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| Best Practices: Family Office |
Trust Busting
Suzanne McGee
10/01/2004
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John Duncan, principal of Duncan Associates in Chi-cago, who has
established several private trust companies for clients, likes these entities
for what he calls their ability to let families “own their own wealth.” “Because
most of a very wealthy family’s assets—perhaps 75 percent—are held in trusts of
various kinds, the trustee ends up making the most important decisions on how
you manage and distribute that wealth,” he says. “So if you don’t control your
trustee, you don’t control your wealth. And a private trust company is the best
way to control the trustee, because the trustees are the family members.”
Is a Private Trust Company Right for You?
A private trust company might serve our family office needs if:
• There are more trusts in our extended family than there are children,
and no one has sufficient time to oversee them.
• We run the risk of disgruntled family members trying to sue our trustees.
• The combined
effort of our multiple trusts is not producing the investment returns it
should.
• We are running out of board members to serve on our family’s
trusts. |
Creeping Institutionalization
Families have been slower to establish
private trust companies than proponents of these structures expected. In
Delaware, where the regulatory burden and capital requirements are among the
highest, there are only four private trust companies. (Capital requirements and
other regulations are significant impediments: Wyoming—where regulations are so
lax that trust companies do not even have to register with the bank
commissioner—has many more trusts than Delaware, but the government cannot
determine the precise number.) In some cases, obstacles to establishing trusts
are logistical. For example, the original trusts may be domiciled in states that
discourage their relocation or restructuring. In others, says Pulsifer, we may
face resistance from the current trustees, who may try to block the change and
refuse to resign.
Some families have more far-ranging concerns about the
limitations of private trust companies, and the long-term ramifications of
creating these structures. Most of those who consider establishing them realize
that they will need to bring in other families to increase the company’s asset
base in order to support the sizeable salaries needed to retain top-flight
talent and to pay expenses. However, many families dislike what they see as the
conservative, cookie-cutter approach of corporate trustees, and have voiced a
worry that expanding their private trust company will lead it to eventually
become the latest in a long line of single-family trusts that have become
institutionalized, and ended up as impersonal financial institutions in their
own right.
“It starts out slowly,” Pulsifer says. “The family that starts the
private trust company decides to take on one more family as a client, then
perhaps another one. Before you know it, the private trust has become an
institution in its own right, and they risk finding themselves right back where
they started, dealing with an anonymous organization.”
Sentinel is trying to
remain on the right side of the fine line that separates a private trust company
from a behemoth corporate trust company, Flowers says. He wants it to offer the
kinds of services and expertise that families get from giants like Smith Barney
or JP Morgan, while delivering those services in a much more personal manner.
The trust company now caters to 20 families nationwide, with fortunes ranging
from $25 million up into the billions of dollars, Flowers says, and its 28
employees include the former head of family wealth planning at Arthur Anderson,
fiduciary experts from Northern Trust and JP Morgan and veteran investment
managers. “We needed to grow to deliver the best possible services to our
families, but it is measured, cautious growth,” he says. Sentinel has not placed
restrictions on the number of families it will take on, but it is exceedingly
selective.
| Individual trustees get old and die. Then you’re faced with the need
to replace them, over and over again. At any given time, we were
looking for trustees for lots of different trusts. |
Those who are unconvinced of the charms of private trust companies
may obtain some of the same benefits by establishing a family limited
partnership (FLP) to coordinate specific trust tasks, whether legal or
investment-oriented. Units in the partnership can be distributed to each
individual trust, but the functions are consolidated within a single entity,
often under the aegis of a family office.
In some cases, a common approach to
portfolio management among several families may not be appropriate. Even then,
such FLP-based “wrap” structures can be used for other tasks, and families can
use a combination of family office executives, corporate trustees and
third-party legal, accounting and investment advisors to coordinate the
nitty-gritty of a trust’s operations.
“The last thing [families] want to do
is make their lives more complex,” Sallstrom says. The irony, she adds, is that
there are limits to any advisor’s ability to simplify the complex network of
trusts that inevitably grow up around a family over the generations—and that
simply trying to tackle that task is complex. “It’s a continual source of
frustration for us and for the families we work with.”
Illustration by Kevin Spaulding.
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