1. Where should the PFTC be established?
South Dakota has been the most favorable boutique trust state for the wealthy since 1983. The legislature has emphasized modern trust laws that answer the needs of wealthy families better than any other state. This has resulted in South Dakota having the best regulated PFTC statute in the country. Consequently, the legislative awareness, proactiveness and responsiveness combined with the experience and knowledge are just a few of the reasons why South Dakota is the most favorable regulated PFTC state in the U.S.
2. Should the PFTC be Regulated or Unregulated?
Whether a PFTC should be regulated or unregulated is an extremely important question. Many families choose the friendly regulation that South Dakota provides along with the assistance of SDTCS so that they do not risk the possible penetration of the corporate veil that could result with an unregulated trust company as well as any possible negative estate tax consequences. Please see the website section on “Regulated vs. Unregulated jurisdictions” for additional information.
3. Who should be the PFTC’s South Dakota Corporate Agent?
SDTCS can assist a family or a family office to establish a cost-effective trust company pursuant to South Dakota law by serving as Corporate Agent. In this capacity, SDTCS plays a de minimis role that gives the families the “minimum statutory contacts” they need to get through the application process with South Dakota’s regulatory group, the Division of Banking and maintain an ongoing minimal relationship with South Dakota. In this arrangement, SDTCS enters into three contracts with the respective family office.
- A lease for space
- A service agreement (discussing installation of a phone line, answering the phone, vault space, forward mailing, et al)
- An arrangement for an officer of SDTC to serve as the South Dakota resident board member
4. What about a trustee agent for the PFTC as trustee?
The role of Corporate Agent satisfies the South Dakota PFTC requirements but may not be sufficient to justify South Dakota trust situs for tax, asset protection and other trust law purposes. Consequently, SDTC can also act as trustee agent to accomplish this objective. As trustee agent, SDTC can provide a number of back office trust administration services in working with the PFTC as trustee. SDTC, as trustee agent, can work with a family’s existing and/or preferred custodian and/or investment advisors in most cases. Please see the website section entitled “South Dakota Trust Company PFTC Services” for additional information.
Having SDTCS as the corporate agent allows the family to meet the necessary requirements to establish a South Dakota trust company. The PFTC then serves as trustee for the family trusts. The trust administration, as a result of South Dakota’s interstate capability can typically take place anywhere in the U.S. Generally, this would be performed where the family office is located. There are, however, several advantages to having the trust administered in South Dakota i.e. the favorable trust and income tax laws, which are discussed in more detail in the “Why South Dakota?” section of our main website. SDTC can serve as trustee agent for the PFTC to accomplish this objective without the need of the family having to hire South Dakota employees or relocate family members and advisors to South Dakota to administer the South Dakota law trusts. All trusts (i.e. both non-South Dakota law trusts and South Dakota law trusts) generally save state income taxes, with some exceptions.
5. Should the PFTC be established with a State or National Charter?
There are definite advantages to a state chartered PFTC rather than a national chartered with state powers due to the fact that the former generally provides a much greater nexus to a state (i.e. South Dakota). This may be important for state income tax and trust law purposes, as well as other purposes. Additionally, most state chartered trust companies can administer trusts governed by the laws of most other states as a result of the reciprocity statutes existing between the states. National charters generally are better for financial institutions with multiple offices around the county. Many large institutions still retain state charters for their boutique trust jurisdiction like South Dakota for better nexus regarding state trust and tax laws. This subject is very misunderstood and often not addressed properly.
6. How are the family control issues juxtaposed to estate taxation?
PFTCs and the underlying LLCs are generally owned by the family thus potentially presenting estate tax and/or other tax issues, if not properly structured. The IRS has provided guidance under IRS Notice 2008-63 that identifies guidelines on how to properly structure the PFTC so as to avoid income, gift, and estate tax issues.
In addition, prior to IRS Notice 2008-63, the IRS issued three PLRs in 2005 approving PFTC arrangements in which a PFTC served as trustee of certain family trusts. In these earlier PLRs the IRS ruled that:
- The value of the trusts for which the PFTC served as trustee were not included in the grantor’s or the beneficiaries’ estate for federal estate tax purposes.
- The PFTC could distribute, apportion, or accumulate principal and income from the trusts for which the PFTC 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.
- Subject to certain restrictions regarding discretionary distributions, the grantor and the beneficiaries served as shareholders of the PFTC and participated in the daily activities of the PFTC without causing the value of the trusts to be included in their estates for federal estate tax purposes; and
- For generation-skipping transfer tax purposes, naming a PFTC as trustee did not adversely impact a trust’s exempt status.
These three 2005 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 that an investment power) that was not limited by an ascertainable standard. (See PLR 200546055 and 200548035). PLR 200523003 provided that no more than half of the direction could be related or subordinate to the grantor.
- 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 2005 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 the 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 PFTC.
In contrast, PLRs 200546055 and 200548035 provided more flexibility with respect to discretionary distributions.
7. Who should own the PFTC?
- Senior Family Member Outright
- A purpose trust with dynasty provisions
- Non-purpose dynasty trust with family member beneficiaries
- Family trusts