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Private Trust Companies

Historically, high net worth families hire professional trustees to ensure that their wealth is transferred appropriately to the beneficiaries of their trusts. However, these families also have concerns regarding this method. Changes from the original trustee/trust holder agreement can take place with institutional trustees in both internal and external buyouts. Secondly, individual professional trustees will likely not survive the expected duration of the trusts. Because of these concerns, the use of private trust companies, once relatively obscure, is becoming more common.

A private trust company is formed specifically for the purpose of providing trust services to a family group or, in a few instances, family groups. This allows the family to appoint advisors to the private trust company who are more familiar with the family's business than a traditional trustee.

Setting up a private trust company is costly. Legal fees alone can total $100,000. In addition to legal fees, there are also minimum capital requirements and administrative costs. It is essential that management has enough assets to cover these costs before entering into a contract with a private trust company.

One concern, which the IRS recently addressed, is whether or not the close relationship between the family and the trusts under management of the private trust company could cause certain incidences of ownership. Such incidences of ownership could cause the trust assets to become included in a beneficiary's, private trust company owner's or private trust company manager's estate tax return.

On June 25, 2008, the IRS issued Notice 2008-63, which addresses concerns regarding the use of private trust companies. The notice states that the use of a private trust company will not by itself cause the following:

• The value of trust assets to be included in a grantor's gross estate
• The value of trust assets to be included in a beneficiary's estate
• Affect the status of a trust if the trust is otherwise exempt from the generation skipping tax
• Cause any grantor or beneficiary to be treated as the owner of a trust under Section 673 or Section 678

Many high net worth families view the issuance of Notice 2008-63 as the green light they have been waiting for to begin using private trust companies for the management of their trusts.

For more information, please contact Mike Calahan at 312-980-2996 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.