To PTC or not to PTC
‘To PTC or not to PTC – that is the question.’ Although not quite the words of the immortal bard (although I do thank him for a great start to the article), it’s often a question I find myself, or indeed my clients asking me when we’re planning their estate and financial affairs. Is the private trust company (PTC) right for me? How can it help? Where do you see it being applied the most? Why would someone even want to consider using one? What value will it add to my overall estate plan? All great questions and ones I’ll be exploring throughout this article.
Rags to riches, and back again
Family dynamics are a wonderful, curious, frustrating and sometimes unpredictable animal. We’ve all seen it, and certainly heard the sayings – ‘rags to riches to rags in three generations’ or ‘shirt-sleeves to shirt-sleeves in three generations.’ No matter which part of the world you’re in, both sayings mean the same thing. Generation 1 (G1) builds the family wealth from the ground up. G1 makes personal sacrifices and suffers hardships to build the wealth, and once G1 has it, it is frugal with it. The family wealth then passes to Generation 2 (G2). G2 understands the pains G1 went through, but does begin to enjoy the family wealth. Because of G2’s understanding of G1’s sacrifices, the spending is limited and is not to detriment of the next generation, Generation 3 (G3). G3 is ‘privileged’, has no concept of G1’s sacrifices and proceeds to fritter away the family legacy. We’ve all seen or heard of this happening, and it is not a good situation.
Of course, this is only one example, but the ‘family dynamics’ factor rings true for many situations we all face. As such, the main question we need to ask ourselves is: how do we mitigate the negative aspect of family dynamics, or at the very least help temper it?
Digressing for a second, but relevant nonetheless, I had a very interesting discussion with a family office consultant a few years ago. We were discussing this exact point (rags to riches, etc.), and considering the various ways family assets can be protected. Thinking a little too literally, my first instinct was to consider third party threats to the family’s wealth. Certainly a valid thought, but taking this one step further and thinking laterally, the ‘enemy within’ needs to be considered. Putting it bluntly: how you can stop the family from pushing the self-destruct button? The answer to this question of how to prevent a catastrophic event occurring from within may indeed lie in the use of a PTC.
The PTC and its use in helping with family governance
Good governance is just as pertinent in the family world as it is in the corporate world. It should form an essential part of any ultra-high-net-worth family’s overall estate plan, and although not a perfect science, its importance cannot be underestimated. This will give the family’s wealth the best chance to continue to grow, be protected and enjoyed for multiple generations.
So, where and how does the PTC fit in? Taking our ‘rags to riches’ example, let’s assume G1 has stepped aside, leaving G2 in control of the family’s affairs. The family’s assets are substantial and include a family business, real estate, investment portfolios and a yacht. G2, like G1, has a good business mind, but is concerned about the future. G2’s concerns are many and focus on the ‘rags to riches’ scenario. Protecting the family, and its assets, from external as well as internal threats is key. G2’s objectives could therefore resemble the following:
- Ensure the family continues to own and control the family business
- Maintain the family legacy and ensure the ideals of G1 form the basis of ongoing operations
- Implement a formalised governance structure
- Centralise and create a streamlined reporting structure
- Protect the family assets against third party and internal family threats
- Create a mechanism for future generations to be able to assist and eventually take over the management of the family’s affairs
- Help family members who benefit from the structure understand how and why the structure is in place
- Maintain management/control of all of the family’s assets
- Help direct how the family or third parties will benefit
- Ensure current and future family members are cared for
- Provide for non-family management involvement
A standard trust and corporate structure would go some way to addressing G2’s concerns, but won’t completely satisfy them. Why? Multiple reasons that I will not get into here, but they mainly revolve around the use, most likely in this case, of a third party trustee. As an example:
- The amount of G2’s input over the management of the assets will be limited, otherwise the structure’s integrity will be called into question – the ‘sham’ argument
- The third party trustee will likely find it hard to fully understand, appreciate and therefore empathise with the ideals of G1, making managing the structure in accordance with the same difficult
- The involvement of future generations will also be difficult, and likely limited to, for example, the family operating business.
As the sophistication and needs of families increase, a PTC structure such as the one shown above becomes more and more appealing. I am certainly not suggesting that the PTC is the holy-grail of planning vehicles, but it can be a powerful tool when the right circumstances present themselves.
Meeting G2’s requirements
The sample PTC structure above goes a long way to meeting the needs of G2 in helping to govern the family’s affairs. Here’s how.
The ‘nerve-centre’ of the entire structure is the PTC itself. G2 will have the ability to be a Director of the PTC, and can also invite trusted advisors to assist with the running of the same. These advisors will likely be people G2 has worked with for many years, and who therefore know, understand and appreciate the family’s objectives and ideals. This has many benefits, below are some examples.
Management and control
In its capacity as a trustee, the PTC is tasked with overseeing the management of the underlying trust assets, ensuring each is being managed and maintained in accordance with the family’s wishes. Reporting lines are created to ensure the efficient flow of information to the PTC, allowing for consolidated reporting and management. Indeed, G2 or its advisors will likely sit on the board of the family operating company, ensuring its interests are maintained.
For larger families, a ‘family advisory committee’ can sit alongside the board of the PTC. The role of the committee would be to provide guidance and advice regarding any major decisions the board may need to take, and specifically those affecting family legacy assets. In addition, the committee could also play the role of educator, educating the younger generations regarding the family’s history and its importance, in terms of good fiscal management etc. There are many possibilities.
The PTC allows for continuity of trusteeship, unlike a third party trustee. In the case of the latter, and should someone wish to remove the trustee, it can be a long, and sometimes painful process. A new trustee has to be identified, provision of due diligence is required, a deed of retirement and appointment needs to be signed, documents need to be transferred and so on and so forth. Not straight forward. In the case of the PTC, however, the PTC remains as trustee but the board of the same can be reshuffled. As such, the perfect catalyst is provided for future generations to take over and run the affairs of the family as a director of the PTC. As an example, G3 is keen to follow in G2’s footsteps. G3 is placed in a ‘family management training programme’, learns the family business, understands the needs of the family and eventually transitions to PTC board level. This process of training and family involvement can continue for many generations.
Protection of family assets
As with any company, external as well as internal attacks are a constant threat. From a PTC management perspective, policies and procedures can be drafted ensuring sufficient checks and balances exist, and may also include disaster recovery planning. These policies and procedures will also be very useful to incoming board members, and can be drafted in conjunction with the family advisory board to ensure G1’s ideals are captured.
Looking to the assets themselves, they are afforded protection from external attacks (depending on where the trusts are domiciled) via the jurisdictional creditor protection in place at that time (e.g., the Fraudulent Dispositions Act, 1991 in The Bahamas.) The structure will also protect the interest in the family business, and other assets, from spendthrift family members, as the assets can only be sold with the consent of the trustee. Lastly, spendthrift beneficiaries can benefit just as they would be in any ordinary trust structure.
Of course, this has been a very broad-brush look at the PTC and its application in the ‘family’ context. A powerful and flexible tool – absolutely. So, one final thought: ‘To PTC or not to PTC – that is the question.’ Given the right circumstances, I think the answer is clear.
For further information on the PTC, refer to ‘First Birthday’ published in the STEP Journal (Vol17Iss5).
The content displayed here is subject to our disclaimer. Read more