foa podcast volume 24 with al king another look at private ... · foa podcast volume 24 with al...

FOA Podcast Volume 24 with Al King

Another Look at Private Trust Companies

22 FOA Podcast with Al King | © 2016 Family Office Association and Angelo J. Robles

FOA Podcast Volume 24Another Look at Private Trust Companies

Copyright © Family Office Association and Angelo Robles. All rights reserved. This white paper or parts thereof may not be reproduced in any form or redistributed for commercial use. For more information about this publication, please contact [email protected].

Disclaimer: The Family Office Association (FOA) is an affinity group dedicated primarily to the interests of Single Family Offices. FOA is intended to provide members with educational information and a forum in which to exchange information of mutual interest. FOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, FOA does not provide tax, legal or financial advice.

Materials distributed by FOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation or recommendation by FOA. Any investment decisions you may make on the basis of any information provided by FOA is your sole responsibility.

The FOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of Family Office Association. All other product and service marks on materials provided by FOA are the trademarks of their respective owners. All of the intellectual property rights of FOA or its contributors remain the property of FOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the FOA web site.

The information presented by FOA has been obtained by FOA from sources it believes are reliable. However, FOA does not guarantee the accuracy or completeness of any such information. All of such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

500 West Putnam Ave, Suite 400Greenwich, CT 06830

www.familyofficeassociation.com@familyoffice

FOA Audio Series Volume 24 : Another Look at Private Trust Companies

Al King III


Based in New York, NY, Al W. King III is the Co-Founder and Co-Chairman of South Dakota Trust Company LLC (SDTC). SDTC is a national trust boutique serving wealthy families all over the world with currently more than $30 billion in assets under administration.

Previously, Mr. King was Managing Director and National Director of Estate Planning for Citigroup and also the Co-Founder and Vice Chairman of Citicorp Trust South Dakota.

Mr. King is the Co-Vice Chairman of the Editorial Board for Trusts & Estates magazine. He has been inducted into NAEPC’s Estate Planning Hall of Fame, serves on their Board of Directors, as well as Chair of their Foundation Advisory Board. He is also a member of many other groups/organizations. Mr. King received his J.D. degree from Syracuse University Law School; his LL.M. in tax law from Boston University School of Law; and his B.A. degree from Holy Cross

Contact: [email protected]



Angelo J. Robles

Angelo J. Robles is Founder and CEO of the Greenwich, Connecticut-based Family Office Association (FOA), a global membership organization that delivers private educational and networking opportunities, proprietary research, and access to salient thought leadership to multiple generations of wealthy families and the professionals who run their single-family offices.

A member of the Princeton Council on Family Offices and the NYU Stern Family Office Council, Mr. Robles has a long record of leadership positions at top financial-service companies, including UBS. Before launching FOA, he founded and ran several successful entrepreneurial ventures: He served as President of the New England chapter of the Hedge Fund Association, and pioneered online retirement planning for Fortune 1000 executives with two Internet startups - 401KRollover.com and IRARollovers.com.

Author of several books and articles, Mr. Robles has appeared on Bloomberg Television and Radio, and has been quoted in the Wall Street Journal, Thompson Reuters, Institutional Investor, Opalesque, Registered Rep, HFM Week, Investment News, EurekaHedge, The Luxury Institute, Private Asset Management, The Greenwich Times and many other media outlets.

Contact [email protected](203) 570.2898

Family Office Association is a global community of ultra-high net worth families and their single family offices. We are committed to creating value for each family that we serve; value that grows wealth, strengthens legacy, and unites multiple generations by speaking to shared interests and passions. FOA has the resources to solve your most difficult challenges and help you achieve your collective goals: to invest intelligently, give strategically, and learn exponentially.

FOA is the community leader in serving all the key imperatives for ultra-high net worth families, respecting your privacy but enabling an intimate community of global families like yours. Our organization delivers private education and networking opportunities, proprietary research, and access to salient thought leadership that will interest all generations of your family.

Contact Family Office Association500 West Putnam Ave, Suite 400Greenwich, CT 06830Email: [email protected]: www.familyofficeassociation.comTwitter: @familyofficePhone: (203) 570.2898

About Family Office Association


Angelo Robles: Hello everyone, this is Angelo Robles at Family Office Association. Welcome and joining us today to our FOA audio podcast on private trust companies. We are very fortunate to be joined by Al King III, co-founder, co-chairman and co-CEO of the South Dakota Trust Company. I’ve known Al for a number of years, he is absolutely one of the true thought leaders in the world of private trust companies, which especially for larger families is usually a very important integral part of the concept around a single family office, governance and trustee issues. Al how are you today?

