Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Private Family Trust Companies Ensure Generational Wealth Control
Transcript
- Lucas: So when you hear 'trust company,' you probably think of a big bank like Northern Trust or Bessemer. But a growing number of ultra-wealthy families are chartering their own. It's called a private trust company, and the numbers are striking. Luna: We're talking families setting up their own regulated entity just to serve as trustee for their own trusts? That sounds expensive. Lucas: It is. Legal setup can run from a hundred thousand to half a million dollars, plus annual operating costs—maybe fifty to a hundred thousand a year. But for families with $100 million or more, it can make sense. The incentive is control. Luna: Control over what, exactly? I mean, a commercial trustee already follows the trust document. Lucas: True, but commercial trustees are conservative. They use standard investment policy statements, standard distribution policies. A private trust company can be tailored exactly to the family's philosophy. More important: it allows the family to retain authority over investment decisions and trust distributions, within legal limits. Luna: So instead of a bank's trust officer, the trustees are family members or trusted advisors? Lucas: Exactly. You typically form a board of directors or a trust advisory committee—some combination of family members and independent advisors. That committee sets investment policy, approves distributions, and can even make loans to family members or to family businesses. Luna: That's the part that surprises me: a trust company can lend to family members? Isn't that a conflict of interest? Lucas: It can be, but it's legal if done properly and with arm's-length terms. In fact, some high-net-worth families use their private trust company as a family bank, making secured loans to children or grandchildren for real estate purchases or business ventures. The trust company earns interest, and the family keeps the transactions private. Luna: And privacy is a big deal. A commercial trust might end up in court filings if there's a dispute. A private trust company keeps everything in-house. Lucas: Right. Plus, some states like South Dakota and Wyoming have trust-friendly laws that allow for dynasty trusts—trusts that can last forever without triggering the generation-skipping transfer tax. If you set up your private trust company in one of those states, you can create trusts that benefit your family for centuries. Luna: Forever is a long time. Are there any downsides? Lucas: The obvious one is cost and complexity. You need a charter from the state banking regulator, you need a board, you need an annual audit, and you need to comply with trust company regulations. It's not something a family with $10 million should do. But for families with multi-generational wealth, the benefits outweigh the friction. Luna: And that friction is exactly why this has become a hot topic in the family office world. The ability to customize everything—from investment policy to distribution rules—is a game changer. Lucas: Absolutely. And if today's deep dive was useful to you, it's exactly the kind of content that stays on the air because listeners support the show at buy me a coffee dot com slash fexingo. No ads, just listener-powered education. Luna: It's a small way to keep these conversations coming. Appreciate everyone who chips in. Lucas: So, let's talk about what happens when you actually set one up. The process typically starts with a feasibility study. You engage a law firm that specializes in trust charters—firms like Holland & Knight or McDermott Will & Emery. They assess your existing trust structure and help you choose a jurisdiction. Luna: Jurisdiction is key. South Dakota has no state income tax, no rule against perpetuities, and a very experienced banking department. Wyoming is similar but with a newer statute. Lucas: Nevada and Delaware are also popular. But South Dakota is the current leader. According to a recent study, about 35% of new private trust companies are chartered there. The state has a dedicated division that processes applications in about 90 days. Luna: That's much faster than I expected. I would have thought regulators would take a year to review. Lucas: The key is to have a solid business plan and a qualified board. Regulators want to see that the company has adequate capital—usually $250,000 to $500,000 in net worth—and that it has competent management. Some families hire an independent trust consultant to sit on the board. Luna: And once the charter is granted, what does day-to-day look like? The family can't just run it from a kitchen table. Lucas: You need a physical office in the state, at least a registered agent. Many families lease a small office and hire a part-time administrator. The trust company then sends quarterly statements, holds board meetings, and files annual reports. It's a formal governance structure. Luna: That formal structure also serves an estate planning purpose. If a family member is a trustee, they can be compensated, which may help with income shifting. And the trust company entity itself can own assets like life insurance policies or real estate, keeping them out of individual estates. Lucas: Right. And that ties into the biggest advantage: avoiding the generation-skipping transfer tax. If you create a dynasty trust that's designed to last multiple generations, the GST exemption shields it from tax at each generational level. But you need a trustee that's not a beneficiary, which a private trust company can provide. Luna: So a family sets up a private trust company, that company serves as trustee for a dynasty trust. The trust owns a diversified portfolio, maybe a family business, and it pays income to descendants without the trust being included in anyone's estate. That's powerful. Lucas: It is. And we've seen families with $1 billion or more use this structure to consolidate assets. One example: the Cargill-MacMillan family, though they use a more complex structure. But the principle is the same—protect assets from divorce, creditors, and poor decisions. Luna: Protection from poor decisions is underrated. A good trust document can include incentive provisions: like requiring beneficiaries to have a job or go to college to receive distributions. Lucas: Exactly. And with a private trust company, the family can amend the trust's administrative provisions more easily than with a commercial trustee. If the family's circumstances change, they can adjust distribution standards or investment guidelines. Luna: But there's a risk: if the family treats the trust company as an alter ego, a court might pierce the veil. The regulators also watch for self-dealing. Lucas: That's why independent directors are critical. Most successful private trust companies have at least one independent director who is not a family member. They ensure that fiduciary duties are taken seriously. And the trust documents must clearly state that the trust company is the trustee, not the individuals serving on its board. Luna: So you get the benefits of a professional trustee—liability protection, regulatory oversight—plus the customizability of a family-run operation. That's the sweet spot. Lucas: All told, the trend is accelerating. The number of private trust companies in South Dakota alone has grown from fewer than 20 in 2010 to over 200 today. And that's just one state. Nationwide, we're probably looking at 400-500 families using this structure. Luna: That's still a tiny fraction of ultra-high-net-worth families, but the assets are huge. Some of these trusts hold hundreds of millions or even billions. Lucas: Right. And if you're a family that already has a family office, adding a private trust company is a natural next step. It gives you a permanent, regulated vehicle for wealth across generations. Luna: Worth considering if you've got the scale. Lucas: Exactly. So the takeaway: if you ever hear someone mention a private trust company, you'll know it's not just a trust—it's a charter, with a board, a regulator, and a long-term strategy for staying in control.