Why Establish a Private Family Trust Company?

Wealthy families are creating their own PFTCs because of how easy they are to create and maintain in South Dakota and also because of favorable South Dakota trust and tax laws.  Additionally, there is flexibility to charter a PFTC in South Dakota while maintaining a full-service family office in another state (i.e., the resident state of the family office).  South Dakota is one of the few states allowing this interstate capability.

The South Dakota PFTC application procedure is both simple and inexpensive ($5,000 application fee and approval generally within three to six months).  Additionally, the setup costs are very reasonable and the capital requirement low (i.e., $200,000).  In addition to the ease of creating and maintaining a South Dakota PFTC, there are also several other compelling reasons to establish one:

• PFTCs take liability away from family members named individually as trustees.
  
  • A PFTC can generally acquire D&O and E&O insurance for all family members who are owners and responsible for running the PFTC.
• PFTCs consolidate and provide continuity to family trust administration.
  
  • PFTC has unlimited duration, thus resolving possible trustee successor problems.
  • PFTC can be wholly-owned by a South Dakota Dynasty Trust in perpetuity. South Dakota has one of the best Rule Against Perpetuity statutes in the U.S. (i.e. based upon 1979 Murphy Case), plus it was enacted prior to 1986 (i.e. the enactment date of the Generation Skipping Tax). Only Idaho, Wisconsin and South Dakota can make both these claims.
• The LLC/PFTC structure enables enhanced family governance. 
• PFTCs are efficient - they control overhead and provide economies of scale.
• PFTCs are generally exempt from registration as investment advisors with the Securities and Exchange Commission and may offer common trust funds and other pooling devices as well as provide other services that are exempt from registration under the Investment Company Act of 1940. PFTCs have most of the powers of a registered investment advisor.
• PFTCs are convenient and accessible.
• The PFTC has generally provided for maximum deductibility of trust administration fees and expenses. Investment management fees integral to the trust have generally been deductible by charging an overall trustee fee that includes the investment management fee.
  
  • Investment management fees are normally subject to the 2% Adjusted Gross Income limitation. This may or may not be the case as a result of recent case law. Final clarification has not been received on this matter.
• PFTCs provide enhanced ability to properly administer and operate illiquid family assets in trust (e.g., LLC, FLPs, etc.) with the ultimate privacy.
• PFTCs allow for better informed trust distribution and investment decisions.
• They enable families to efficiently work with their own family office and all outside product advisors (i.e., investment, insurance, etc.).
• Broad powers – a PFTC is the only form a family office can take to provide fiduciary services directly to family members rather than just supporting the family’s individual trustees or unaffiliated corporate fiduciaries.
• A South Dakota Private Family Trust Company has all the powers of a South Dakota money lending company and consequently benefits from all of South Dakota's great lending statutes.