Al King: Very good thank you Angelo.

Angelo: My pleasure. It’s a pleasure to have you on the call. Why don’t we begin. For those that may be a little bit newer to the concept of a private trust company or “PTC” very simply what is a private trust company?

Al: Yeah basically a private trust company is typically a family owned entity authorized by either a state or a – the federal government to operate as a trust company serving as trustee for a family’s trust. The typical structure is an LLC that we’re seeing but they do operate like corporations. So rather than naming a family member individually as many families typically

do or by naming an institution, a large bank or another institution to serve as the trustee a family will end up setting up their own private trust company. And again that’s usually an LLC structure, typically in one of the more popular states and that will end up serving as trustee for their family trust.

Angelo: What is the difference between a regulated and an unregulated private trust company?

Al: Yeah that’s the question of the day Angelo. The – and there’s a lot of differences to amongst the states in this regard and some states provide regulated and other states provide unregulated and some states provide both. The basic difference is that an unregulated trust company is obviously not regulated by a state division of banking

whereas a regulated trust company is regulated by a state division of banking. Some people are scared by the word “regulated” but many of the states the more popular PTC states have bifurcated their laws so that the family trust companies are treated differently



A private trust company is typical a family owned entity authorized by either a state or the federal government to operate as a trust company serving as trustee for a family’s trust

from a public commercial trust companies. So there’s a different level of audit and it’s more a mentoring audit and so it’s not an overwhelming audit. It gets the job done but it’s typically friendly type audit. So the regulated family trust companies are typically audited once every 36 months whereas a commercial regulated trust company would be audited once every 18. And an unregulated trust company is not audited at all, which a lot of families like. The difference is with an unregulated someone would get a license versus a charter that they would receive with a regulated but there are some limitations. The unregulated obviously doesn’t have the state banking doing their audits once every 36 months. And because of that it may limit a families ability to do interstate administration

meaning they may want to set the unregulated trust company up in Wyoming or Nevada, those are two of the more popular states and do trust administration back in their home state. They could do that with regulated. They can’t do that with unregulated generally; so there’s a limitation with reciprocity and the ability to do – set up a trust company in one of

these states and do the trust administration in another state.

The other big differentiation between regulated and unregulated is unregulated doesn’t receive SEC exemption and as we all know what the Wall Street Reform Act of 2010 and subsequent issuances by the SEC, many family offices now have to register with the SEC, although private trust company is exempt from that type of registration if it’s regulated. Again if it’s not regulated generally it would not receive that exemption; so for many families the exemption from SEC registration is very important to them. Others view the ability to set up common trust funds and business trust as a key to their overall planning and they can’t do that with unregulated but they

can with regulated. Now the other concern with many people is that if the unregulated trust company does not follow through with a lot of the formalities that the regulated follows through on that there could be some issues down the road on

either the estate tax side, the state income tax side or the asset protection side. So many of the unregulated trust companies even though they’re not audited by the state division of banking they will have a policy and procedures manual just a regulated. They may have capital just like a regulated, although these aren’t required but a lot of them will still follow

FOA Podcast with Al King | © 2016 Family Office Association and Angelo J. Robles7

The other big differentiation between regulated and unregulated is unregulated doesn’t receive SEC exemption ...many family offices now have to register although a private trust company is exempt from that type of registration if it’s regulated.



through with a lot of the requirements.

The great thing is about either regulated or unregulated they do both provide governance which as you mentioned earlier Angelo and that’s very important to a lot of families. So whether it’s unregulated or regulated they do both provide governance to a family.

Angelo: Yes and we’re going to get to governance very shortly. There’s been a what

I would define as a tremendous explosion in the interest and families, especially very large families moving forward in creating a private trust company over the last 20 years. Why? And do you expect that trend to continue?

