Before we compare a professional trust company with a private trust company (PTC), we should discuss some basics about trusts.
What is a trust?
Contrary to popular belief, a trust is NOT an entity like a corporation or an LLC.
Rather, a trust is simply a contract.
Who are the parties to a trust?
The “settlor” or “grantor” is the person who transfers legal ownership of their assets to the trustee, placing them “inside” the trust.
The trustee is the person or party responsible for holding and administering the trust’s assets. In many jurisdictions, trusts can have more than one trustee.
Beneficiaries are generally named by the settlor and benefit from the trust – typically, by receiving a distribution from the trust and/or by having use of trust assets.
Trusts may have a protector – someone responsible for overseeing the trustee. Generally, a protector has the power to replace a trustee for certain reasons or for no reason at all.
Professional Trust Company or Private Trust Company?
Many people can fulfill the trustee position for your trust.
But people most commonly use a professional trust company or a private trust company.
Just like it sounds, a professional trust company is in the business of serving as trustees of trusts.
Generally, professional trust companies are highly regulated by the jurisdiction in which they are located. To protect the public at large, governments often require them to be licensed, bonded, and insured.
A private trust company (PTC), on the other hand, is a private entity generally established by the grantor to serve as a trustee for the family trust.
Generally, private trust companies can only serve as trustee for certain people and families – they are not permitted to hold themselves out as in the business of providing trustee services.
Private trust companies are typically subject to fewer regulations compared to professional trust companies. At times, they might be exempted from regulation altogether.
What is best for you?
It depends on your goals with your foreign trust.
If you are looking to maximize asset protection, then you will probably be best served by going with a professional trust company.
The distinction between the grantor and beneficiaries and the trustee is clear.
A professional trust company is its own independent legal entity owned and operated by third-parties. The individuals working there likely have no family relations or personal history with the grantor and beneficiaries.
However, things can be unclear with a private trust company.
Sure, the private trust company is formed as a separate legal entity. But the grantor, his family members, business partners, etc. often serve as its manager.
Regardless of how the decision-making process is structured, a private trust company should provide the grantor direct control or significant influence over trust assets.
This is why the private trust company works best for those looking to maximize control but can be a liability regarding asset protection.
The problem is, a court could potentially claim that the trust is merely the “alter ego” of the grantor and find a way to seize control over the trust’s assets.
Your advisor should help you find the right balance between control and asset protection.
Quick Comparison: Private Trust Company v Professional Trust Company
Both professional trust companies and private trust companies come with many advantages and disadvantages relating to important matters like succession planning, estate planning, privacy, speed, cost, etc.
Private Trust Company – Advantages
· Control over the board of the PTC
· Control over the succession of the board of the PTC
· Easy to optimize for the family it serves
· Enhanced privacy
· Rapid commercial and business decisions
· Lower operating costs than professional trust company (they typically charge based on a percentage of assets in the trust)
Private Trust Company – Disadvantages
· Higher setup costs compared to professional trust company
· Complex to set up
· Management intensive – proper procedures, corporate governance, and best practices must be followed or risk losing the tax and asset protection benefits of the trust
· Compliance intensive – filing and reporting requirements must be followed
· Higher risk of improper administration
· Potential tax disadvantages
· Economic substance regulations
· Estate planning issues due to the outstanding shares or interests in the PTC entity
Professional Trust Company – Advantages
· Not complex to setup
· Easier to obtain proper administration & compliance
· No tax disadvantages
· No estate planning issues
· No Economic Substance Regulations issues
· Greater asset protection
· No Setup Cost
Professional Trust Company – Disadvantages
· Loss of control
· Not optimized for the family it serves
· Rigid institution
· Loss of privacy
· Slower commercial decisions
· Risk averse
· High ongoing costs
What about taxes?
Some person or entity must own the shares in the private trust company.
Depending on their location, this could have negative consequences regarding economic substance regulations and complicated tax reporting.
Additionally, if the private trust company has US owners, they may owe US taxes due to tax rules relating to controlled foreign corporations (CFCs) and Subpart F income.
In short, achieving your desired tax outcome with a private trust company is likely easier said than done.
Watch Jimmy Sexton, Esquire Group’s founder and CEO, discuss the differences between a professional trust company and a private trust company.
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