A private trust company is a corporate entity a wealthy family forms to serve as trustee for its own trusts, replacing individual trustees or commercial bank trust departments with a dedicated, family-controlled fiduciary. Setting one up means chartering or registering the entity at the state level, funding it with liquid capital that commonly runs from $200,000 to $500,000, and designing governance carefully enough to satisfy IRS safe harbor rules so trust assets don’t get pulled back into a family member’s taxable estate. Families usually start weighing the structure once collective trust assets reach roughly $100 million, and the cost becomes negligible relative to assets above about $500 million.
Below that range, the annual overhead (legal counsel, compliance, insurance, audits, staff or outside providers) can easily reach six figures and eats into returns in a way that’s hard to justify. Above it, the control benefits are substantial: the family sets its own investment philosophy, its own distribution policies, and keeps sensitive information out of a commercial bank’s bureaucracy. The structure is especially useful when the family holds hard-to-value assets, such as closely held businesses, real estate portfolios, or private equity interests, that commercial trustees are reluctant to manage.
Regulated or Unregulated
Every private trust company is organized as either an LLC or a corporation under the law of its home state. The more consequential decision is whether to seek a state banking charter, which splits these entities into two categories.
Regulated
A regulated (also called licensed or chartered) private trust company holds a trust charter from the state banking department and is subject to periodic examinations, capital adequacy requirements, and ongoing reporting. The compliance burden comes with real advantages. A state-supervised trust company qualifies as a “bank” under the Investment Advisers Act of 1940, which excludes it from the definition of “investment adviser” and removes the SEC registration question. Regulated status also carries certain federal bonding exemptions and eliminates doubt about whether older irrevocable trust instruments will accept the company as a successor trustee.
Unregulated
An unregulated (exempt or unlicensed) private trust company skips the state charter and its examinations. Compliance costs drop, but new problems appear. Without state banking supervision, the company may fall within the federal definition of an investment adviser, potentially triggering SEC registration. It may face restrictions on interstate trust activity, and it can be barred from serving as successor trustee under older instruments that require a state or national charter. Modifying such an instrument to accept an unregulated company generally requires a court order.
Both types are prohibited from soliciting trust business from the public. A private trust company may serve only a defined class of family members and, in some states, family-related charities and employees of family enterprises. The permitted class is usually tied to a specified degree of kinship to a person named in the charter application.
Where to Form the Company
About eight states have enacted statutes specifically governing private trust companies or family trust companies. The choice of jurisdiction sets the capitalization floor, the regulatory burden, the available trust law features, and the state income tax treatment of trust assets. The family doesn’t need to live in that state, but the company will need a registered office there and some physical presence to keep its charter and receive legal service.
Comparison factors worth weighing include whether the state offers both regulated and unregulated options, the minimum capital requirement, the scope of permissible fiduciary activities, the quality of the state’s trust code (directed trusts, decanting, perpetual trusts), and whether the state taxes trust income. Nothing prevents a trust from having contacts with more than one state, and practitioners usually recommend mapping all state connections early so the family doesn’t inadvertently trigger tax obligations in an additional jurisdiction.
Forming the Company
Formation requires several governing documents and a real capital commitment before any application is filed.
Governing Documents
The foundation is the Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC), establishing the entity’s legal name and fiduciary purpose. Alongside the articles, the family drafts Bylaws or an Operating Agreement setting out how the board operates, how votes are conducted, how officers are appointed, and how trust distribution decisions get made. These internal documents deserve serious attention because they must be structured to satisfy the IRS safe harbor requirements described below.
Board and Officers
The initial board of directors and executive officers must be identified before the application is filed. For regulated companies, the state banking department evaluates each proposed director’s professional background, financial history, and fitness to serve as a fiduciary. Even for unregulated companies, board composition has direct tax consequences and cannot be treated as a formality.
Capital
The company must be funded with liquid capital sufficient to meet the state’s minimum net worth requirement. In states with dedicated private trust company statutes, minimums typically fall between $200,000 and $500,000, though some states with broader trust company charters require $3 million or more. The capital must be available and unencumbered when the application is submitted. Application or registration fees generally run between $5,000 and $10,000, separate from capitalization.
