SDTC and SDTC Services can provide for the set-up, operation, administration and compliance of both regulated and unregulated Private Family Trust Companies (PFTCs). South Dakota remains the jurisdiction of choice for regulated PFTCs.
Traditionally, families have chosen as their trustees: family members, advisors and/or commercial trustees whom they have had personal, professional or business relationships with over the years. PFTCs allow families to involve these family members, advisors and institutions within the trust company, providing maximum control and flexibility without the liability of them serving individually. PFTCs are typically located in South Dakota due to the state’s top rated PFTC, trust, asset protection, tax and privacy laws.
Additionally, South Dakota has the lowest regulated PFTC capital requirements in the U.S. (i.e. $200,000), as well as low set-up and maintenance costs, resulting in many families establishing their PFTCs in South Dakota.
A South Dakota PFTC is typically a South Dakota LLC or corporate entity that is 100% owned by the family or a trust which qualifies to do business in South Dakota as a PFTC. The PFTC receives a charter following a meeting and acceptance by the South Dakota Division of Banking. The South Dakota PFTC then works with the non-South Dakota Family Office via service agreements to provide related services to the family trusts.
The owners of the PFTC LLC, i.e. the family, can acquire Directors and Officers Insurance as well as Errors and Omission Insurance, and can serve as trustee within a LLC wrapper versus individually. This eliminates the personal liability they would assume if they were individually named as a co-trustee in a family members’ trust document.
The PFTC can then lease investment management and advisory, asset allocation, tax and other services from the non-South Dakota Family Office. Families may also place their PFTC in a South Dakota Dynasty Purpose Trust with an unlimited duration so that it can exist in perpetuity. A Purpose Trust has no beneficiaries; their sole purpose is to own and perpetuate the PFTC. South Dakota has a perpetual Purpose Trust statute with a separate rule against perpetuity (RAP) provision which is very rare. Many advisors claim a separate RAP is necessary for the purpose trust since it does not have any beneficiaries. South Dakota’s unlimited duration dynasty statute dates back to 1983. The statute follows the Murphy case to which the IRS acquiesced in 1979. South Dakota is one of the few states that can make these claims.
When and Why Does a Family Create a Private Family Trust Company?
- Typical Family Net worth: Regulated SD PFTC – $100 million and above (some exceptions)
- Regulated SD PFTC’s generally desire SEC exemption for privacy purposes – Typically involves a dynamic and dynastic family
- Unregulated WY PFTCs – No minimum net worth requirements(typically $25 MM and above)
- Families where family members and individuals are named as trustees for family’s trust(s):
- Solves personal liability issues (D&O/E&O insurance)
- Resolution of successor trustee issues
- Employment opportunity for family members
- Families experiencing issues with bank/institutional trustees:
- PFTC services tailored and responsive to specific family needs
- Investment flexibility
- Also allows for the ability to hold one asset without diversification if desired
- Allows for a sophisticated asset diversification model (i.e., Yale Endowment, FOX, IPI)
- Illiquid assets in trust (i.e. closely-held stock, real estate, oil & gas interests, gambling interest, etc.)
- Planning opportunities for deducting investment fees in light of Treas Reg § 1.167-4(d) (final regulations issued 5/9/14; previously IRS Notice 2008-32)
- Additionally, a PFTC may offer tax efficiency when located in a state without state income tax (South Dakota) or capital gains tax on trusts
Regulated vs. Unregulated:
Private Family Trust Companies (PFTCs) can either be regulated or unregulated. The regulated trust companies generally receive a charter, and the unregulated trust companies generally receive a license. South Dakota is the industry leader in regulated PFTCs.
The question of whether to establish a regulated or an unregulated trust company is an important one. Many families select the regulated option because there is significantly less opportunity to “pierce the corporate veil” than there would be under an unregulated PFTC. The formalities associated with the regulated PFTC, (capital requirements, state audits, policy and procedures manuals and compliance) all help to ensure that the PFTC is a properly functioning entity and trustee. Possible estate tax issues are also generally less cumbersome under a regulated versus an unregulated PFTC. Properly regulated PFTCs are also SEC exempt, which is important to many families both for privacy reasons, the ability to establish common trust funds and/or business trusts as well as many other key reasons. Please note that PFTCs did not become popular until the early and mid-1990s and have grown dramatically since then with South Dakota as the industry leader.
