TBA Law Blog


Posted by: Christy Gibson on Sep 22, 2014

By:  Richard A. Johnson and Aaron B. Flinn

A family-owned business is susceptible to suffering the “shirtsleeves to shirtsleeves” dilemma.  That is, the first generation creates and grows the family business, the second generation enjoys the fruits of the family business and the third generation is left with no business.  A Tennessee private trust company (a “PTC”) can be a vehicle for an owner(s) of a family-owned business to enable their descendants to enjoy the economic benefits of the business while maintaining the ownership  of the business for future generations.  At the same time, a PTC can also provide a mechanism for the business to continue under competent management.

A PTC is a state chartered trust company, organized as either a corporation or a limited liability company, established to provide fiduciary services solely for extended family members and their spouses.  The ultimate owners of the PTC must share a common ancestor within ten generations by affinity or consanguinity; in addition, charitable organizations established by the family may also be owners of a PTC.  By law, a PTC can only provide fiduciary services to family members, trusts of which the family members are beneficiaries, and entities and charitable organizations which are controlled by the family members. The relationship of these family members must also comply with the ten generation requirement. Since a PTC is prohibited from offering fiduciary services to the general public, it is subject to less state regulatory oversight than a public trust company. 

In 2012, the laws applicable to Tennessee PTCs were amended to specifically permit a family-owned business to create and own a PTC.   While this amendment may at first impression seem insignificant, in essence, it permits a family-owned business to control itself, thus limiting the potential of future non-family members becoming owners of the business. Family members are not required to be employed by the business. 

To illustrate, assume Family Co. is owned by trusts which benefit Founder’s spouse, adult children, and grandchildren and it is Founder’s intent that Family Co. continues to be owned by trusts benefiting future generations.  Family Co. can establish a wholly-owned subsidiary, Family PTC, to serve as Trustee of the trusts. As a result, Family Co. is owned by trusts, the Trustee of which is Family PTC, a subsidiary of Family Co.  As Trustee, Family PTC will oversee all facets of administering the trusts, including voting the trusts’ Family Co. stock.  As such, Family PTC, as Trustee, elects the Directors of Family Co. who in turn elect the Directors of Family PTC. In this illustration, Family PTC becomes especially effective as stock ownership becomes more fragmented among future generations and avoids stock ownership directly by disruptive family members who would otherwise become shareholders.  Thus, a PTC can provide a significant business succession planning opportunity to a family-business owner who wishes to ensure a smooth succession of control following their death and increasing the probability that the family business can survive for future generations.

In more general terms, a PTC also represents an attractive alternative to the use of an individual as Trustee, who may die or otherwise become unable to act. Compared to a corporate fiduciary, a PTC has the flexibility to invest in various types of investments which a corporate fiduciary may prefer to avoid (i.e., alternate investments and real estate).  In addition, unlike a commercial trust company, the staff of a PTC will likely be retained longer, thereby fostering a stronger personal relationship between the PTC and trust beneficiaries. Notwithstanding the numerous benefits afforded by a PTC, there are costs to establishing and operating a PTC.  Therefore, economically, a PTC may make sense for large family-owned businesses and high net worth families. 

There are a number of federal estate, gift and income tax rules that apply to a PTC which are generally related to provision of fiduciary services.  These “tax sensitive” provisions relate to the identity of the individuals who may exercise discretion to make distributions and who exercise the voting rights of any stock of a family business held in the trusts.  There are also restrictions as to who can have the authority to change the tax sensitive provisions in a PTC’s governing documents.  In general, the individuals making these decisions cannot be related to the creator (and contributor) of the trusts or to the owners of a PTC. The relationships, in general, are parents, spouses, siblings, descendants, and certain employees.

While the use of a PTC to centralize the administration of multiple trusts provides a multitude of benefits to high net-worth families, the 2012 amendments to Tennessee’s PTC laws have also made a PTC an attractive and viable alternative for family business owners and their business succession planning. Specifically, integrating a PTC into a family business owner’s estate planning can allow the owner to confer the financial benefits of ownership on their descendants while also facilitating a smooth succession of ownership control over the business following their deaths, as well as increasing the likelihood that the family business will remain in the family for future generations.

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RICHARD A JOHNSON- Richard is a partner in the law firm of Waller Lansden Dortch & Davis, LLP.  Family-owned businesses, high net worth individuals, tax-exempt organizations, and large closely-held companies, rely on Richard Johnson to provide practical tax and business planning solutions. Clients benefit from Richard's vast experience with S-corporations, LLCs, private trust companies, and partnership law which, when combined with strategic tax planning, helps minimize corporate and personal tax liabilities on both the state and federal levels. Best Lawyers in America recognizes Richard for his work in Tax Law and Trusts and Estates, and in 2012 named him as Tennessee's Lawyer of the Year for these categories.