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KEEPING IT IN THE FAMILY: Private trust companies are an increasingly popular alternative to a traditional trust structure for families that want to retain greater control of their assets, says Emma Greenaway of Trident Trust's British Virgin Islands of.

The concept of the trust, in which a person's assets are put into the care of an independent trustee for the benefit of a third person or persons, is well established in the global wealth management profession. Thousands of trusts have been established around the world by settlors (the person transferring the assets to the trust) wishing to ensure that their wealth is managed and protected according to their wishes, whether this is to provide for family in the event of the settlor's death, to protect the inheritance of children until they are ready to take responsibility for it or to help succession planning in a family business.

However, not everyone wishing to manage their assets through a trust is content to fully relinquish control of them to an independent trustee. In these instances, the less well-known private trust company (PTC) concept provides an interesting alternative, in which the settlor is able to keep a higher level of control, while still retaining many of the benefits of a trust.

A PTC is a privately owned company established to act as the trustee to a family's trust (or group of trusts related to a family). The company is ultimately owned by the settlor of the trusts or the family as a whole (although it is generally not advisable that the shares of the PTC are directly owned by a family member). Perhaps most notably, family members can sit on the board of the PTC. The PTC will usually engage a professional trust administrator to undertake the administration (e.g. preparation of accounts, organization of meetings, record-keeping) of all the underlying trusts.

Example Uses of a PTC

The following scenarios help illustrate why and when a PTC structure may be used.

Say that Mr. X has two daughters and two sons. He wishes to provide for his two daughters and his youngest son only, following a long-standing feud with his eldest son. The eldest son is aware of his father's assets and it is likely that on his father's death, he will commence proceedings to claim his share through the institutional trustee he knows his father already uses for wealth management. Mr. X decides to set up a separate private trust company for each beneficiary, to distance his identity from the institutional trustee company, separate the trusts from each other and to make it difficult for anyone seeking to attack the trusts to obtain information about them.

That's one scenario. Alternatively, two brothers could live in a civil law country which does not recognize the trust concept. They are not comfortable putting legal ownership and control of the family's assets in the hands of a stranger, but they want to ensure that the companies they have founded remain in the family and are effectively governed, even after they cease to be involved. Since the brothers at this time wish to remain involved in the management of the companies, they decide to set up a PTC structure in which they can act as the directors.

A final scenario might be that a Chinese family is not convinced an institutional trustee can fully understand the motivations and workings of the family. The family owns three trading companies and an investment company and prefers the idea of using a private trust company so that the family members can be on the board of directors. By having younger members of the family as members of committees of the board, the next generation can better understand the management of the family's wealth and the responsibility it brings. This could not be achieved using an institutional trustee, who would risk breaching the terms of the underlying trust by allowing third parties to take part in the decision-making process.

Advantages of a PTC

In the right situations, a PTC therefore offers three main benefits over a conventional trust: control, speed of decision-making and confidentiality.

The PTC has a board of directors, which can comprise solely of members of the family or a mix of family and specialist advisors. Through the board, families are able to introduce younger members to the management of family wealth with support from a group of experienced professionals. In addition, it is much easier to change the directors than it is to change a trustee, so the directors can change while continuity is provided through the PTC itself.

A PTC is often able to react faster and make better informed decisions on commercial and sensitive trust issues because of the board's greater understanding of the family. Substantial stock holdings in a single company can also be better understood and supervised. Family members are more likely to be familiar with the company assets and have a greater expertise in running the family trading company than a professional trustee.

A PTC limits the circulation and disclosure of information concerning the family's affairs, providing comfort to families in locations where financial privacy concerns are driven by issues of personal safety.

Disadvantages of a PTC

Of course, a PTC structure can have some disadvantages. First, having family members as directors may create greater potential for disputes than between professional directors, unless clear rules are included in the company's articles. Time and effort should be put into considering the roles family members will play at the outset, which may be costly. There is perhaps an increased risk that the trust will fail if the directors of the PTC do not act with impartiality and administer the trust properly and in the best interests of its beneficiaries.

A trust may also not be effective for tax purposes in some jurisdictions, unless the settlor takes care to remove himself from the "sphere of influence". The tax residence of the company can be affected by the residence and place of meetings of the directors, so these issues should be carefully considered.

Banks and investment houses may not understand the PTC concept and the opening of accounts for the trust in the name of a non-regulated trustee company could provide challenges.

Choosing a jurisdiction

While many jurisdictions have PTC legislation, the British Virgin Islands (BVI), the Cayman Islands and Singapore are among the more popular domiciles. Each offer their own advantages. For the BVI, for example, a PTC can take advantage of quick and cost-effective incorporation, in some cases is exempt from full licensing requirements and has a pre-existing VISTA trust structure to ensure asset protection is strong.

While they are not the best solution in every situation, PTCs provide another option to families looking for an effective estate management plan. Using an independent trustee is still likely to remain the more popular choice. But for families who require greater control and even more privacy than a traditional trust structure, the PTC may be an appropriate alternative.

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Publication:China Offshore
Date:Oct 22, 2012
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