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| Best Practices: Family Office |
Trust Busting
Suzanne McGee
10/01/2004
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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. |
Sentinel is just one of several hundred private trust
companies that have been established by families struggling to manage their
assets more rationally. “Trusts are wonderful, one of the most flexible and
powerful legal devices we have, and that’s why they proliferate,” says Glenn
Kurlander, managing director of family wealth advisory services at Smith Barney.
With little effort, most families end up with at least a few dozen trusts in the
first two or three generations.
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. |
Brenda Sallstrom, now chief investment officer at Crosswater
Financial in Minneapolis, spent nine years running a family office for four
generations of a family in the Midwest, during which time its legal entities,
including trusts and private partnerships, nearly doubled in number, despite her
best efforts to rein in growth by periodically collapsing or merging trusts. “I
would hate to see how many entities they have today,” she says. Tom Livergood,
chief executive of Family Wealth Alliance and a family office management
consultant, says he once went in to advise a family office on improving its
efficiency only to find it had more than 80 trusts. “And this isn’t a dynasty,
just a two-household, two-generation family,” he recalls, still horrified.
“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.
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