Private wealthy families who seek flexibility, control, and privacy over trust matters can benefit from establishing a trust company. Unlike trust services offered by other professional non-private trust companies or individuals, a private family trust company (PFTC) is created to act as trustee for only that one family. In addition, private trusts are subject to less stringent reporting and regulation than trusts managed by public trusts, which allows for more confidentiality. PFTCs also provide minimal liability for family members or trusted advisors who act as trustees of your trusts.
While a PFTC can be beneficial, customers need to understand key regulatory and operational requirements, as well as the costs and expenses associated with them.
The states where practitioners frequently use situs trusts are also some of the best states to start a trust company. Practitioners have traditionally viewed Nevada, South Dakota, and Wyoming as the major jurisdictions. In addition, Tennessee and New Hampshire recently enacted laws to make their respective jurisdictions desirable. Delaware is often used by large institutions.
PFTCs can either be regulated or unregulated. Nevada, New Hampshire, South Dakota, Tennessee, and Wyoming all allow regulated PFTCs. Wyoming and Nevada also allow unregulated PTFCs. Both regulated and unregulated trust companies are required to complete the company formation by the Secretary of State. Both types of PFTCs offer advantages. For example, unregulated trusts typically have lower operating costs than regulated trusts, while regulated PFTCs offer family offices a potential exclusion from the need to register as investment advisers with the SEC.
Government regulators typically review regulated trust companies by reviewing the management, operations, results, compliance and asset management components.
As of January 1, 2021, South Dakota will lead the number of regulated public trusts and PFTCs. Wyoming and Nevada are often used for unregulated PFTCs.
Another requirement to be aware of is that regulated PFTCs should generally have a minimum capital requirement of between $ 200,000 and $ 500,000. Regulated public / retail trust companies should generally expect minimum capital requirements between $ 400,000 and $ 2 million.
The capitalization depends on the proposed overall risk profile of the trust company, the pro forma projections for income and expenses, and the selected state jurisdiction. For example, South Dakota public trust companies that act as trustees of foreign trusts or administrators of cryptocurrencies have had to raise and maintain higher capital.
In addition to capitalization requirements, potential trust companies should consider the costs of starting and operating a trust company. In general, the cost of a PFTC is less than that of a public trust company. Most applicants hire a legal advisor or consult an expert who understands the requirements for starting trust businesses. There is also an application fee payable by the state.
Traditional expenses include: insurance for directors and officers; Borrowing from a financial institution; annual fees based on the status of the charter; Board memberships; Trust accounting software; and staff / third party account management providers. The expenses also depend on how much responsibility the family members take on themselves.
License / charter process
A regulated trust company can be formed through proper application with a state banking authority. The incorporation process depends on the type of application and the state in which the application is being filed. After the application is submitted to the state authorities, the regulators conduct a thorough review of the application and the corresponding business plan. In addition, regulators conduct background checks on proposed owners, directors, officers and employees. A face-to-face or virtual meeting between board members and regulators is usually required prior to approval.
The approval process and the time it takes to obtain approval vary from state to state. In general, it takes around five to nine months to obtain a charter / license from a private or public trust company. The timeframe depends on the name of the trust company (private or public), the complexity of the business model, the quality of the application submitted and the number of applications currently pending in the selected state.
The requirements for regulated trust companies vary by jurisdiction and designation as a public / retail or PFTC company. In addition to periodic audits, regulated trust companies should plan a physical office in the charter / license jurisdiction where original or escrow copies, including electronic copies, of all essential business records and accounts of the trust company can be obtained and readily available for review by the commissioner.
In some states, PFTCs are required to have at least three board members.Regulators are likely to backlog and conduct the criminal background checks of potential board members, officers, employees and major owners. Not a person convicted of a crime or offense involving fraud, dishonesty or breach of trustmay serve as a director, officer, or principal of a trust company. Trust companies of non-U.S. Residents in the capacity of a trust company are likely to need to conduct advanced due diligence with state regulators. In addition, government regulators can conduct a background check at FINRA on applicants registered with the SEC.
Regulated trust companies are also often required to hold quarterly board meetings. In addition, regulated trust companies are often required to maintain a bank account with a state or nationally chartered bank with a head office in the charter / license state.
* This article is an abbreviated summary of “Trust Company Requirements in Major US Jurisdictions, ” which appeared in the March 2021 issue of Trusts & Estates.