Filing Sequence
Organizers first file the articles with the Secretary of State, creating the legal entity. For regulated companies, a more extensive application then goes to the state banking or financial institutions department, triggering a review that can last several months as the agency evaluates proposed directors and the business plan. After the entity exists and any required charter is granted, the company must apply for an Employer Identification Number from the IRS before opening bank accounts or conducting financial transactions.1Internal Revenue Service. Get an Employer Identification Number (EIN) The IRS advises forming the entity through the state first; applying for an EIN out of sequence can delay the process.
Ownership Structure and the Estate Tax Problem
This is where most families get into trouble without careful planning. The ownership structure of the private trust company has direct consequences for whether trust assets end up in a family member’s taxable estate, potentially undoing years of prior planning.
Direct Ownership vs. Purpose Trust
The simplest approach is for family members to own the company’s shares directly. The problem is that direct ownership can create arguments that the family member retained control over trust assets, which is exactly what triggers estate tax inclusion. A more protective approach uses a non-charitable purpose trust to hold the shares. The purpose trust exists solely to own and maintain the private trust company, with its own independent trustee and a protector who ensures the trustee fulfills its obligations. Because no family member owns the shares, ownership is formally detached from the family, reducing the risk that the IRS treats the company as a family member’s alter ego.
How Inclusion Gets Triggered
Section 2036 of the Internal Revenue Code pulls trust assets into the gross estate of a person who transferred property but kept the right to income from it or the right to decide who receives the property or its income.2Office of the Law Revision Counsel. 26 USC 2036 Transfers With Retained Life Estate Section 2038 covers the retained power to alter, amend, revoke, or terminate the trust.3Office of the Law Revision Counsel. 26 USC 2038 Revocable Transfers The danger with a private trust company is direct: if a family member who created a trust also controls the company acting as trustee, the IRS can argue the family member effectively retained the power to direct distributions. Whether the power was exercised does not matter. What capacity the family member held does not matter. Holding the power jointly with others is enough to trigger inclusion.4eCFR. 26 CFR 20.2036-1 Transfers With Retained Life Estate An unrestricted power to remove the trustee and appoint yourself is treated the same as possessing the trustee’s powers directly.
The IRS Notice 2008-63 Safe Harbor
The IRS published Notice 2008-63 to address this exact problem, setting out safe harbor conditions that keep a private trust company’s governance from triggering inclusion under Sections 2036 and 2038.5Internal Revenue Service. Notice 2008-63 Guidance Regarding Private Trust Companies The core requirements:
- A Discretionary Distribution Committee (DDC) must be created and given exclusive authority over all discretionary distribution decisions for each trust the company manages. No other body inside the company can decide distributions.
- No DDC member may participate in decisions about any trust where that member or their spouse is the settlor, a beneficiary, or someone owing a legal support obligation to a beneficiary.
- Only the company’s officers and managers may make hiring, firing, promotion, and compensation decisions. Family members who aren’t officers cannot influence staffing.
- Family members cannot enter any agreement, express or implied, to trade favorable distribution decisions across trusts.
If the company is formed in a state without a specific private trust company statute, the safe harbor also requires an Amendment Committee. A majority of its members must be individuals who are not family members and not “related or subordinate” to any shareholder within the meaning of IRC Section 672(c). The Amendment Committee must hold sole authority to change the company’s governing documents on DDC creation and membership, personnel decisions, and the ban on reciprocal agreements. Nothing in the company’s governing documents may override a more restrictive provision in any trust instrument the company manages.
Governance and Fiduciary Duties
Independent Directors
The board oversees fiduciary activities, approves investment policies, and ensures tax and trust law compliance. Many states with private trust company statutes require at least one independent or disinterested director. Independence for these purposes is situation-specific, but the analysis typically asks whether the director is free from business relationships, personal ties, or financial arrangements that could compromise autonomous judgment. A director who sits on multiple boards at the family’s request, holds shared investments with a controlling family member, or receives significant compensation from family-related entities beyond normal board fees would face serious questions about independence. The Notice 2008-63 rules layer on top: DDC members must not be related or subordinate to the trust’s settlor under IRC Section 672(c), which excludes employees, business partners, and certain family members.
