The Private Trust Company - Greenberg Traurig LLP

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The Private Trust Company –
A Fiduciary Services and Asset Management
Alternative for High Net-Worth Families
High net-worth families seek flexible and creative
solutions to meet their estate planning and asset
management goals. In response, a number of
features have popularized the use of the private
trust company (“PTC”): (1) the desire for additional
measures of family control of their assets,
(2) asset management training for family members,
and (3) the ability to own operating family
businesses in a trust. Despite these attractive
features, advisors have been reluctant to recommend
PTC’s because of the uncertainty surrounding
its treatment for estate tax purposes.
Three Private Letter Rulings (“PLRs”) issued by
the Internal Revenue Service (“IRS”) in 2005
provide advisors with insight on the proper
structure and operation of a PTC. This alert
focuses on those rulings.
What is a PTC and why are Families
Employing It?
A PTC is a trust company that is owned by and
provides fiduciary and wealth management services
to a single family. The PTC can provide all of
the services available from institutional trustees.
However, because of its flexible nature, the PTC
can customize its services to meet a family’s
changing needs and concerns and to assist a family
in achieving financial and non-financial goals.
Using a PTC allows families to select the PTC’s
personnel and officers, select the best outside
investment managers in each asset class, obtain
independent advice (because the PTC has no
vested interest in selling its own financial products),
develop a family succession plan, determine
the most suitable jurisdiction for managing family
wealth, and own operating businesses in a trust.
Unlike individual independent trustees, PTCs
provide the opportunity for multi-generational
asset management and fiduciary services because
they can be unlimited in duration.
“High net-worth families
seek flexible and creative solutions
to meet their estate planning and
asset management goals.”
Properly Structured PTCs Avoid Common
Estate Planning Pitfalls
During 2005, the IRS issued three PLRs approving
certain carefully structured PTC arrangements
in which a PTC serves as trustee of certain family
trusts. 1 Because PTCs are relatively new and
untested by the IRS and the courts, the PLRs
provide welcome (albeit non-binding) guidance
regarding the proper structure and operation of
a PTC. In the PLRs, the structure of the PTC and
the trusts for which the PTC serves as Trustee
successfully avoided common estate planning
pitfalls. After reviewing the facts provided by the
taxpayer requesting the PLR, the IRS ruled that:
� The value of the trusts for which the PTC
served as trustee were not included in the
grantor’s or the beneficiaries’ estates for federal
estate tax purposes; 2
� The PTC could distribute, apportion or
accumulate principal and income from the
trusts for which the PTC was serving as
trustee to the grantor’s beneficiaries without
causing the grantor or the beneficiaries to be
treated as the owner of such trusts; 3
� Subject to certain restrictions regarding
discretionary distributions, the grantor and
the beneficiaries served as shareholders of
March 2006

the PTC and participated in the daily activities
of the PTC without causing the value of the
trusts to be included in their estates for federal
estate tax purposes; 4 and
� For generation-skipping transfer tax purposes,
naming a PTC as trustee did not adversely impact
a trust’s exempt status. 5
Preferred PTC Structure Based on PLRs
The three PLRs seem to provide the boundaries for
structuring the PTC – from most restrictive to
somewhat flexible. The PTCs examined in the PLRs
included the following key features:
� The board of directors had at least one board
member that was not a family member, or a
grantor of, a donor to, or a current or contingent
beneficiary of a trust (i) of which any family
member was a grantor, donor, or current or
contingent beneficiary and (ii) for which the
trustee had any discretionary power (other
than an investment power) that was not limited
by an ascertainable standard; 6
� In PLR 20053003, the board of directors
appointed a Distribution Committee (a/k/a
Discretionary Decisions Review Committee in
PLRs 200546055 and 200548035) to make
discretionary distributions of trust principal
and income.
� In all three PLRs, the Distribution Committee
was subject to restrictions with regard to
discretionary distributions of trust principal and
income. The restrictions were critical in
protecting the grantor and beneficiaries from
causing the value of the trusts to be included in
their estates for federal estate tax purposes.
PLR 200523003 provided strict rules regarding the
composition of the Distribution Committee. Trust
grantors (and their spouses) as well as current and
contingent beneficiaries (and their spouses) were
prohibited from serving on the Distribution
Committee. Any person considered related or
subordinate to a grantor or current or contingent
beneficiary was also prohibited from serving on
the Distribution Committee. No member of the
Distribution Committee could participate in any
discretionary decision with respect to any trust
beneficiary to whom he or she owed a legal obligation
of support. And the majority of the
Distribution Committee members could not be
employees or directors of the PTC.
In contrast, PLRs 200546055 and 200548035 provided
more flexibility with respect to discretionary
distributions. Initial discretionary distribution decisions
were made by PTC trust officers subject to
review by senior trust officers. Upon the written
request of a beneficiary, the Distribution
Committee (appointed by the PTC’s board of
directors and comprised of at least three directors)
would review the discretionary distribution
decisions made by the PTC trust officers. A variety
of restrictions prevented this arrangement
from causing estate tax inclusion for the grantor
and beneficiaries. For example, discretionary distributions
decisions were required to be made by
non-family PTC trust officers, and PTC officers and
directors were prohibited from participating in any
discretionary distribution decision with respect to
a trust if the officer or director, or his or her spouse,
is a grantor, donor, or a current or contingent beneficiary;
or if the officer or director, or his or her
spouse, is a family member.
Conclusion
PTCs offer high net-worth families significant flexibility.
Three recently issued PLRs provide important
guidance for advisors on how to structure and
operate a PTC in order to avoid common estate
planning pitfalls. As a result of this guidance, PTCs
may become more widely utilized.
The Private Trust Company – A Fiduciary Services
and Asset Management Alternative for High Net-Worth Families Page 2

Footnotes
1 Private Letter Ruling 200523003, issued on June 10, 2005; Private Letter Ruling 200546055, issued on November 18, 2005; and
Private Letter Ruling 200548035, issued on December 2, 2005.
2 All three PLRs focus on inclusion of the trust in the grantor’s estate under IRC §§ 2036 and 2038 (regarding the retained right
to affect the beneficial enjoyment of trust property and the retained right to alter or amend the trust) and inclusion of the trusts
in the beneficiaries’ estates under IRC § 2041 (regarding general powers of appointment).
3 All three PLRs analyze whether the PTC’s appointment as trustee or the PTC’s exercise of discretion regarding trust
distributions causes trust beneficiaries to be treated as owners of the trusts under IRC § 678. They also address this same issue
with respect to the grantor under IRC §§ 677 and 674(a).
4 There was no inclusion in the grantor’s estate under IRC §§ 2036 or 2038 or the beneficiaries’ estates under IRC § 2041 because
the structure and operation of the PTC prevented the grantor and the beneficiaries from participating directly or indirectly in
decisions regarding discretionary distributions.
5 In both PLR 200546055 and PLR 200548035, the IRS ruled that naming the PTC as trustee is an administrative change and will
not be considered a shift in a beneficial interest in a trust to a beneficiary who occupies a lower generation and the change
does not extend the time for vesting any beneficial interest. See, IRC § 26.2601-1(b)(4)(i)(D)(1).
6 See, PLR 200546055 and PLR 200548035. PLR 200523003 provided that no more than half of the directors could be related or
subordinate to the grantor.
The Private Trust Company – A Fiduciary Services
and Asset Management Alternative for High Net-Worth Families Page 3

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1724-v3-0306-NAT-GTFIRM
This Alert was written by Jonathan Forster, Rebecca Manicone and Jay R. Pelkofer
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