Friday, November 25, 2005

Private Trust Companies

At times, families often seek to establish their own trust company to serve as fiduciaries of estates and trusts of family members. Such a trust company can reduce the costs involved with using third party trust companies, allows for continuity, management and control of the fiduciary function by a family, and avoids some of the drawbacks to both third party trust companies and individual fiduciaries. Indeed, several well-known trust companies got their start as private trust companies for a family.

Since the trust company is generally established and controlled by senior family members, tax issues arise regarding whether this “related” relationship gives rise to retained control by family members such that the grantor trust rules may be inadvertently brought into play, and that also may result in unintended estate tax inclusion in family members of the trust assets.

In a favorable ruling, the IRS has confirmed that when properly structured (including provisions that exclude family members from participating in discretionary decisions and having adequate trust company “firewall” provisions), the private trust company is not a “related or subordinate” party for purposes of these tax provisions and does not otherwise give rise to undesired grantor trust consequences. Private Letter Ruling 200546052, 11/18/2005.
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