Steadily increasing interest by wealthy families in private trust companies will be ramped up even more by a potentially favorable IRS ruling and new legislation, says attorney John Duncan, a nationally-known authority in the field.

The number of private trust companies in the US will double in the next five years, according to one of the country’s top legal experts in the field.

“We’ve seen interest in private trust companies from wealthy families climb steadily for the past ten years, and I anticipate there will be an explosion of new companies as soon as the Internal Revenue Service comes out with a ruling sometime before the end of the year,” John Duncan, principal and founder of Chicago-based Duncan Associates said in an interview with Family Wealth Report yesterday.

“There’s definitely increasing interest in private trust companies by wealthy families,” said Thomas Handler, partner for Handler Thayer in Chicago who is a nationally known legal authority on family offices. “They’re seen as a good alternative to public trusts because they give families a greater measure of control, and because the families own the trust, they can modify it to react to future circumstances,” he said. 

There are currently approximately 75 to 100 regulated private trust companies and about 150 unregulated private trust companies in the US, Duncan estimated.

IRS ruling, financial reform bill may boost private trust companies

The IRS ruling, he said, will decide how much individuals can do with their own private trust company without creating tax issues for themselves.

Based on draft reviews, Duncan believes the IRS will allow individual family members “substantial” leeway as long as they “can’t control their own distribution.”

The Financial Reform bill now working its way through Congress may also prove to be a boost to private trust companies, because family offices may lose their exemptions under the Investment Advisor Act and become regulated by the Securities and Exchange Commission, according to Duncan.

“If the new law doesn’t provide a good alternative to registration with the SEC, then some families who have back-burnered a private trust company will make it a priority,” he said.

Families should have at least $250,000 in assets to consider opening a private trust company, Duncan said. The cost would be one-tenth of one per cent of their assets, and less as assets rise, he added.

Private trust companies are empowered to act as trustee with full control over fiduciary assets and exercise comprehensive financial company powers to provide a broad range of family investment and other financial services.

As a result, families considering opening one need to be “very committed to achieving long-term goals,” Duncan said.

In addition to control, the primary benefits of a private trust company are “solving the trustee succession problem” and “coordination of all the families’ financial functions under one umbrella,” he said.

But, Duncan warned, private trust companies “are a lot of work. Families need to ask themselves if they really have the necessary level of commitment and unity to pursue multi-generational goals.”

"Flexible" South Dakota, Nevada friendly to trusts

South Dakota and Nevada are among the most popular states to open a private trust company because there is no income tax on trusts and “a lot of flexibility” in the trust laws, said Duncan, who is also co-founder of the Chicago-based Private Trust Companies Association.

New Hampshire and Tennessee are “up and coming” states for attracting private trust companies, and Florida is working on a new trust company law, he added.

Because unregulated private trust companies are not supervised by state banking regulations, can’t operate on an interstate basis, and are not exempt from the Investment Advisor Act, they are more suitable for “more passive and limited”  family offices, Duncan said.

In addition to being less safe for assets, unregulated private trust companies are “much more likely to expose ownership and management to personal liability,” he added.