Why Are Private Trust Companies Gaining Popularity?
The popularity of private trust companies (PTCs) is on the rise, largely because they offer greater privacy, flexibility, and potential cost savings than alternatives such as family offices or corporate trustees.
Though the confidential nature of PTCs makes it challenging to pinpoint their exact numbers, estimates suggest that thousands operate across the United States, either independently or under the umbrella of bigger institutions.
For families seeking enhanced control over their wealth and a range of tax advantages, including in estate, income, and gift taxes, PTCs offer unique benefits. This article provides an essential overview to help you understand how PTCs might serve your family’s needs.
What Is a Private Trust Company?
A PTC is an entity created by a family or group to manage trusts for the benefit of family members. Because a PTC is typically structured to manage trusts exclusively for a single family, it provides greater flexibility in terms of governance and allows family members to be directly involved in decision-making processes as well as enhanced privacy in managing family assets. The PTC itself serves as the trustee over the family’s trusts, therefore eliminating the need to give up any control to an external trustee.
In addition to benefits regarding privacy and governance, a well-structured Private Trust Company can provide various tax benefits for U.S. families, particularly in areas related to estate, income, and gift taxes.
Many states allow formations of PTCs, but certain states are especially popular for their formation and operation due to trust-friendly laws, favorable tax structures, and business friendly environments. These states include Alaska, Delaware, Nevada, South Dakota and Wyoming.
Key Tax Benefits of Private Trust Companies
Here’s a look at some of the main tax advantages:
Avoiding Estate Tax on Growth of Assets
By transferring assets into trusts managed by a PTC, the growth of these assets may escape estate taxation, helping reduce the taxable estate. When a family member transfers assets into a trust, they are effectively removing those assets from their taxable estate. Over time, this can lead to significant tax savings as the assets appreciate in value.
Avoiding State Income Tax with Proper Situs Selection
Only a few states in the US allow PTCs including Wyoming, Nevada, Delaware and South Dakota. By organizing a PTC in a state which does not impose state income taxes on trusts for non-resident beneficiaries, income generated by the trust may grow and be reinvested without being reduced by state income taxes, maximizing the value of the trust for beneficiaries. Wyoming, for example, does not impose taxes on income, capital gains, gifts, or estates and is considered one of the best jurisdictions to organize a PTC.
Generation-Skipping Transfer Tax (GST) Benefits
Trusts managed by a PTC can be structured to take advantage of the generation-skipping transfer (GST) tax exemption. This tax applies to transfers that skip a generation (e.g., from a grandparent to a grandchild), which would normally incur significant tax liability. By utilizing a PTC to manage GST-exempt trusts, families can make transfers across generations with reduced tax consequences.
Income Tax Efficiency with Irrevocable Trusts
Trusts managed by a PTC can also create income tax efficiencies, particularly when using irrevocable trusts. Irrevocable trusts separate assets from the grantor's estate, often lowering the family's overall tax burden. Additionally, income earned in these trusts can sometimes be taxed at lower rates than if the income were held by family members individually, depending on the trust structure and applicable tax rules.
Charitable Contributions and Tax Deductions
PTCs can work with charitable trusts that generate deductions for estate, gift, and income taxes. Families can establish charitable remainder trusts or other charitable entities managed by the PTC, benefiting from deductions while aligning with philanthropic goals.
Non-Tax Benefits of a Private Trust Company
While tax efficiency is a significant advantage, PTCs also offer other benefits that may be equally attractive to families, including:
Control and Family Governance
PTCs provide families with the ability to structure and manage trusts according to family values and long-term goals. Family members can be appointed to the board of the PTC, allowing for a direct role in governance, investment decisions, and the distribution of trust assets.
Customization and Flexibility
Unlike traditional trust companies, PTCs are customizable and can be structured to meet a family’s specific needs. Families have more say in setting policies, choosing service providers, and determining the terms and conditions governing distributions and investments.
Privacy and Confidentiality
PTCs offer a high level of privacy because they are private, family-owned entities. This is particularly valuable for families that value discretion and wish to avoid the public scrutiny that can come with traditional trust companies.
Streamlined Multi-Generational Wealth Transfer
A PTC provides a centralized entity through which wealth can be efficiently managed and transferred across generations. By having a structured governance model, the PTC can ensure continuity and consistent management of family wealth.
Final Thoughts
A PTC is a more complex alternative to traditional trust and estate planning which can provide high-net-worth families with a unique structure that allows for inter-generational wealth transfer and governance while enjoying tax savings on the growth of assets. While a PTC can offer solutions to certain challenges faced by certain families, they are subject to regulatory and reporting requirements and must be carefully administered.
As Wyoming is a very favorable state for PTCs, a primary focus of our Jackson, WY office is to assist those responsible for administering a PTC with the preparation of certain documentation required to be regularly reported under the governing instrument and applicable law. Specifically, we can assist with maintaining the financial books and records of the PTC (on both a book and tax basis), preparing quarterly financial statements, and filing and paying taxes.
If you are interested in exploring how a PTC could support your tax planning goals, or if you are one of the many professionals who specializes in the administration of PTCs, please schedule a call using the link below. We look forward to discussing how we can assist you.
