Key differences in wealth goals and fiduciary duties set these two popular wealth-management solutions apart.
For decades, international families have used private trust companies to manage their private wealth.
But ever since family offices roared into vogue in Asia amid the COVID-19 pandemic lockdowns in 2020, these two popular estate-planning structures sometimes get confused with one another.
This can happen because the same ultra-high-net-worth family members hold key roles in both their family office and private trust company, says Octavia Liu, a wealth planner at RBC Wealth Management in Asia.
For example, someone who heads the family office may also be sitting on the board of directors of the family’s private trust company. Other times, families may need several private trust companies, and use a family office to manage them.
“Family offices and private trust companies are not incompatible with one another,” says Liu. “That’s why people see them together in a shell, and may not be able to distinguish the differences.”
Research published by Singapore Management University’s Yong Pung How School of Law offers the following comparisons between a single-family office and a private trust company:
Asian family dynasties – often spanning three or four generations – typically lean younger than their European counterparts, where family wealth can stretch eight or more generations, says Alvin Chiam, a wealth planner at RBC Wealth Management in Asia.
As a result, Asian families favour family offices for their emphasis on growing wealth, by centralizing and carving up portions of the family’s private wealth for family members to invest.
“The idea of taking care of and growing the family wealth is generally much closer to the hearts of Asian families,” explains Chiam. “The European concept of being a fiduciary and acting as a trustee of the family legacy is still slightly remote at present. This is simply because of the cultural context here in Asia, the general age of family wealth and the overall growth environment in the various localities we are in. However, we are noticing that families are starting to consider the fiduciary and stewardship of family legacy based on traditional family values.”
Unlike family offices, private trust companies have long been seen as a legacy-planning and family-governance tool.
While some high-net-worth families seek to pass on their fortune to as many generations as possible, others set aside a sum for their descendants and give away the rest to designated beneficiaries, which can include philanthropic causes.
Liu says some families have a private trust company primarily because the head of the family wants to maintain control over the wealth transfer plan.
In a private trust company, family members do not act as investment personnel, but as joint decision makers or a governing council who exercise fiduciary responsibility in distributing family wealth.
Despite the differences between family offices and private trust companies, Liu and Chiam say the process of deciding which structure to apply to manage a family’s wealth is not always straightforward.
Factors to take into account include:
These factors – made more complex if family members reside in different countries – necessitate assistance from experts who can assess the context and ensure the structure of each solution complies with tax laws and local requirements of the relevant jurisdictions.
There are also matters of confidentiality. Engaging experts enables families to put together a team of people to execute their wealth plan, yet maintain a level of control and confidentiality within a transparent legal structure.
“A properly executed family governance model allows participation from various family members. Family members from various family branches can be involved as part of a committee. Each member brings a variety of expertise – this can create better outcomes and value to the wider family,” says Chiam.
While family offices are currently popular in Asia, they are not always the right answer to a family’s needs.
For example, during the height of the COVID-19 pandemic, some saw setting up a family office as a “residency tool, as opposed to an investment tool,” Chiam says.
Others recognized that alternative solutions better suited their goals. Liu says conversations with wealth planners have led some clients to realize that they had not thought deeply enough about their family legacy.
“Our clients have found that having conversations with experienced wealth planners enables them to better articulate their long-term legacy plans and gain access to a wider variety of planning solutions to expand the reach of their legacy,” Chiam adds. In some cases, wealth planners, such as Chiam, do deal with businesspeople who are fastidious and relentless in terms of running their business.
“But in terms of private wealth, in terms of governance of their own family investments, they need that same determination and hard work,” he says. “By consulting with external professionals, you’re bringing other people on board to generate more family wealth at a faster pace.”
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