Revisiting the Ohio Family Trust Company Act

I first wrote about the Ohio Family Trust Company Act (OFTCA), shortly after it was enacted in 2016. The OFTCA allows families to establish Family Trust Companies (FTCs) in Ohio to serve as trustees for their family trusts. This legislation positions Ohio among approximately 16 states, including South Dakota, Nevada, and Wyoming, that have similar statutes, with Ohio being one of the few to offer both licensed and unlicensed FTC options. The Act aims to provide a flexible wealth management tool for families, particularly those with significant assets, while keeping business and investments within the state.

Key Features of the Ohio Family Trust Company Act

Definition and Structure

A Family Trust Company (FTC) under the OFTCA is defined as a corporation or limited liability company organized under Ohio law that meets specific requirements:

• It must be wholly owned by "family clients" and exclusively controlled (directly or indirectly) by one or more family members or family entities, such as trusts or estates tied to the family.
• It cannot transact trust business with, act as a fiduciary for, or accept trust business from anyone who is not a family client, ensuring it serves only the family and related entities.
• A "family client" includes family members (lineal descendants of a designated ancestor not more than 10 generations removed, their spouses, spousal equivalents, adopted children, stepchildren, and foster children), family charities, estates, irrevocable trusts with family beneficiaries, key employees, and certain business entities wholly owned by family members. This definition aligns with the SEC’s "family office" concept to limit the FTC’s scope to private family matters.

Licensed vs. Unlicensed FTCs

The OFTCA allows for two types of FTCs, each with distinct requirements and benefits:

1. Unlicensed FTCs:
   • Purpose: These can provide services only to "family members," as defined above, and are not allowed to solicit trust business from the public.
   • Regulation: Unlicensed FTCs are not subject to supervision by the Ohio Superintendent of Financial Institutions, reducing regulatory oversight. They must, however, file an annual affidavit with the Superintendent confirming compliance with statutory limitations (e.g., serving only family members). The Superintendent may charge a fee for this filing.
   • Advantages: They are exempt from banking regulations and do not need to register with the SEC as a Registered Investment Advisor, which lowers operational costs and administrative burdens. They must, however, comply with SEC rules if providing investment advice.
   • Naming Restriction: Unlicensed FTCs cannot use "trust," "family trust company," or "FTC" in their name to avoid implying they are regulated entities.
2. Licensed FTCs:
   • Purpose: Licensed FTCs can serve a broader range of clients, including family members, certain non-family members (e.g., up to 25 beneficiaries of a family member’s will or trust), and affiliated entities like family charities or businesses.
   • Regulation: They are subject to oversight by the Ohio Division of Financial Institutions, including audits every 18 months initially and at least every 36 months thereafter.
   • Requirements:
     • Maintain a minimum capital balance of $200,000 (up to $500,000 at the Superintendent’s discretion).
     • Hold at least two board meetings per year in Ohio with a quorum physically present.
     • Maintain an office in Ohio, employ or contract with at least one part-time individual in the state, and perform at least three trust administration activities (e.g., issuing Crummey letters, preparing annual trust statements) in Ohio.
     • Maintain fidelity bonds and directors/officers insurance, each at least $1 million.
     • File a $5,000 nonrefundable application fee, with the Division investigating the applicant within 60 days.
   • Naming: Licensed FTCs must include "family trust company" or "FTC" in their name.

Powers and Functions

FTCs, whether licensed or unlicensed, are granted broad powers to manage family assets, including:

• Acting as a fiduciary (e.g., trustee, personal representative) within and outside Ohio.
• Serving in various capacities such as investment adviser, financial adviser, custodian, escrow agent, or managing agent, and managing real or personal property for family clients.
• Specific fiduciary powers while acting as a trustee, including:
  • Investing in securities or contracts affiliated with the FTC or family entities.
  • Using family-affiliated brokers for security transactions.
  • Depositing trust funds in financial institutions owned by family affiliates.
  • Making equity investments in nonpublic entities controlled by family members.
  • Loaning or borrowing money from family members or trusts managed by the FTC.
  • Acting as a proxy to vote shares or appoint officers/directors in business entities held by the trust.

These powers allow FTCs to maintain significant family control over investments and decision-making, which is a key advantage over traditional trustees like banks or individual family members.

Limitations and Compliance

• Client Restriction: FTCs are limited to serving family clients, preventing them from operating as public trust companies. This ensures they remain private entities focused on family wealth management.
• Regulatory Oversight for Licensed FTCs: Licensed FTCs face stricter requirements, including audits and capital minimums, which increase operational costs but allow them to serve a slightly broader client base.
• SEC Compliance: Unlicensed FTCs must navigate SEC rules to avoid registering as investment advisors, which can limit their investment advisory activities unless carefully structured.