Al: Yeah most definitely. I think that there’s a lot of reasons for families to set up private trust companies but generally speaking when we travel the country and talk to advisors, pundits like yourself and families and family advisors, there’s a trend taking place that hasn’t taken place any point in time up till now obviously. And if you look at the statistics for gifts going into trust in ’95 families are only putting 12.5%

of all their gifting into irrevocable trust. For the top 10% of the families in this country that’s now up to 40% and one of the big reasons is the advent of the modern trust structure 1995 and one of the keys to that modern trust structure family is the private trust company. And when we’re dealing with families we see a lot of demands that they want with their estate planning. And one’s education, succession but they also want control and flexibility regarding the trust administration regarding

the investment management. They want privacy; they want probably most importantly family management meaning the promotion of social and fiscal responsibility in their family. And lastly some of them will look for asset protection and tax savings but

it’s interesting how asset protection and tax savings for higher net worth families is further down on their list of estate planning demands then a family of lower net worth of non-private trust company family.

The great thing is of all those desires the private trust company can fill all of them and more. So that’s why they’ve gained in popularity and why gifting into trust has gained in popularity by an enormous broke trend.

Angelo: Indeed it has. Let’s talk a little bit and we’re going to dive into the weeds and get a little intense and structural on the people

If you look at the statistics in 1995 families were only putting 12.5% of all their gifting into irrevocable trust. For the top 10% of the families in this country that’s now up to 40%.



listening in. But I think there is a little bit of a mystery surrounding it so let’s try to uncover it and make it clearer for the audience. It may play out better if they could literally see a graph or something visual so you’re going to have to put on those listening, kind of your imagination and kind of imagine a little bit from the next series of my questions. So let’s assume the family does the diligence and sees the value in creating a private trust company and I realize we haven’t yet done a really deep dive into what that value is. We’re getting to that but I want to get the structuring issues kind of out of the way first; so yes as a very wealthy family we want to move forward, we did diligence. The actual private trust company, the funds or the money would need to come from somewhere to execute it and have the resources to move forward. Traditionally and I know there’s going to be various ways to do it but as most classic to create a private trust company LLC or some entity that the family funds and then that entity shareholders gives authority allocating the capital to create the actual private trust company.

Al: Yes that’s correct, there’s usually depending on whether it’s regulated or unregulated there is a procedure that it would apply to the division of banking and it would be an application, again it’s a little more extensive with regulated than unregulated. And the formalities in the PTC jurisdiction would

be different for regulated and unregulated meaning an office there, possibly staff there, possibly a local board member. There are corporate agency services in the jurisdictions that provide those services. A lot of that is not required with an unregulated but suggested; so that there won’t be any issues down the road just really no different then if somebody sets up an LLC for business purposes and they don’t follow any of the formalities, the ability or possibility of piercing that corporate veil is higher then if they follow the formalities. So whether it’s regulated or unregulated a lot of families like to follow through on a lot of the key formalities. But with the regulated because a lot of them are getting SEC exemptions they definitely need to, but again it’s basically an office in the trust company state, a corporate agent to accept due process and service of process. If there is any actions, the liaison with the division of banking and usually a local board member; so those are generally the requirements. And then generally the private trust company doesn’t replace the family office, if anything they supplement each other nicely. And the private trust company enters into service agreements with the family office in another state and the family office would generally provide non-trust administration services to the trust company. So asset management, asset allocation, investment advisory, in some instances bill paying, oversight of private equity investments, real



estate. The running of the real-estate, those type of things and as you alluded earlier those could also be in separate LLC’s that are either owned by the trust or enter into service agreements with the private trust company.

Angelo: Yes so a family of great wealth that sees the value as of course in my mind they should, having a single family office may even have the structure or entity – it could be in their home state and keep it real simple. But often if they’re a little bit more careful and want some asset protection benefits they may consider Alaska, Nevada, Wyoming, Delaware, New Hampshire, South Dakota. The private trust company is created by a separate entity (often a PTC LLC) the family “funds,” that then starts the process. Let’s assume in giving your name, that’s done in South Dakota. And it enters like you noted effectively into agreements often with the actual entity, corporate entity etc., that is the single family office. Obviously a family is looking to be careful. They’re not necessarily looking to have a profitable single family office because that could have a negative tax picture; so usually it’s a series of agreements that usually net out about equal relative to what the private trust company is paying the single family office.

Now I did note several minutes ago that this was not going to be so easy to follow without some level of graphs so hopefully I didn’t lose

everyone in my commentary there and let me know if I’m not on the right track. But let’s go a little bit back to the private trust company. So effectively it really is going to be a trustee of various trusts and then the assets are going to be separate in various other entities, whether that’s owned by an LLC and again maybe very well in a different state. Maybe one with cascading or series LLC’s like Delaware. And I know this is going to get a little confusing for the audience but a sophisticated family that is concerned about governance, about estate planning and about effectively some level of privacy and asset protection they’re going to want to do it right and I think there’s very few people who really understand the way the structure should be laid out.

