Article by: Bryan A. Phillips
One of the toughest challenges that wealthy families face is the growth and preservation of their wealth from generation to generation. This challenge is compounded by the presence of potential threats like litigation, divorce, and the federal transfer tax system.
Most of these families hold the common vision that their family legacy be maintained in both value and mission, while providing a better life for their members. Often this takes the matriarch or patriarch to legal counsel, where a well-developed estate planning strategy is put in motion, typically involving the use of irrevocable trusts. A high premium is placed on tax mitigation, distribution limits, and creditor protection, but families often struggle with how and when to involve beneficiaries versus other trusted individuals in the administration and investment of their trusts.
This problem is compounded by the fact that, as wealth in the United States has skyrocketed, the assets in these trusts will likely pass through multiple generations of family members, the qualifications and interests of which are unknown.
Historically, the “trustee” function was rolled up into one individual or entity, who performs all the functions of administration, investment, and distribution of trust assets. Often a family member or trusted friend would be chosen to be trustee, but they may not be up to the task of managing significant wealth. Highly-qualified individuals could be appointed, but may not want to subject themselves to fiduciary liability. Individuals can also suffer from unpredictable personality changes and death, making transitions inevitable and difficult. Other families have chosen to engage a commercial corporate fiduciary, with their expertise, consistency, and capitalization. The existence of unique trust assets and need or desire for control, however, may lead the family to look beyond the traditional corporate fiduciary.
As a result, many wealthy families tend to seek and embrace trust and entity structures that encourage and create opportunities for each generation to discuss and influence the management of family wealth. This article will examine one such structure, the private trust company.