Banks and Trust Companies Law as restricted licensed trust companies. In 2008, a registered PTC vehicle was introduced; one that is exempt from the licensing procedure in particular circumstances. This PTC has to be registered with the Cayman Islands Monetary Authority (“CIMA”). Each type of trust company has its own unique features and benefits.
Benefits and Challenges of PTCs
There are many potential advantages to PTCs, especially in cases where the management of the trust fund requires special technical expertise, or where a trust’s philanthropic or other purposes would benefit from the direct involvement of those already running such programmes.
PTCs can complement existing family office structures, and where appropriate, they may allow for the inclusion of future generations of family members to be involved in trust-related decisions. This often helps to facilitate efficient decision-making and it can provide the opportunity to meaningfully include certain family members and benefit from their skills and perspectives.
Although PTCs are very useful in the right circumstances, care should be taken to ensure that they are used for the right reasons and that those appointed as board members to a PTC are suitably qualified to take on the responsibilities of the role.
The associated trade-offs should also be properly understood: A higher degree of inclusion of a family in the management of a trust, where decision-makers potentially stand to benefit, can challenge their objectivity and create or exacerbate conflicts.
It is common for family interests to diverge as they grow with new generations and the family dynamics change over time. Discussions and decisions involving wealth can easily amplify even the slightest strains in family relationships.
The thought of one’s family having a high degree of control over a PTC board can be appealing to many settlors until they come to realise how it can potentially go wrong.
There are ways to address these challenges that preserve the desire for inclusion while minimising the potential for conflict. Indeed, many jurisdictions require PTCs to have licensed professional trustee representation on their boards, although to varying degrees. Not only does having a professional and independent trustee on a PTC board bring the necessary technical skills and experience required to fulfill its role, and meet legal and regulatory obligations, it also adds a valuable element of objectivity.
Whether it is a family PTC with one’s own advisors, an independent professional provider of trustee services, or a combination of both, the importance of this choice of trustee cannot be overemphasised. Independence and objectivity are vital characteristics of a good trustee, especially where the trustee holds discretionary powers and at times when difficult decisions need to be made. Careful consideration is needed when weighing the pros and cons of creating a PTC and evaluating its usefulness as family dynamics shift with future generations.