Prudent Investor Standard
Regulated or not, the company becomes a fiduciary the moment it accepts a trusteeship, carrying a duty of loyalty (act solely in beneficiaries’ interest) and a duty of prudence (invest and manage as a careful, informed person would). Nearly every state has adopted the Uniform Prudent Investor Act, which requires evaluating investments in the context of the whole portfolio rather than individually. The trustee must diversify unless specific circumstances make concentration appropriate and must consider the trust’s purposes, distribution schedule, and tax situation. A trustee with special expertise is held to that standard, not a generalist one. Delegation to qualified investment managers is permitted with reasonable care in selection and monitoring.
Self-Dealing
The company cannot transact with itself or its owners in ways that create conflicts. The duty of loyalty prohibits buying assets from a managed trust, lending trust money to family members, leasing family-owned property to the trust, or otherwise using trust assets for anyone other than the beneficiaries. These transactions are voidable even when the terms are objectively fair, because the conflict itself is the problem. Governing documents should include a clear related-party transaction policy, and the board should document its reasoning whenever a transaction comes near the line.
Federal Compliance
Anti-Money Laundering
FinCEN requires state-chartered, non-depository trust companies without a federal functional regulator to establish and maintain anti-money laundering programs. These programs need written policies and procedures, a designated compliance officer, an employee training program, and an independent audit function. Customer identification and beneficial ownership verification requirements also apply. This infrastructure should be budgeted from the outset rather than added late.
Form 56
When the company assumes a trusteeship, it must file IRS Form 56 to notify the IRS of the fiduciary relationship.6Internal Revenue Service. Instructions for Form 56 A separate Form 56 is required for each trust the company manages, and if multiple individuals within the company serve as co-fiduciaries, each files independently. Form 56 is also required when the fiduciary relationship ends. The identifying number on the form is the trust’s EIN, not the company’s.
Beneficial Ownership Reporting
The Corporate Transparency Act originally required most domestic entities to report beneficial ownership information to FinCEN. As of March 2025, FinCEN revised the regulatory definition of “reporting company” to include only entities formed under foreign law that have registered to do business in a U.S. state. Domestic entities, including private trust companies formed in the United States, are currently exempt from beneficial ownership reporting.7Financial Crimes Enforcement Network. Beneficial Ownership Information Reporting FinCEN has stated it will not enforce BOI penalties against domestic reporting companies or their beneficial owners. The rules could shift through future rulemaking, so this is worth monitoring, but a domestically formed private trust company currently has no BOI filing obligation.
Insurance
A company managing tens or hundreds of millions in trust assets needs coverage matched to that exposure. Four policies are typical:
- Trustee liability insurance (errors and omissions), which covers claims of negligence in trust administration, including poor investment decisions, missed distributions, or failure to follow the trust instrument. Some states require it as a condition of the trust charter.
- Directors and officers insurance, which protects individual board members and officers against personal liability for their decisions running the company, including defense costs, settlements, and judgments related to alleged breaches of fiduciary duty.
- A fidelity bond, which insures against employee dishonesty such as theft, forgery, embezzlement, and misappropriation. Regulated trust companies under state banking supervision may be exempt from certain federal bonding requirements; those supervised only at the state level typically are not.8U.S. Department of Labor. Field Assistance Bulletin No. 2008-04
- A fiduciary bond, which protects the trust estate itself from dishonest acts by the company’s personnel, covering fraud, misrepresentation, and similar wrongdoing.
The distinction matters. A fidelity bond covers dishonest acts like theft. Trustee liability insurance covers honest mistakes like negligent investment management. One does not substitute for the other.
Keeping the Entity Alive
A private trust company that stops behaving like a real company loses its legal protections. The board must meet regularly, at minimum annually, to review trust performance, approve financial statements, and re-elect officers. Detailed minutes must be kept for every meeting. Those minutes are the evidence that the company functions as a genuine independent entity following its own governing documents, not an extension of one family member’s personal decisions.
Company assets and family members’ personal assets must stay strictly separate. The company needs its own bank accounts and accounting records, with income and expenses properly attributed. Commingling funds or using company accounts for personal expenses is the fastest way to lose the liability protection the corporate structure provides.
Most states require annual report filings and franchise tax payments to keep the charter active. Regulated companies also face periodic examinations by the state banking department, reviewing financial condition, compliance posture, and adherence to the charter. The company must maintain a registered office within its home state to receive legal service and regulatory correspondence. Letting any of these obligations lapse can result in administrative dissolution or revocation of trust powers, which would leave every trust the company manages without a trustee.