Private Trust Companies and Family Offices: A California Guide
Estate size this page covers: $100 million and up, and occasionally families between $30 million and $100 million with an operating company held in many trusts. Below that, a corporate trustee or a family member as trustee usually costs less. For the full range of techniques above the exemption, see ultra high net worth estate planning in California.
Short answer – A private trust company is a corporation or LLC a family forms to act as trustee of its own trusts. Nevada and Wyoming let one run without a state charter, while South Dakota and New Hampshire require approval, and California has no family trust company statute at all. The federal tax framework is Notice 2008-63, a proposed IRS ruling that was never finalized: it keeps trust assets out of family members’ estates if distribution decisions sit with a committee that bars each member from voting on trusts he or she created or benefits from. A family office is the family’s investment and administrative operation, and under the SEC’s family office rule it isn’t treated as an investment adviser at all if it serves only family clients, is family owned and controlled, and doesn’t hold itself out to the public.
What the trustee’s location costs a California family
Take a California family with dynasty trusts that accumulate $8 million a year of taxable income from investments that aren’t California-source. Distributions are discretionary, so no beneficiary’s interest is noncontingent. If a private trust company administered mostly in California is the trustee, California taxes all of that income, $1,064,000 a year. If the same company is administered mostly outside California, the California bill is zero. The family is hypothetical and the chart shows the yearly California tax depending on who the trustee is and where the trust is administered.
| Who is trustee and where | Share taxed by California | Yearly California tax | Ten years |
|---|---|---|---|
| Private trust company administered mostly in California | All (R&TC § 17742(b)) | $1,064,000 | $10,640,000 |
| Three individual trustees, two of them California residents | Two-thirds (R&TC § 17743) | $709,333 | $7,093,333 |
| Private trust company administered mostly outside California | None | $0 | $0 |
All $8 million is taxed at California’s top marginal rate of 13.3%, which is the 12.3% top bracket plus the 1% surcharge on taxable income over $1 million (R&TC § 17043). The middle row applies § 17743’s apportionment to three trustees, two of them California residents. The model ignores federal tax, which doesn’t change with the trustee’s location, and assumes the trust company’s administration is in fact where the row says.
The last row holds only if the company does its trust work outside California in fact.
Why some families form their own trustee, and when it makes sense
A private trust company is a company a family owns to act as trustee of the family’s own trusts, and it doesn’t take business from the public. Nevada’s statute, for example, defines a family trust company as a corporation or LLC that acts as a fiduciary for family members and doesn’t solicit or transact trust business with anyone else (NRS 669A.080).
Bank trustees often won’t hold a concentrated position in the family’s operating company. Individual trustees die, lose capacity or fall out with each other. And a family with dozens of trusts across three generations wants one place where investment, distribution and record-keeping decisions are made under written rules. The cost is a second set of governance problems: who owns the company, who sits on its committees, and who decides.
In my judgment, a private trust company starts to make sense around $100 million, and only for a family with several of these: an operating company or concentrated position it intends to keep for generations, many trusts across branches, a family office already in place, and members willing to sit on committees and follow written rules. Below that, a corporate trustee, a directed trust with an investment adviser, or a family member as trustee with an independent co-trustee usually does the job at a fraction of the cost. For California families, the trust company also has to live, in fact, outside California.
| Question | Bank or corporate trustee | Individual family trustee | Private trust company |
|---|---|---|---|
| Who decides distributions | Bank trust officers | The individual, limited by the trust terms and Prob. Code § 16081(c) when the trustee is also a beneficiary | A distribution committee that bars members from their own and their spouse’s trusts (Notice 2008-63) |
| Concentrated family company stock | Often resisted under the bank’s own investment policies | Family keeps control | Family keeps control through an investment committee, with the voting rule in IRC § 2036(b) in mind |
| Continuity across generations | Strong, but staff turn over | Weak: death, incapacity, family conflict | Strong, if governance documents work |
| Cost | Asset-based fees | Low in fees, high in personal liability | Formation, capital, staff, insurance, and exams if chartered |
| California trust income tax | Depends on where the bank administers the trust (R&TC § 17742(b)) | Apportioned by the number of California resident trustees (§ 17743) | Follows where the company does most of its trust administration (§ 17742(b)) |
| Estate tax risk | Low | Higher when a grantor or beneficiary holds discretionary power without a standard (Old Colony) | Low if the firewalls in Notice 2008-63 hold, though the notice is still only proposed |
| When it works | Most families | Smaller trusts, simple assets, a trusted relative | Families of roughly $100 million and up with many trusts and an operating company |
This page is for California families of roughly $100 million and up, usually with an operating company, who are choosing between a bank trustee, family trustees and their own trust company, or who already have a trust company and want its governance checked against Notice 2008-63 and California’s residency rules.