Let’s talk a little bit about the issue that at the end of the day the private trust company, being a private trust company, is looking at to be the trustee of various often multi-generational assets. Why is the family’s private trust company as the trustee often better than more classic a big institution or even people that are not as connected to the family being a more classic traditional corporate trustee. Why could a private trust company be a better solution?

Al: Yeah there’s a lot of reasons Angelo. There – for one the family takes the trust role into their – under their control versus possible turnover or possible delays for



distribution decisions or possible limitations with investments or their may even be environmental investments that they cannot find a corporate trustee or individual family members are uncomfortable serving individually. There may be hotels with gambling interest and nobody wants to register as a gambling agent. So the same thing with liquor licenses; so there are a lot of reasons that large families set these up, mainly to take the role of family trustee into control because they can still hire out bank trust departments as agents, they’re just not hiring them directly. They can hire them as money managers; so what they try to do is be in control of who they’re choosing to work with the family and to mentor the family and the family is heavily involved in the private trust company structure. Whether it’s distributions, it’s selecting the investments, it’s promotion of family values and as you mentioned there’s three major sets of entities. There’s the private trust company which now gives them governance formality and most importantly D&O and E&O insurance because if they’re sitting out there individually, the level of liability is extremely high. So this wrapper, the private trust company wrapper provides the governance, all these other bells and whistles, but also a ton of liability protection in order to serve these trust in perpetuity and do what’s right. And then of

course you’ve got the family office, the second set of entities and then the entities that hold the family investments.

But the other big reason that families will do it is if they’ve got a trust company in one of these jurisdictions generally the laws are much more favorable than their home states because their home state may be operating under the prudent investor act so California, New York, Connecticut, New Jersey. Most states, Florida, are all operating the high wealth states are all operating under a prudent investor act. So what that might do for a family member serving

individually is limit their ability to go into direct private equity or go into a hedge fund that might be viewed as more risky or hold one asset. Hold a huge position in a public or a private stock. With the private trust company if it’s in one of these – the better private trust company states they don’t have that issue; so they don’t have to think the state law allow us to do this. As long as it’s not illegal and the trust document allows for it they can do it; so if they want to buy timber land in Oregon or they want to buy real estate in France, or

The private trust company wrapper provides the governance, all these other bells and whistles, but also a ton of liability protection in order to serve these trust in perpetuity and do what’s right.



whatever they want to do the trustees are not saying “Well I’m not sure that’s something we feel comfortable dealing with”. So that issue was aside and that’s huge for a lot of families because a lot of them as you well know what to emulate a Harvard or Yale endowment type asset allocation and a big part of that is direct private equity, hedge funds and they don’t want any limitations on their trust laws that say you know, you may not want to be doing this, particularly in the economic environment that we’re currently in.

Angelo: Yes I think for some families it may even be a number one reason for considering creating a private trust company if they’re a large and very successful family they may have unique asset classes. In some ways sometimes not even that unique it’s just something classically that a traditional corporate trustee often even for something like land and real estate let alone some of the more truly unique asset classes that you noted. They just don’t want the fiduciary responsibility for and they often rather bluntly don’t even have the knowledge to maybe properly guide and make a decision to that; so to some degree I understand their position. But that’s a tremendous benefit of a private trust company.

Let’s talk a little bit going back to the “exciting” world of structuring. Okay so we now have the

entity set up. We’ve got the entity that funded a private trust company. We made our domicile decision and whatever, let’s assume in the great state of South Dakota where I have been to before and had a great time by the way.

Al: Hopefully the summer.

Angelo: What – yes it was in the summer. I had a great time with my family by the way, we drove there, how about that for someone in Connecticut driving to the great state of South Dakota and many states out west but we’ll save that discussion for my podcast on travel one day. But back to the private trust companies.

What does kind of the inherent structure and the engagement with the family look like, meaning are there directors and officers, are there various boards or committees that could also involve and engage the family as part of the governance benefits of a private trust company?

