Perspecta Trust talks about how - despite being “very much en-vogue right now” - private trust companies are not appropriate for every wealthy family and in some cases are perhaps being overused.

New Hampshire-based Perspecta Trust recently crossed the $5 billion mark in terms of assets under supervision as wealthy families and advisors increasingly take advantage of the state’s progressive governance rules and lack of fiduciary income tax.

Clients seeking to establish multi-generational trusts are opting to do so in the Granite State because its progressive statues allow for dynasty trusts, asset-protection trusts and - most recently – oversight under a dedicated trust court. The firm believes that larger institutions have become more rigid in their approach to wealth management offerings as a way of minimizing risk, and Perspecta has benefited by being able to offer flexible à la carte wealth and investment management.

Here, Family Wealth Report speaks to the firm’s president, Scott Baker, and one of its principals, Todd Mayo, about how - despite being “very much en-vogue right now” - private trust companies are not appropriate for every wealthy family and in some cases are perhaps being overused. 

Baker said private trust companies - essentially family-owned enterprises combining attributes of institutional and individual trustees - are best suited to families with large, privately-held businesses or in cases where a family might have a few dozen individual trusts worth hundreds of millions of dollars, for example.

Private trust companies offer families a way to develop strong governance practices by facilitating the centralization of management and administration of all activities carried out within the entity. But Baker said his firm is seeing them prescribed to families in cases where the same flexibility and control could be put in place without the associated costs and complexities by setting up new trusts or moving existing trusts to a jurisdiction like New Hampshire.

“It’s all about governance,” Baker said, noting that there are indeed “many good reasons” why a family would choose to set up a private trust company. If a family has enough “moving parts” and they want to take in-house all of the management and trusts themselves – and they’re aware of the challenges with respect to audits and external examinations, for example – a private trust company may well make sense. Indeed, Perspecta itself has assisted families with setting up their own New Hampshire private trust companies - most recently a multi-billion dollar entity in December.

But in states with “modern” trust laws – such as New Hampshire, Delaware and South Dakota – the ability to set up a governance structure akin to what a private trust company would provide is much easier and comes without the high legal fees and ongoing costs associated with management and administration.

In the aforementioned states, for example, you can have four different entities or people serving in distinct, limited capacities to perform the traditional responsibilities of a trustee. For example, trusts can be constructed to designate different advisors to manage investments or specific holdings, make distribution decisions, perform administrative duties and provide custody services. Some 20 or 30 years ago, a trustee would have had to either perform or oversee all of these functions themselves - and be compensated for assuming the liability of doing so.

Baker also noted that these states allow for the appointment of a “trust protector” – something which, while not necessarily new, has gained a lot of traction in the last few years. The trust protector can be a person or entity and while their responsibilities can be very narrow or very broad in scope, their overarching role is to protect the intentions of the trust’s settlor and provide guidance as to what the settlor would have wanted. The trust protector can make decisions with respect to how the trust is managed, hire and fire other advisors, and can retain veto power over most decisions. Crucially, in naming a protector that knows the settlor’s intentions, values and priorities, the family can maintain a level of control with how the trust functions over time. The concept of the trust protector is not necessarily talked about because it’s not available to trust creators in all states, Baker added.

“A lot of the time, people are unaware that that the role of the trustee can be bifurcated; they’re still operating under the notion that there is one big trust company operating under a large bank with full control over how the trust functions. It’s the history that can scare people,” Baker said. “Jurisdictions like New Hampshire that have modern trust laws and allow bifurcation make that type of trustee relationship obsolete. Families create a broad and flexible governance structure that can last for multiple generations and can accommodate increasing wealth, complex holdings and multiple managers - all with a high degree of privacy. With such an approach, there is no need to create a private trust company additionally.” 

Mayo said that what’s happening with private trust companies now reminds him a lot of what happened with private family foundations some ten years ago.

“Many families created private foundations because they offered the opportunity to create a public legacy. But these entities were formed without a full appreciation of the advantages and disadvantages of the structure. Over time, many families turned toward simpler, more cost-effective vehicles like donor advised funds. Like a foundation, family trust companies require a lot of care and expense. Foundations ran into problems because families’ appetite for continuing to maintain them diminished over time. We could well see that with the private trust companies that are being created today,” he said.

Awareness

Baker believes that, in many cases, families are simply not being made aware of all the different options available to them, such as choosing a different situs for existing trusts. For example, in a state like New Hampshire, trustees can “decant” the assets of one trust and “pour” them into a new one with different terms and provisions.

He gave the example of how, years ago, a client set up a trust funded with interest in a small private business he was running from his home. The terms of the trust stated that his children would receive a specified portion of the assets annually, beginning when they graduated college; at the time it was set up, the children would have received a nominal annual sum to pay off their school loans over time. But the company in the trust ended up being hugely successful and is now one of the largest companies in the world. Based on the terms of the original trust, the children would begin receiving a staggering multi-million sum each year at the same age.

“We’ve seen what happens when some young adults are given unfettered access to millions of dollars,” Baker said. “In this case, the parents wanted to be proactive about avoiding those pitfalls.”

The settlor ended up moving the trust from his home state to New Hampshire to take advantage of the state’s very flexible decanting laws. The trustees were then able to move the assets into a new trust with provisions that provided more control over the disposition of trust assets to beneficiaries.

“That is an example of a trust that was intended for a certain purpose,” Baker said. “It happens so many times that family situations shift or the nature of trust holdings changes - what was a perfect trust ten years ago, is now sub-optimally positioned to serve the settlor and his beneficiaries.”

He added that many individuals simply endure a trust that doesn’t work the way it is supposed to. “We see examples of it all the time. Thankfully, there are usually options available for families willing to explore trust modification in a favorable jurisdiction,” he said.

In conclusion, families “really need to do their homework” when exploring all the different options available to them, especially when one of the options is something as costly as a constructing a private trust company, Baker said. “They need to ask questions like: ‘Can this be accomplished in other ways that are easier, less costly and less complex?”