California taxes the trust where the company does its work
A trust company run from California makes the trust taxable here on all its income. California taxes a trust’s taxable income if a fiduciary, or a beneficiary whose interest isn’t contingent, is a California resident (R&TC § 17742(a)). So the first row of the hypothetical is $1,064,000 and the last is zero. When there are several fiduciaries or several beneficiaries and only some live here, the income is apportioned (§§ 17743 and 17744). With individual trustees, the fiduciary share is apportioned by the number of trustees who live in California (§ 17743).
A corporate fiduciary’s residence is the place where the corporation transacts the major portion of its administration of the trust (§ 17742(b)). A Nevada or South Dakota trust company whose distribution committee meets in Los Angeles, and whose family office staff run the trusts from there, gives the Franchise Tax Board a strong argument that it’s a California fiduciary. California also bars a non-bank foreign corporation from conducting trust business here (Fin. Code § 1555).
California-source income is taxed anyway
Moving the company out of California shelters only income that isn’t from California sources. In Steuer v. Franchise Tax Bd. (2020) 51 Cal.App.5th 417, the Court of Appeal held California taxes the entire amount of a trust’s California-source income regardless of where its fiduciaries live. It also held that a beneficiary whose distributions rested in the trustees’ absolute discretion had a contingent interest, so her California residence alone didn’t make the trust a California taxpayer under § 17742. The Franchise Tax Board won on California-source income, and the trust won on its beneficiary’s discretionary interest. See Nevada trusts and California taxes.
California has no family trust company statute
A California family can’t form a private trust company under a family trust company statute, because California doesn’t have one. It is unlawful to conduct trust business in California except through a corporation organized for that purpose (Fin. Code § 1005), and that corporation needs a certificate of authority from the commissioner and a deposit with the State Treasurer (§ 1550). “Trust business” includes acting as trustee for any purpose permitted by law (§ 115).
The exemptions in Fin. Code § 1553 cover a natural person serving as trustee of trusts where at least one trustor is a family member, lawyers and CPAs serving as trustee for their own clients, nonprofits, court-appointed fiduciaries and licensed professional fiduciaries. None covers a company a family forms to serve its own trusts. And a foreign corporation, other than a national bank or an out-of-state bank authorized here, may not conduct trust business in California (§ 1555). Even the name is restricted: the Secretary of State won’t file articles using “trust” or “trustee” in a corporate name without the commissioner’s approval (Corp. Code § 201).
Whether a company that serves only one family is in the “business” of acting as trustee hasn’t been decided in any California case I found, and California families who form a private trust company form it in another state and keep its trust administration and decisions there, which is also what the income tax rules above reward. Those licensing rules and the name restriction argue for keeping the company’s trust administration, its records and its committee meetings outside California.
States split on whether a family’s trust company needs a charter. The table reflects the statutes as read for this page.
| State | Unregulated option | Chartered or licensed option | Statute |
|---|---|---|---|
| Nevada | A family trust company doesn’t need a license and isn’t supervised by the Commissioner unless it applies | A licensed family trust company, or a full trust company license under NRS ch. 669 | NRS 669A.080, 669A.100, 669A.110 |
| South Dakota | None. A private trust company is still organized as a trust company | Articles must be submitted and approved before the company engages in business | SDCL 51A-6A-1, 51A-6A-4, 51A-6A-7 |
| Wyoming | A private family trust company, not supervised by the commissioner, files a signed waiver and may not do business with the public | A chartered family trust company, with at least $500,000 of initial capital | Wyo. Stat. §§ 13-5-301, 13-5-601 to 13-5-605, 13-5-701 to 13-5-703 |
| New Hampshire | None. A family trust company is a state bank and also a trust company | Organized in accordance with RSA 383-A, after an application under RSA 383-D, Article 5 | RSA 383-D:1-102, 383-D:5-501 |
| California | None. There is no family trust company statute | Only a corporation authorized by the commissioner may conduct trust business | Fin. Code §§ 1005, 1550, 1553, 1555 |
A chartered or licensed company costs more and is examined by the state, but it gives the family a regulator’s stamp and the clearer statutory framework that Situation 1 of Notice 2008-63 assumes. An unregulated company is cheaper and private, and it has to build every firewall into its own governing documents, as Situation 2 of the notice describes.
