Suzanne McGee
10/01/2004
D. Fort Flowers of Houston says that when he first discussed establishing a private trust company with the Fruehauf family a decade ago, “There wasn’t even a name for what we started to think about doing.” Flowers, 43, is the grandson of H. Fort Flowers, who founded an engineering and manufacturing empire in Ohio in 1915; the Fruehauf family wealth creator was August Charles Fruehauf, who pioneered the building of semi-trailers in the early 20th century. By the 1990s, family members found themselves tangled in a Byzantine maze of interlocking and overlapping trusts. To simplify matters, they created a private trust company, a corporation with one set of managers and directors, charged with overseeing all their trusts and related family office matters.
Private trust companies have
actually been around for many decades, although they are now growing in
visibility due to the profusion of family trusts, and families’ desire to
streamline them. While a large and complex array of trusts is not, in Flowers’
view, a problem in itself, the logistics—in particular the need to find trustees
for the multiple entities—can become overwhelming.“Individual trustees get old and die,” Flowers says. “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.”
In their new trust company, which they christened Sentinel Trust, the Flowers and Fruehauf dynasties found a way to manage their respective trust networks more efficiently, integrating investment, estate and tax planning strategies and structures. Sentinel received its charter in early 1997; within six months the founders opened it to other families. “We realized we could build a stronger, deeper organization and offer cost-effective, top-quality service on everything from investments and trust management to family office services,” Flowers explains.
| We have one family looking at setting up a private trust company, in part because when they want to have a meeting of the trustees, they have to rent an auditorium. |
Clearing the Thicket
Trusts multiply as each family member sets up educational or charitable trusts, or special-purpose trusts of other kinds, such as ones that hold business assets for the benefit of family members. In the first few generations, says Wally Head, president and chief operating officer of Chicago-based Family Office Exchange, the best strategy may simply be for the family to turn to a law firm, private bank or accounting firm to design a streamlined way to track cash flows and prepare tax returns. At some point, however, the standard team of advisors is no longer enough, nor is the family office.
| TOP VIEW Trusts serve myriad purposes, but having too many of them can create a logistical nightmare. Private trust companies, which take on all of the responsibilities and liabilities of administering family trusts, may be one solution, but they have been slow to catch on. |
“In many ways, having too many trusts is a wonderful problem to have, as it means the family has substantial wealth,” says Delaware attorney Thomas Pulsifer, a partner in Morris, Nichols, Arsht & Tunnell in Wilmington. However, a profusion of trusts can make us feel as if our success is pinning us to the wall. Without coordination and a uniform investment philosophy, the aggregate returns can suffer. In other cases, the problem is not necessarily quantitative, but logistical. A fourth-generation member of a wealthy family trying to tap a trust’s assets to launch her own business may find it takes weeks to figure out what trusts she can ask for a disbursement—and weeks more to get the approval of trustees. Then there are basic communication challenges: “We have one family looking at setting up a private trust company, in part because when they want to have a meeting of the trustees, they have to rent an auditorium,” says Debbie Cox, a managing director at JP Morgan Private Bank in Dallas.
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?
Creeping Institutionalization
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.
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. |
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.