Despite the numerous advantages of a regulated PFTC, many families desire to establish an unregulated PFTC primarily for regulatory simplicity, cost, and privacy. Additionally, the family net worth requirements for a regulated PFTC (i.e., approximately $100 million) are not as high with an unregulated PFTC (i.e., approximately $25 million or less).
SDTC Services for the Regulated Private Family Trust Company:
South Dakota Trust Company (SDTC) can assist a family or a family office with the setup, operation and administration of a cost-effective South Dakota regulated trust company by serving as Corporate Agent. In this capacity, SDTC plays a de minimis role that gives the families the “minimum statutory contracts” they need to get through the application process with South Dakota’s regulatory group, the Division of Banking, and to maintain an ongoing minimal relationship with South Dakota. As Corporate Agent, SDTC enters into three contracts with the respective family office:
- A lease for office space;
- A service agreement (discussing installation of a phone line, answering the phone, vault space, forward mailing, et al);
- An arrangement for an officer of SDTC to serve as the one required South Dakota PFTC board member. (Minimum of 3 board members are required with a maximum of 12 – one board member must be from South Dakota).
Please note: the South Dakota board member provided by SDTC may or may not participate in private family matters. They can participate in the PTC/banking portion of the board meeting, while taking no part in an executive session for private family matters.
Although the role of SDTC as Corporate Agent will allow for a South Dakota PFTC, it may not be sufficient to justify South Dakota trust situs unless the trusts are also administered in South Dakota. Consequently, SDTC can also act as Trustee Agent to the PFTC to satisfy this requirement. Furthermore, in addition to providing South Dakota trust administrative services, as trustee agent, SDTC can assist with regulatory/compliance issues, trust accounting, and custody services associated with a trust that has named the PFTC as trustee. SDTC, as trustee agent, generally works with a family’s existing custodian as well as the family office for investment allocation, advisory and management.
SDTC Services of Wyoming/SDTC Services of Nevada – Unregulated Private Family Trust Company:
For families desiring an unregulated PFTC, SDTC’s sister company, SDTC Services of Wyoming, LLC (SDTCSW), and SDTC Services of Nevada, LLC (SDTCSN) can assist with the formation, operation and administration of an unregulated PFTC in Wyoming/Nevada. Wyoming/Nevada are one of the industry leaders for unregulated PFTCs. This SDTC service offering allows a family to establish an unregulated PFTC with many of the services provided by SDTC as Corporate Agent to a regulated PFTC. Consequently, SDTC can provide the necessary oversight and expertise to help operate the unregulated PFTC as if it were regulated. Maintaining these formalities may be important for many situs, tax, asset protection and trust law reasons, and to avoid potential issues. Unregulated Wyoming/Nevada PFTCs are not audited by the Wyoming/Nevada Division of Banking unlike regulated South Dakota PFTCs. The South Dakota and Wyoming/Nevada Divisions of Banking examine regulated PFTCs every 36 months which is necessary to qualify for SEC exemption.
Private Trust Company Services for Commercial Entities:
SDTC can also assist a commercial entity (i.e., multi-family office, investment firm, CPA/accounting firm, law firm, insurance company, bank, trust company, etc.) with the setup, operation and administration of a Private Trust Company (PTC). These PTCs, which are owned by the commercial entity and hire SDTC as corporate and trustee agent, allow a corporate entity to focus on their core business (i.e., investment management, insurance, banking and/or brokerage, accounting, etc.), but gain a competitive market advantage by adding trust administration as a product offering to its clients/prospects. As with a Private Family Trust Company, in addition to the day-to-day operation of the PTC, SDTC can deal with trust administration, regulatory issues, trust accounting systems, trust tax returns, fiduciary duties and audits, as well as the day-to-day operation of the PTC.
The PTC generally enters into a service agreement with the firm or entity for investment, accounting and insurance products & services as well. The PTC’s statements have the corporate entity’s name thus allowing them to both retain their branding and work with the corporate entity’s existing custodian.
For more information please visit our website: www.privatefamilytrustcompany.com