Al: Yeah I mean there’s all different ways to structure it. The great thing is when we looked at those desires and demands earlier that people want with their estate plan. The great thing about it is the comfort level that people have with their family – their trusted family advisors and their own family and the fact that their goal in many instances is to mentor



the family so that these things can operate in perpetuity and perpetuate the family assets and trust as well as the family values. And so each family is a little different and when they’re looking at these things the structure and governance is going to depend on the expertise of the family members themselves, the non-family member advisors and the role of their family office because as you know and everybody knows the family offices are all structure quite differently. A lot of them out source totally, some of them have expertise in taxes, some in investment oversights; it’s all over the board. So the idea is to look at what’s in place and then add the family trust company as a compliment to that and maximize everybody’s duties. You do need

independent so it can’t be totally family. The IRS rule that a family trust company is not included will not include a trust or cause a trust to be included in one’s estate if it’s properly administered. And that is really no different than having a trust outright. And it basically means if there are the family can determine distributions for health education, maintenance and support which are basically

everyday living, any time there’s distribution requirement over and above that to start a business for example there’s guidance but usually you need an independent to make that decision. So there’s obviously family members to provide the guidance but they in turn would have to make the final decision. And so that’s basically no different than having a trust with a corporate trustee or family members and other independent trustees; so the trust company just kind of formalizes that wrapper. So the administration of the trust with both family and non-family members and advisors is also very critical and as I mentioned the type service agreements it enters into with the family office will depend on the family offices strengths and weaknesses and then how the investments are

titled over will depend on how they’re owned.

The one twist to this is a lot of families will either own the trust company outright or they’ll own it in family trust but a recent trend which is even better

is to own it in what’s called a purpose trust. And purpose trust have no beneficiaries; so for instance some of the popular private trust companies states have purpose trust statutes. So in our case a lot of the families in South Dakota that set up a South Dakota trust will have the trust owned by a South Dakota purpose trust with a dynasty provision so that the asset will perpetuate forever. And so now

Look at what’s in place and then add the family trust company as a compliment to that and maximize everybody’s duties. You do need independent so it can’t be totally family.



the trust company is owned by a trust and enters into a service agreement with the family office which holds the family assets. And as you mentioned Angelo an audio/video would be much better, but that’s the typical structure that’s fairly powerful because then for asset protection and tax purposes you can’t say that there are any California owners of the trust company or any New York owners or any Florida owners, so it adds a powerful level to it. Angelo: And I did mention the directors and officers inside a private trust company. Is it usually an odd number for some issues pertaining to voting in terms of majority and how do directors and officers rotate out as other family and non-family members come into that position?

Al: Yeah it’s all over the board; you know the states are quite different. It’s usually a mini-mum of three for families and a maximum of 12, that’s the broad average. It is usually an odd number and the question that one has is a lot of times the trust company will have a board of managers to run the trust company from a business standpoint and then they’ll have a separate distribution committee that may or may not contain some of the board of managers. And they’ll have a separate investment committee that may or may not contain some of the board of managers, or they’ll all be one. The board of managers will run the business, it will be

the distribution committee and it will be the investment committee. But the – generally in the operating agreement and in the drafting if they’re stalemates or anything that is spelled out but usually we’ve seen an odd number just so you don’t have any issues in that regard and typically in a lot of the regulated states they require a local board member so usually a corporate agent for instance, we serve that role a lot where we’re the South Dakota board member. And then a lot of times if there is a stale mate we may be asked to step in and make a decision so to speak. On the other side we don’t have to do that and we can be out voted. But it’s usually like any trustee they usually will – if they’re holding voting closely shares but with management and the documents are drafted to do that, but most corporate agents for instance as board members have the ability to be outvoted by the family. But maybe called upon if there is stagnation to assist with whatever the issue might be.

Angelo: Could a family member who is also a director and officer within a private trust company also be a beneficiary of one of the trust where the PTC is a trustee to?

Al: Yeah they just can’t – just like it’s no different than with a single trust structure where a family member could be a trustee, a co-trustee and beneficiary but they can’t



generally determine distributions as to themselves; so somebody else would need to be doing that. And the other caveat Angelo is if they’re replacing any fiduciaries within that structure generally you don’t replace an independent member with a family member; so that’s basically what – and that’s the same with individual trust where families are named as individual trustees or banks are named. If there is a bank named you can’t generally take them out and put in a family member in order to run afoul of any of the rules, so usually you know that’s all drafted in and so it’s very similar, the structure and the restrictions are very similar to if somebody were just administering a single trust without the trust company structure. But the trust company structure if done right can provide so many more bells and whistles as

well as the liability protection. But the statistics of high end families it’s interesting, because 70% of them today name family members individually as trustees. Now that number is dwindling as these families slowly find out how friends these modern trust structures are, like the private trust company.

