Restructuring Family Offices

New Dodd-Frank regulations may require some Family Offices (FOs) to register with the Secruities and Exchange Commission as investment advisers. The alternative to this registration would be restructuring their organizations. One route FOs can take is to become a private trust company (PTC).

Some of the advantages of this restructuring include:

• Greater family control and privacy are possible.
• No state income or capital gains taxes on trusts if PTC is established in a tax friendly state.
• If PTC is regulated by state law, it may be exempt from registration as an investment adviser.
• More flexibility in managing and investing trust assets is possible.
• Common trust funds can be created to offer the same opportunities for efficiencies and economies of scale.

Some of the disadvantages include:

• PTCs are relatively untested.
• There is potential for family conflict if trustee is not free from family control.
• PTC has high initial capitalization, start-up costs, and continuing administration costs.
• If mismanagement or poor investment performance, family members may have no real recourse against a fiduciary.
• Potential tax consequences if certain family members have too much control over PTC activities
• There are extra regulatory and financial reporting requirements.

If an FO does decide to convert to a PTC, then it has to decide which jurisdiction to form the PTC in, and whether the trust should be regulated or unregulated. Most states require that a PTC be fully regulated.

Other decisions concerning governance of the PTC also have to be made including determining the PTC’s purpose and defining the roles and responsibilities of the PTC’s shareholders, directors, and its investment and distribution committees. The structure of a PTC is divided into directors and shareholders. The shareholders are responsible for electing the directors and approving extraordinary corporate actions. The Directors are responsible for the daily business of the PTC and are elected by the shareholders. If family members retain too much control over certain PTC activities, gift, GST, or income tax consequences could arise.

See Susan Hartley, Converting a Family Office to a Private Trust Company, Trusts and Estates Newsletter, Mar. 28, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.