A regulated private family trust company, called a “Chartered Family Trust Company” in Wyoming, can be useful for extraordinarily wealthy families who seek the flexibility of PFTCs and their regulation by the Wyoming Division of Banking.
On July 1, 2015, Wyoming enacted the Chartered Family Trust Company statute. If chartered by the Wyoming Banking Board, a PFTC isn’t required to register with the U.S. Securities and Exchange Commission. To fall within the current exception from registration with the SEC, a family office must provide securities advice only to members of a single family, be managed and controlled by the requisite family members and entities and not hold itself out to the public as an investment advisor. Wyoming-regulated PFTCs are required to maintain a minimum capital of $500,000, have a physical office in Wyoming and be examined by the Wyoming Division of Banking at least once every three years, among other requirements.
The CFTC statute attracts wealthy families to Wyoming, where they can enjoy the following benefits:
Exemption from Investment Advisors Act of 1940 After Dodd-Frank
After enactment of the Dodd-Frank Act, an affluent family can continue to qualify for the SEC’s family office exemption and isn’t required to register as an investment advisor if it organized under Wyoming’s CFTC statute.
The Investment Advisors Act of 1940, or the Advisors Act, identifies who must register as an investment advisor. Prior to the Dodd-Frank Act, the Advisors Act had an exemption from registration for “private advisors.” Family offices and PFTCs serving only one family used this exemption to avoid the requirement to register as an investment advisor.
The Dodd-Frank Act eliminated the private advisor exemption, but created a new exemption for family offices and delegated the definition of a family office to the SEC. In Rule 202(a)(11)(G)-1 under the Advisors Act, the SEC defines a “family office” as serving only one family and being wholly owned by that one family. It also defines a “family member” as all lineal descendants of a common ancestor, as well as current and former spouses, provided that the common ancestor is no more than 10 generations removed from the youngest generation of family members. Key employees—not just any employees—may also be served.
Pooling and Commingling of Family Assets
The PFTC structure facilitates a pooling of assets and commingled investments that might not otherwise be available to individual family members.
A related issue involves retaining and asserting common fiduciary control and decision-making over a single stock position or similar concentrated or whether to diversify a single stock or large equity position. A traditional corporate trustee may be hesitant to hold a single stock or equity concentration at the request of the family. With a PFTC, however, the decision-makers are those same family members who benefited from the investment concentration or the advisors that those family members hire, and, thus, there’s a motivation to continue with the family’s long-term investment concentration philosophy. Therefore, in some situations, the single stock or concentrated, often illiquid equity investment is the driving force for the family to create a PFTC, which insures the investment concentration will be retained in each of the family trusts.
Wealthy families have started to consider the benefit offered by creating the family’s own PFTC. If a single-family office restructures and implements a PFTC, it can avoid the Dodd-Frank compliance burden. Certainly, not all families with an SFO will benefit from creating and maintaining a PFTC. Family needs differ, so there’s no specific hard and fast rule for when a wealthy family should consider organizing a PFTC, preferably a “regulated” PTC in Wyoming. A family should consider a regulated PFTC if it desires the advantages of an SFO, but wishes to have more control over the trustee. The family will seek to replace an existing corporate trustee with a captive, family-friendly trustee who will cater to the family’s needs, while satisfying the requirements of a corporate trustee. By naming an entity with perpetual life as trustee, the death of a key family member serving as trustee is less critical.
Like the other leading trust jurisdiction next door in South Dakota, Wyoming also has a very low tax burden, is rated in the top tier of fiscally sound state governments, has a pro-business legislature and has very business-friendly regulations. Among the benefits of accessing Wyoming law are: no state income tax, no corporate tax and no state estate tax, strong privacy laws, 1,000-year perpetual trust duration, easy trust reformation and, at least in Teton County (home to Jackson Hole), a responsive court system.
Create Continuity of an Independent Trustee for all Family Trusts
PFTCs also create continuity of trusteeship. Long-term trusts established for multiple generations are common in affluent families. One issue that arises in the trust administration of long-term trusts is trustee succession. An inherent problem arises when the long-term trust outlasts the designated individual trustees. While many sophisticated trust documents provide for trustee succession provisions, not all documents for a family will necessarily have similar succession provisions, and suitable successors may be difficult to identify. Thus, the controlled management of trustee succession can be problematic.
Wealthy families create PFTCs to act as an independent trustee for the family’s trusts. A PFTC can be structured to meet the requirements of an independent fiduciary so that the trustee is a corporate trustee, and the family retains greater control over the administration of the trust. This is especially common if the trust agreement (perhaps an older agreement) calls for a corporate fiduciary or the trustee succession has resulted in a successor corporate trustee.
Elimination of CRS Red Tape for Non-U.S. Residents
The Common Reporting Standard was originally aimed at preventing tax evasion by those resident outside of the U.S., such as in Europe, the Caribbean, certain countries in North, Central and South America, Australia and Asia. These 100+ countries, known as Adopting Countries, have signed on and become adopters to CRS. CRS also applies to certain passive entities with controlling persons residing in an adopting country.
As the United States isn’t an adopting country, U.S. financial institutions needn’t comply or report under the CRS. Only financial institutions from countries that have adopted the CRS have the duty to report. For non-U.S. residents, organizing a PFTC in Wyoming or migrating an existing offshore trust to Wyoming and engaging a local Wyoming trust company as trustee can eliminate the red tape of the CRS.