Angelo: And sticking a little bit to a family engagement and governance, certainly family communication, a sense of purpose, a private trust company especially for a family that may have exited the business which was a bond among the various family members, potentially, private trust company is a way to still keep that family communicating and engaged even if they’re not a part of the directors and officers. Most private trust companies could have various boards and committees to engage in various different activities. If you could explain a little bit about that and how that correlates to family governance.

Al: Yeah and that’s a great point Angelo. Yeah the distribution and investment components of the family trust companies are a key because

some families really look to promote and mentor family members regarding both distributions and investments. Regarding investments depending on what the family is doing, it’s a broad asset

allocation or diversification or if it’s a family business or real estate or whatever the family might be doing or a combination of all those, both domestic and international. The family will generally bring in advisors to assist and in that process mentor the younger family members so they got transition all along; so

A private trust company is a way to keep the family communicating and engaged even if they’re not a part of the directors and officers.



that – and a lot of times the meetings won’t take place if they’re a New York resident, they’re Connecticut or California in those states, their board meetings will take place in vacation areas or nice places. So – but the mentoring is heavy on the investment side and on the distribution side as we talked about earlier as Warren Buffet once said I’m not so – I’m very concerned that if you give your family too much money they’ll lay on the beach and do nothing. And so he wanted to not only make charitable distributions but also create family values and promote social and fiscal responsibility.

And there’s a lot of different structures that families are setting up on the distribution committee sure that happens and a huge trend taking place which I think is the next Tsunami and charitable giving is you don’t need a charitable trust to make charitable donations so a lot of these non-charitable family trust have provisions to donate to charities once they reach certain network levels or once certain triggers happen within the trust. So the family on the distribution committee of a non-charitable trust through the trust company gets together to make donations directly to charities may not be the private foundation in this instance. It may be directly to a cause and therefore the family is – attends fund-raisers and does all these type things; so that promotion of social and fiscal responsibility

to a lot of families through the distribution committee and the mentoring, and again they’ll bring in a lot of outside family office experts to assist with the psychological aspects of this but that growth on both the investment side and on the distribution side is huge. And so they view this structure as extremely powerful and a very powerful wrapper around all that and it’s really the bow on the gift and the families view that in a lot of instances as first and foremost that promotion of social and fiscal responsibility and the education of family on the investments and all the different permutations of those. So it’s a powerful structure to give a family all those bells and whistles.

Angelo: Of course it is. How long does it generally take to create and have a private trust company up and running?

Al: Yeah and a regulated typically it’s as quick as the paperwork can be turned in. From that point usually four to six months for regulated. For unregulated much less. I mean you can generally well within two months you can have an unregulated family trust company. But neither one takes very long so it’s regulated trust companies are non-depository banks. And typically many of them are also money lending companies so that if families want a – a lot of families also use them as lending entities where they outsource the credit; so



they themselves won’t lend but they will go to entities, hedge funds, pensions, go to banks and say we have our own non-depository bank that also has lending powers and we would like a loan, to make a loan through it for this purpose to this family member and they’ll outsource the loan just like a sub advisor of investment fund, they would kind of sub advisor outsource the loan; so that’s another

very important use of the trust companies.

Angelo: How much does it cost to create a private trust company?

Al: Yeah the regulated – generally the local fees for regulated you know, I would say they average you know probably anywhere from $50,000 to $125,000 meaning the legal fees in the PTC state and all the state fees for regulated. And then generally the capital starts at $200,000; $100,000 of its generally working and that can go up as high as $2 million depending on the state. So you know that’s a key, with unregulated they’re much less expensive; so generally you know $25,000 or under, sometimes even less. The thing is with the regulated usually that’s families of

well over $100 million typically, a quarter of a billion or higher, generally certainly when someone gets the $500 million and a billion the family trust company very few reasons that it would not make sense. The unregulated on the other hand provides governance and a lot of the other bells and whistles, particularly if the formalities are followed. And that can be available for families you know, $10 million and

up, lower, lower.

Angelo: And the benefit; let me ask a follow up question to that Al, I understand if they have issues pertaining to not wanting to register with the SEC because they don’t

fall within the exemption that then may not necessarily be the best route to take. But if they’re looking for an entity to streamline trustees, if they’re looking for an entity like we noted earlier the benefits of – because of that holding unique assets, that corporations often won’t take to be a trustee and are looking for something to help to bond the family and unify relative to governance even an unregulated private trust company could still be a very good value.