How Notice 2008-63 keeps trust assets out of family estates
The notice sets out a proposed revenue ruling for a family that owns a trust company serving as trustee of trusts for children and grandchildren. Its conclusions rest on firewalls (Notice 2008-63, 2008-31 I.R.B.):
- A discretionary distribution committee. The company delegates every discretionary distribution decision to the committee.
- No member votes on his or her own trusts. A member may not take part in decisions for a trust he or she or a spouse created or benefits from, or for a trust whose beneficiary the member or a spouse is legally obligated to support.
- No reciprocal deals. Family members may not agree, expressly or implicitly, to trade distribution decisions.
- Personnel decisions stay with officers and managers. Only officers and managers decide hiring, firing and pay.
- An amendment committee where no statute does the job. In a state without a private trust company statute, only a committee whose majority are neither family members nor related or subordinate to a shareholder can change these rules.
If the firewalls hold, the proposed ruling says the family’s own trust company as trustee won’t by itself bring trust assets back into the estate of a grantor or a beneficiary. Under those facts, the proposed ruling concludes that the company’s service as trustee won’t alone cause estate inclusion for grantors under IRC §§ 2036 or 2038 or for beneficiaries under § 2041, won’t make gifts to the trusts incomplete, won’t affect GST-exempt status, and won’t make anyone the income tax owner under §§ 673, 676, 677 or 678. Grantor trust status under § 675 is left as a question of fact for audit. Under § 674, the notice looks through to the committee members acting on a particular trust and treats ownership of the company’s voting stock as not significant under § 672(c).
None of that is final law. The notice is only a proposed ruling, and the IRS still lists private trust companies under IRC §§ 2036, 2038 and 2041 as areas under study where it won’t issue private letter rulings (Rev. Proc. 2026-3, section 5). It also specifically asked for comments on trusts holding stock in a controlled corporation or life insurance, the two assets most family trust companies are formed to hold.
In Estate of Wall v. Commissioner (1993) 101 T.C. 300, the grantor could replace the corporate trustee, but only with an independent corporate trust company that wasn’t the grantor or a company in which she had an interest. The Tax Court held that power didn’t cause inclusion under IRC §§ 2036(a)(2) or 2038(a)(1). A family-owned trust company is the kind of company the Wall trust excluded, and the firewalls in Notice 2008-63 are what stand in for that independence.
In Old Colony Trust Co. v. United States (1st Cir. 1970) 423 F.2d 601, a settlor serving as trustee could stop his son’s income and add it to principal whenever the trustees found that in the son’s “best interests.” The trust was included in the settlor’s estate under § 2036(a)(2). The court said administrative powers alone don’t cause inclusion. Distribution power without an ascertainable standard does. Don’t put a grantor on the committee that decides distributions from her own trusts. Old Colony shows what a distribution power without a standard costs, and Notice 2008-63 depends on her stepping aside.
The family office is a separate company with its own regulatory rule
A family office stays outside the SEC’s investment adviser rules if it serves only the family, the family owns and controls it, and it doesn’t hold itself out to the public. A family office is the company that manages a family’s investments and affairs, and under the SEC’s family office rule it isn’t treated as an investment adviser if it has no clients other than family clients, is wholly owned by family clients and exclusively controlled by family members or family entities, and doesn’t hold itself out to the public as an investment adviser (17 C.F.R. § 275.202(a)(11)(G)-1).
“Family member” in the rule means the lineal descendants of a common ancestor no more than 10 generations removed from the youngest generation, plus their spouses or spousal equivalents. Key employees and certain trusts, estates, charities and companies owned by family clients also count as family clients. A family office that takes on one outside client loses the exclusion, so a family that wants to share its office with a friend’s family needs securities counsel first.
