The structure of choice

Professional trust companies manage trusts for many individuals or families. However, many exigent clients wish to have a trustee that looks after their assets exclusively. This can be achieved by constituting a private trust company (PTC), an increasingly popular structure offering many advantages.

PTCs are suitable for families with substantial assets that need a tailor-made instrument that can evolve over the long term, adapting to changes in generation, country or entrepreneurial activity. A PTC offers an opportunity to further both the estate planning and the family governance aspects.

High-net-worth individuals (HNWIs) are often reluctant to set up an irrevocable trust because it implies a loss of control over their assets. The use of a PTC may reduce this fear since the company acting as trustee can be owned by the family.

Advantages

The advantages combine a means to retain a greater degree of control over the trust’s affairs, having the possibility of family members involved in the management of the PTC without compromising the validity of the trust, with continuity of trusteeship. In contrast, ordinary trust companies can undergo a takeover, merger or liquidation. The ownership of the structure can remain confidential, typically if it is structured with the use of a purpose trust. A PTC provides the possibility for the family to set up a tailor-made team and ensure its continuity over time, with clear and individualised processes for wealth management and family governance, sometimes with appropriate limitation of liability for family members and professionals involved in the management of the trust.

A PTC can procure improved investment opportunities such as the creation of investment vehicles with no limitation or constraints regarding the types of possible investment or assets.

Management

Like any corporation, a PTC is primarily managed by its board of directors. The composition of the board is of paramount importance. In practice, it is the board that take the trustee’s decisions, both in matters of management of the assets and of distributions. The board often consists of a mix of family members and professionals.

The settlor can typically request for some of his family members to sit on the board to ensure that their vision is understood and taken into account, as well as the family's background and dynamics. However, a settlor or family member willing to be appointed to the board of the PTC must understand that acting as a director is a time-consuming and demanding position that implies responsibility.

It is also possible for the family's voice to be heard in other ways; for example, by giving a family council the role of an advisory committee. Family members may also sit on an investment committee, an audit committee or a board of protectors. Usually, however, a professional trustee is involved in the administration of the PTC. This ensures impartial decisions in the long-term interests of the family. Moreover, managing large and complex wealth is a profession in itself, requiring specific skills and training.

Ownership

The way in which the shares of the PTC are held is a crucial element for its proper functioning. One option is for the PTC shares to be held directly by the settlor or other family members. This is the simplest solution but has its disadvantages. First, the settlor cannot claim that they have divested themselves of their assets by setting up an irrevocable trust. Second, if the settlor is the owner of the shares of the PTC, they cannot prevent their heirs from controlling the trust after their death as they will likely inherit these very shares upon their death.

Alternatively, the PTC may be owned by a trust or a foundation. In order to protect the PTC from any issues concerning its shareholders (such as death, insolvency or change of ownership in case of a corporate shareholder), the preferred solution is usually for the PTC to be ‘ownerless’. This can be achieved by setting up a non-charitable purpose trust or foundation with the sole purpose of holding the shares in the PTC. The purpose trust does not have beneficiaries, which avoids any succession issues. This vehicle can hold the shares of the PTC for an unlimited duration where that is required, such as in the case of a ‘dynasty’ trust)1 . A private purpose trust must have an enforcer, whose role is to ensure that the purpose of the trust is effectively pursued. The enforcer must be independent from the trustee of the purpose trust. A professional advisor of the family is often considered appropriate for this role.

A foundation can also be considered to act as a trustee, which achieves the same result as a PTC with a simpler structure.

Retention of control

The settlor of a trust often wishes to retain some control over the assets they place in the trust. This is one of the reasons why people set up PTCs. However, it is important that the trustee exercise its powers properly and independently. The retention of significant control by the settlor and the absence of a real and effective transfer of governance over the trust assets can leave the trust particularly vulnerable to challenges on the grounds that the trust is a sham.

From a tax perspective, the trust may not be effective in certain jurisdictions unless the settlor is removed from the ‘sphere of influence’ of the trust. It is licit for the settlor or family members to be both beneficiaries and directors of the PTC, but they should remain a minority on the board.

Where certain family members retain de jure or de facto control over the PTC, without the real involvement of independent professional directors, the risk of a breach of trust claim is particularly high. It may even lead to personal claims against the family members involved in the administration of the trust/s. This will typically be the case if the trust assets or the insurance cover of the PTC are insufficient.

Regulation

The trustee business is subject to a modern and well-designed regulation in Switzerland. It aims to protect customers by ensuring that financial institutions comply with strict conditions and applies to professional trustees offering their services to the public. By contrast, it does not apply to players operating in a closed family circle: trustees that solely manage the assets of members of their family are not subject to regulation. This exception can apply to certain PTCs. Using a properly structured PTC can, therefore, allow a family to reduce regulatory burden and costs.

Swiss trust law

Swiss PTCs should soon be in a position to manage trusts governed by Swiss law. At present, Switzerland does not have its own legislation on trusts. The numerous trust companies operating from Switzerland therefore administer trusts subject to foreign laws. This system works well, especially for international families.

However, the Swiss authorities have decided to adopt a true Swiss law of trusts. The project is currently under consultation and should come into force in two or three years.

This new Swiss trust law will offer new possibilities to international clients, but above all, it will open the doors of the trust to Swiss families.

• 1A dynasty trust is designed to minimise estate taxes being applied to family wealth with each subsequent generation.