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The marriage between family offices and trustees

14 Apr 2022

Today’s ultra-high-net-worth (UHNW) families and their family offices are employing more sophisticated, institutional-like governance and investment strategies. That being said, such strategies still usually involve a core ‘umbrella’ vehicle to bring everything together – and that vehicle, most commonly, is a trust. With a trust comes a trustee; a critical role in ensuring any estate or succession plan is executed properly. So how best can family offices and trustees work together?

As family offices grow in number and become increasingly professional in their operations, this question becomes more and more pertinent – which is why it was my focus at our recent family office ‘content, conversation and champagne’ event in London, co-hosted with Agreus. During my presentation, I discussed how to make the ‘marriage’ work between family offices and trustees, outlining three alternative models of trusteeship.

Family offices and trusteeship: three options

Each of the following options have pros and cons and their merit is highly dependent on the specific circumstances and objectives of the family.

1. Do it yourselves

The main benefit of the DIY method is control, with everything under your own roof. But, in taking this approach, what would the family office be risking?

  • Optimal location: Not being in the right jurisdiction with the best trust law and courts means a trust may lack the necessary safeguards and risk mitigants available elsewhere and setting up in such a jurisdiction can be tricky and costly
  • Trust professionals: Finding the right fiduciary talent to employ in-house can be difficult and expensive
  • Regulatory compliance: Costly and burdensome to achieve and stay on top of
  • Good governance: Trustee independence, one of the cornerstones of good governance, may be compromised with resulting conflicts of interest
  • Liability: Exposure may be increased by fiduciary obligations.

It’s worth noting that DIY tactics were similarly tried by banks with their ‘universal’ banking approach, but this has all but died in the UHNW space. Private clients now have the financial firepower to choose the best providers for each service line, including trustees, which leads us to the next option.

2. Outsource fully

In practice, this is most often the only real practical option for family offices. The downside is, arguably, more cost and less direct control, but the plus side is extensive. Benefits include:

  • Access to the most appropriate jurisdictional trust law and courts
  • A consistent trustee service; support from a professional team rather than reliance on one individual who may take a holiday, fall ill or retire
  • Good governance brought by the independence, objectivity, resources, experience and fiduciary expertise of a professional trustee
  • Compliance peace of mind, as most first-tier trust jurisdictions also regulate their trustees.

When choosing a third-party trustee, it’s important to consider the firm’s reputation, the ‘bench strength’ of its professionals, the breadth and depth of its expertise and service offering, its jurisdictional presence, industry recognition, regulatory compliance, data management, governance and control procedures, cultural affinity – the list goes on. With all of this on top of ensuring competitive fee levels, it’s easy to see why it quickly can be a difficult choice.

3. Hybrid

As with many decisions, choice of approach here is not necessarily binary. A hybrid approach to trusteeship has evolved alongside the growth of family offices. Put simply, it’s the integration of family offices into the trust structure(s).

Hybrid arrangements tend to rest upon UHNW families wanting to create some form of structure whereby they are part of the ‘trustee body’, including their children who, at an appropriate age, can be brought on board and permitted some level of input before the time comes for the next generation to fully take the helm.

Several structural variations have emerged over the years. One popular option among UHNW families is the private trust company (PTC) structure, where the family effectively creates a separate trust company (administered by a professional trust company, as required by most regulatory regimes) that acts as trustee solely for trusts benefiting that particular family. PTC board members often include family members as well as trusted advisers and a professional fiduciary (the latter to help ensure relevant fiduciary expertise and independence akin to a non-executive director).

Legislative changes have also helped facilitate the hybrid approach. These include codification of the ability to reserve or grant certain powers (such as investment power) over the trust. Such powers are often given to investment committees, which include family members and family office professionals – another structural linkage back to the family and/or family office.

Another example of how ‘hybrid’ is achieved is via underlying investment holding structures. These often take the form of both:

  • Corporate vehicles, which can have mixed boards featuring family office members alongside the trustee, and
  • Funds, wherein the family office acts as general partner (GP) while the trust holds the limited partner (LP) interests and administers the fund itself (another example of institutional practice being employed by UHNW families).

Of course, tax considerations, such as the residency of the various parties, must be considered in relation to all of the above.

Don’t forget the emotional side

Crucially, effective collaboration between family offices and trustees must extend beyond structures. Much like in a real marriage, emotional intelligence is also key.

A family office can and often does help minimise misunderstandings in trust matters by facilitating communications between trustees and beneficiaries, thus aiding in the avoidance of strained relationships between family members and advisers. Together, family offices and trustees in a proper ‘marriage’ educate beneficiaries on the structure and operations of the trust so there is a better understanding of its various tax and non-tax benefits, which in turn minimises risk of contentious situations.

Further, family offices can offer critical insight on family dynamics and individuals. This knowledge should help to determine the trustee best suited to address the family’s particular set of circumstances – not only from a technical servicing perspective, but in terms of cultural fit.

Ultimately, whatever the legal and structural means that binds family offices and trustees together, there is one other very important shared attribute that ought to ensure a smooth ‘marriage’. A common fiduciary obligation that, whilst different under law, brings a good level of alignment to always act in the best interests of the family or families we represent – a marriage arguably unparalleled in the financial and wealth industries.

Speak to IQ-EQ

Having worked closely with wealthy individuals and family offices for over 50 years, IQ-EQ is well versed in the shifting family office landscape and offers a comprehensive suite of family office support services, including of course trusteeship, built upon our experience ensuring our clients’ evolving needs are always met. To find out more, please get in touch.

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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