A family office and a private trust company often sit side by side, and keeping them separate matters. The family office runs the investments and the books. The trust company holds legal title as trustee and makes the fiduciary decisions. Keeping them as separate entities, with separate boards and minutes, is what lets the trust company’s firewalls be shown later. The family office has its own tax footing as well. In Lender Management, LLC v. Commissioner, T.C. Memo. 2017-246, the Tax Court held a family office that managed investments for family members, and was paid with profits interests, was carrying on a trade or business for purposes of IRC § 162, despite the family relationships, and the family won.
The enforceable rules belong in the family’s governance documents
The family constitution
A family constitution is a written statement of how the family makes decisions about its shared wealth: its purpose, who can serve on boards and committees, how members are educated and brought in, and how disputes are resolved. It works best as a guide the family uses. The rules that have to be enforceable belong in the trust instruments, the trust company’s bylaws, and the family office’s operating agreement, because those are the documents a court and the IRS will read.
The investment committee
The investment committee holds the power the family usually cares about most: control of the operating company and concentrated positions. Voting control is where estate tax risk lives. In United States v. Byrum (1972) 408 U.S. 125, a grantor kept the right to vote stock in his closely held companies that he had put in a trust with an independent corporate trustee. The Supreme Court held that wasn’t a retained right to designate who enjoyed the income or retained enjoyment of the stock under IRC § 2036(a), and the taxpayer won. Congress responded with IRC § 2036(b): keeping the right to vote, directly or indirectly, shares of a controlled corporation transferred to a trust is treated as keeping the enjoyment of the shares, so the result no longer protects voting stock of a controlled corporation. A family member who transferred company stock into trusts shouldn’t vote those shares through the trust company’s investment committee.
The distribution committee
Notice 2008-63 relies on this committee. Its membership rules, recusal rules and minutes are what show that no grantor or beneficiary decided his or her own distributions. Distribution standards still matter inside a committee: a standard like HEMS gives the committee a measurable test and a record a court can review.
Trust protectors and successor rules
Most families pair a trust company with a trust protector who can remove and replace the trustee, change administrative terms or move the trust’s situs. A protector who can appoint a company the family controls is where the firewalls can fail, so the protector’s removal power and the company’s amendment rules have to be drafted together.
Working with Ridley Law
The call is for families weighing a private trust company or family office, and for families whose existing structure was set up before anyone checked it against California’s trust tax and licensing rules. The first call is free and runs 30 minutes, by phone or Zoom. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts.
Book my 30-minute call or call 805-244-5291.
Frequently asked questions
What is a private trust company?
A corporation or LLC a family owns that serves as trustee of the family’s trusts and doesn’t serve the public. Some states charter and supervise them. Nevada and Wyoming also allow unregulated versions.
Does California allow family trust companies?
California has no family trust company statute. Trust business here requires a corporation authorized by the commissioner (Fin. Code §§ 1005, 1550), and the family exemption in Fin. Code § 1553(a) covers only a natural person serving as trustee for family.
What is the difference between a family office and a private trust company?
A family office manages a family’s investments and administration. A private trust company holds title as trustee and makes fiduciary decisions. Many families have both, as separate companies.
Is a single-family office regulated by the SEC?
Not as an investment adviser, if it advises only family clients, is wholly owned by family clients and controlled by family members or family entities, and doesn’t hold itself out to the public as an adviser (17 C.F.R. § 275.202(a)(11)(G)-1).
What is a discretionary distribution committee?
The committee inside a private trust company that makes every discretionary distribution decision. Under Notice 2008-63, no member may vote on a trust he or she or a spouse created or benefits from, or on a trust for someone the member must support.
Is Notice 2008-63 final?
No. It’s a proposed revenue ruling issued for comment in 2008, and the IRS still lists private trust company estate tax questions as areas under study in Rev. Proc. 2026-3.
Does a private trust company make a trust a California resident trust?
It can. A corporate trustee’s residence is where it transacts the major portion of its administration of the trust (R&TC § 17742(b)). A trust company run from California makes the trust taxable here on all its income.
What is a family constitution?
A written statement of how a family makes decisions about shared wealth: purpose, eligibility for roles, education and dispute resolution. The binding rules belong in the trust instruments and the company documents.
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