Al: Oh yes I think they’re powerful as heck Angelo, particularly if the formalities are fault. If somebody is going to get the license and throw them in the drawer, I do think that’s bit risky and some families will do that. And in fairness to them I don’t think their – they

Unregulated private trusts are much less expensive...general $25,000 or under, sometimes even less.



understand some of the things they could be doing that aren’t too burdensome to create or to actually follow through on a lot of the formalities. I think if they understood them they would do them. So I think very powerful and there are a lot of families that as you say, the SEC issues wasn’t an issue and they just want an easy way to get governance and they may not want to be audited once every 36 months as friendly as that may be for family audits but they just don’t want to deal with it or think that there’s issues there. I think that there’s just like with registering with the SEC there is issues of having a division of banking audit and there may be privacy issues there although there are not but I mean that’s what a lot of people think.

Angelo: What are among the more popular destinations within the United States? What specific states are leaders in terms of the benefits to a family in creating a private trust company?

Al: Yeah I mean it’s kind of interesting. The leaders on the regulated side are you know South Dakota and New Hampshire, on the unregulated side it’s Wyoming and Nevada, although Wyoming and Nevada also do regulated. So those are fairly new so the regulated typically you’ll see sometimes Texas. You’ll see South Dakota, New Hampshire and Texas, some Nevada. On unregulated it’s basically Wyoming and Nevada. Florida

has passed legislation, Ohio I believe has legislation pending and Tennessee has passed legislation. Tennessee’s is fairly new. Florida is very new; Ohio I think has gone through the house and not through the Senate. So there’s some other states out there. When somebody is looking at this where to go. I mean they want to first, which I don’t think is frequently done but if they’re doing regulated talk to the division of banking there and get a feel for how they’re going to treat family trust companies. Talk to the corporate agent who would be your local presence and then look at the one key these days is the economy, the state economies because a lot of states are implementing income taxes. And the last thing a family wants to do is to get to a jurisdiction and find out that there’s a weak economy and all of a sudden trusts are taxed or entities in that state are taxed; so you know that’s become a recent kind of check list item. The other thing are their private trust company laws. They all differ a bit and just because there’s fewer ties to the state doesn’t make them better because down the road there are certain formalities are going to be a key, meaning whether it says you should have an office there or not, generally most people say that’s highly suggested. And whether you have a local board member or not that’s highly suggested. So there are a few things that are highly suggested so that someone doesn’t pierce the corporate fail.



But the other thing you want to look at is reciprocity, the capability of reciprocity because some families will set trust companies up in these states and then they’ll do the administration back in their home state because they’re not looking to garner any tax advantage or any trust advantage of the PTC states. So you know that also could be an important consideration and again the regulated versus the unregulated for the SEC exemption which keeps coming up.

Angelo: South Dakota certainly evidenced by your involvement and your firm name has been certainly a leader in regulated as you noted private trust companies mainly due to your amazing efforts over the last couple of decades and the great work that you’ve done illustrating the value of private trust companies. Many of the world’s specifically in the US billionaires have elected to use South Dakota as their state of choice. Of course I don’t expect you to name names Al, but if you could give us a little bit of color as to the volume of such prominent families and some of their reasons as to why? I’m assuming they come from all different industries?

Al: Yeah I mean it’s interesting. What a lot of people don’t realize Angelo about South Dakota if you go on the FDIC website there’s less than a million people but it’s the top bank asset jurisdiction in the country. So if you add

Alaska, California, Delaware, Florida, Nevada, New Hampshire, New York and Wyoming all together. South Dakota has more bank assets than all of those states. And again it’s on the FDIC website and I did mention New York and California in that grouping.

Angelo: Yes you did.

