Shields Designed Comprehensive Private Family Trust Company to Safeguard Family Business and Generational Wealth

A high-net-worth family was committed to the preservation of their generational wealth and sought a comprehensive solution to mitigate estate taxes, protect their assets and privacy, manage wealth, and improve succession planning. The family recognized that their revocable trust (or living trust) structure did not provide these features given their level of wealth. Our tax and estate team designed and implemented a custom private family trust company (“PFTC”) framework to address each goal.

Introduction

Our client is a wealthy family with substantial assets, including investments, real estate, and a successful family business. They strongly desire to preserve their wealth for future generations by effectively managing assets and distributions with family control. Our client understands that planning for every possible contingency is impossible and believes the family should be trained and empowered to adapt to changing circumstances. The client intends to empower and train family members, hold them to high standards and coordinate with qualified professionals to safeguard family wealth, transfer values, and foster a strong sense of purpose for future generations.

Problem

Our client was forced to contemplate the passing of one spouse and faced the imminent prospect of significant estate taxes at that time. Together, they understood that the lifetime gift and estate tax exemption amount will soon be dramatically reduced and that they needed a plan. For 2023, the personal federal estate tax exemption amount is $12,920,000. However, in 2026, the lifetime exemption is anticipated to revert to $5MM, adjusted for inflation, unless Congress agrees to extend the higher threshold.

We learned that asset protection was another of their key concerns. The family was keen on safeguarding their assets against potential claims, including lawsuits, creditor issues, and the complexities of divorce. They valued managing and preserving the family business because of its significance within the family’s wealth portfolio and had a strong desire to ensure it remained within the family’s control and ownership. In particular, they wanted to ensure that the business would not be divided in the event of a marital dissolution, lawsuit, or mismanagement.

Our client aimed to strike a delicate balance between empowering their descendants to develop their own skills and find their life purpose, fostering individual growth and self-sufficiency while also seeking to provide a safety net, offering a degree of security and support in the face of unforeseen challenges.

Our client also recognized the paramount importance of flexibility within their wealth management approach. They wanted to tailor their financial support to the specific talents, interests, and needs of their descendants, fostering an environment where entrepreneurship could thrive, or a descendant could pursue more traditional higher education. The ability to adjust and adapt according to each family member’s path was central to their vision of a dynamic and supportive family legacy.

Solution

Our team engaged in a collaborative process with the client, beginning with a crucial first step: gaining a deep understanding of the client’s existing asset structure, overarching goals, and family relationships. We undertook a comprehensive evaluation of the client’s asset portfolio, determining not only what assets they held but also the way the assets were owned, whether directly or indirectly. Simultaneously, we engaged valuation experts to gain comprehensive insight into the client’s financial portfolio and the value of their total estate.

This detailed comprehension led us to implement a sophisticated and customized wealth management strategy. Establishing a PFTC in conjunction with Spousal Lifetime Access Trusts (SLATs) was our central strategy. The strategy addressed several particularly critical estate financial and estate planning objectives due to the significant portion of family wealth tied up in closely-held businesses and real estate. The concentration of assets in these domains made it impractical for the family to pay their potential estate tax liability without causing substantial disruption to their finances.

The PFTC empowers the family to control the trust management and distribution decisions and ensure assets are utilized in accordance with their goals and values. The model requires collaboration with trusted professionals and advisors along with deep family involvement. The PFTC model maximizes family and professional skills and abilities by integrating PFTC committees with different focuses, such as distributions to beneficiaries, education of beneficiaries, investment management, and oversight of the closely-held business.

Forming SLATs in parallel provides a vehicle for tax-efficient wealth transfer and reduces the family’s overall estate tax liability. As the client actively administers the SLATs and operates the PFTC, they are also actively engaging in the endeavor to educate and prepare future generations about effective wealth management and financial stewardship, thereby ensuring the continuation of their legacy.

Conclusion

Shields Legal’s efforts helped develop a comprehensive private family trust company structure. Adaptability makes the PFTC truly remarkable, finely tuning it to the family’s unique situation. In this particular case, each family member was given a committee role, and their respective strengths shaped the PFTC’s structure. The family benefitted from estate tax mitigation, unified management of illiquid assets, and allowed current family members to impart financial wisdom to future generations. Our client has taken the helm of this structure, ushering in greater transparency across generations concerning the family’s assets and succession planning. The family also used the structure to create an educational platform that facilitates learning for younger generations about building and managing wealth effectively, ensuring a legacy of financial literacy and responsibility.