Al: Banking is near and dear to South Dakota; so the governor, the banking, the division of banking, all great people and then the trust committee is great; so they realize that unlike some of the other states that we compete against banking may not be their top industry, in South Dakota it is. And because of that there’s heavy emphasis every year on new legislation and always trying to make things better. So it’s not kind of a stand back and see you know what others are doing and try to copy it so to speak; it’s more based on what the families are saying and what the advisors are saying and what their lawyers are saying. What can we do pro-actively to make things better? So that in turn has resulted in you know a lot of growth to the state over the years and their budgets always balance; so unlike a couple of the competitor states where there have been income tax proposals, but they’ve been pulled off the table. Knock on wood, you know South Dakota just because of the emphasis on banking and trust that has not been the case. So it’s not only the



trust company laws that we look to keep fortifying and making better, it’s the trust laws themselves because that – they can be very beneficial to many families that have the – their private trust company trusts administered in South Dakota versus their home state. And one thing we didn’t touch on but they can hire a trust agent in South Dakota to do that so they have the corporate agent to provide them the office, the board member, the service of process, the ability to forward mail, forward phone calls. And then if they want the trust to be for instance South Dakota trust or even if they’re in another state Wyoming or Nevada or New Hampshire they can hire an agent in those states that can do the trusted administration in those states as agents of the private family trust company. And everything else would be through most of the investment components and everything else would be done through the family office in the family’s home state through service agreements. So that structure works very nicely. I think you know just to wrap up on South Dakota and I thank you for bringing it up but they’ve been more regulated than anybody so they’ve got a lot of experience there by far and so they do not have unregulated.

Angelo: Another question I suppose I should have asked it earlier we all understand the value of a multi-generational family with complex family tree and trust; does a private

trust company also still make sense for a family that’s still in the first generation of wealth creation. Is it harder to make the case or is there still value?

Al: Yes, just following up, Angelo on the first generation there are a lot of reasons for them to follow-through just for liability governance, but also flexibility on their own family investing and a lot of others that are the same advantages for several generation families.

Angelo: I agree. For those who may not have heard the question – the question was private trust companies have obvious advantages for complex multi generational families with various, sometimes dozens if not hundreds of trusts. The question was does it still make sense for a first generation family that doesn’t have the layer of trust or family members. And I concur with Al’s response that given the issue of setting the right framework of family governance and still issues with unique assets the answer is yes, but it was great to hear your more eloquent version as to why Al. Certainly thank you very much.

I am going to ask you one final question as we transition into the close: What could be popular alternatives to the value of a family whether earlier in a generation as first or second or a multi-generational family as opposed to setting up a private trust company. What other



solutions could they use?

Al: Yea, there is the – obviously the private family trust company the unregulated trust company where the family serves as their own trustee with help. The other option is what is called a special person entity or a trust protector company. Those are LLCs but they have to work with a qualified trustee in one of the jurisdictions. So usually a commercial trust company would be hands off. The great thing is they are really inexpensive to set up and their sole purpose is to direct the trustee in New Hampshire, South Dakota, Wyoming or Nevada, Delaware has them as well direct them as to investments, distributions and trust protector functions relating to the trust. So the family instead of serving individually is in an LLC and getting D&O and E&O insurance, providing governance and these things are $2500 to set up. And typically the operating agreements will read they don’t do any of those decisions or don’t provide any of those decisions in the client’s home state. They are generally done when they are in a different state. So a New Yorker would do them in Connecticut or Florida, for example, so no decisions are made in their own states. So for us with protection and income tax advantages they are very powerful. The thing is they are working with a commercial trustee who understands their role in working with those entities. But a very inexpensive way to

provide family governance. So for a family who didn’t want to do the unregulated trust company that was below the $100 million threshold and maybe even well below the $50 million threshold the special purpose entity is another great – or trust protector company—another great option to consider that is often overlooked.

Angelo: A very good point. For those that are listening that would love to learn more and follow-up, Al, if you don’t mind a note how they could learn about South Dakota trust companies, about private trust companies in general and how to reach out to you.

Al: Yes. I mean, thank you. We have a New York office. I am based in that office and live up the road from Angelo in lovely Connecticut, but my phone number is 212-642-8377 and my email is [email protected]. [email protected]. I should mention, Angelo, hopefully it is okay – I wrote an article that will be coming out in February in Trust & Estates magazine comparing the regulated trust company with the unregulated with a special purpose entity trust protector company and it is already out on wealth management.com it just came out yesterday. That could be helpful to some of the viewers.

Angelo: Of course, it is very helpful. Al, it has been such a pleasure. I look forward to up-



coming ones. I have lots of ideas for the future. We appreciate your time. Everyone, this is Angelo Robles at Family Office Association. Would like to thank Al King and everyone listening in to our FOA audio podcast today. I look forward to the next one. Everyone have a great day. Thank you very much.

Al: Thank you.


foa podcast volume 24 with al king another look at private ... · foa podcast volume 24 with al...

Documents