Advantages of Family Trust Companies (FTCs)

Enhanced Control and Family Involvement:

• Advantage: FTCs allow families to maintain significant control over their trusts and assets by appointing family members or trusted advisors as officers, directors, or managers of the FTC. This ensures that trust administration aligns with the family’s values, investment philosophy, and long-term goals.
• Details: Unlike a traditional trustee (e.g., a bank or individual), an FTC is a corporate entity wholly owned and controlled by the family. Family members can serve on the board, make investment decisions, and oversee trust administration, fostering a sense of ownership and continuity.
• Example: A family can use an FTC to manage a family business held in a trust, ensuring that business decisions reflect the family’s vision rather than an external trustee’s priorities.

Perpetual Existence and Succession Planning:

• Advantage: As a corporate entity, an FTC provides a permanent trustee solution that can manage family trusts across multiple generations without the disruptions caused by the death or incapacity of individual trustees.
• Details: Individual trustees (e.g., a family member or attorney) may pass away, become incapacitated, or resign, requiring the appointment of successors, which can lead to delays or disputes. An FTC, as a legal entity, exists indefinitely unless dissolved, ensuring seamless trust administration.
• Example: If a dynasty trust spans several generations, an FTC can serve as its trustee for decades, avoiding the need to appoint new individual trustees as older ones retire or pass away.

Education and Governance for Future Generations:

• Advantage: FTCs provide a platform for younger family members to learn about wealth management, fiduciary responsibilities, and family governance by participating in the FTC’s operations.
• Details: Family members can serve on the FTC’s board or committees, gaining hands-on experience in managing investments, trusts, and family businesses. This prepares them to handle wealth responsibly and ensures the family’s legacy is preserved.
• Example: A family might involve their adult children in the FTC’s investment committee, teaching them about asset allocation and risk management while ensuring they understand the family’s financial goals.

Cost Savings and Convenience:

• Advantage: FTCs can reduce costs associated with hiring external trustees (e.g., banks, professional trust companies) and eliminate the need to establish trusts in other states, keeping business and revenue local.
• Details: Before statutes like the OFTCA, families often had to set up trusts or FTCs in states like South Dakota or Nevada, incurring travel, legal, and administrative expenses. An FTC in the family’s home state (e.g., Ohio) lowers these costs and simplifies operations. Additionally, FTCs can manage multiple family trusts under one entity, reducing administrative overhead compared to hiring separate trustees for each trust.
• Example: An Ohio family with $50 million in assets can save on fees by using an FTC to manage their trusts instead of paying a corporate trustee 1% annually ($500,000/year) plus additional fees for out-of-state operations.

Flexibility in Trust Administration:

• Advantage: FTCs have broad powers to act as fiduciaries and manage family assets, offering flexibility to tailor trust administration to the family’s specific needs.
• Details: Under the OFTCA, FTCs can serve as trustees, investment advisors, financial advisors, custodians, or managing agents, and they have specific powers like investing in family-affiliated entities, using family brokers, or making loans to family members. This allows the FTC to adapt to the family’s unique financial situation, such as managing a family business, real estate, or alternative investments.
• Example: An FTC managing a dynasty trust can invest trust assets in a family-owned startup, something a traditional trustee might avoid due to risk aversion or conflicts of interest.

Privacy and Regulatory Exemptions:

• Advantage: Unlicensed FTCs in Ohio are not subject to banking regulations or oversight by the Ohio Superintendent of Financial Institutions, reducing regulatory burdens and enhancing privacy.
• Details: Unlicensed FTCs only need to file an annual affidavit confirming they serve family clients, and they are exempt from registering with the SEC as Registered Investment Advisors (though they must comply with SEC rules if providing investment advice). This minimizes public disclosure and administrative costs while keeping family affairs private.
• Example: A family using an unlicensed FTC can manage their trusts without public filings or audits, unlike a licensed FTC or a public trust company.

Attracting Out-of-State Families:

• Advantage: Ohio’s lack of a residency requirement allows out-of-state families to establish FTCs in the state, benefiting from Ohio’s favorable trust laws and potentially boosting local economic activity.
• Details: Families from states without FTC statutes can set up an FTC in Ohio to take advantage of its flexible regulations, such as the ability to serve non-family beneficiaries (for licensed FTCs) or the lack of supervision for unlicensed FTCs.
• Example: A family from New York might establish an FTC in Ohio to manage their trusts, benefiting from Ohio’s laws while keeping their investments and operations in a single state.

Centralized Management of Multiple Trusts:

• Advantage: An FTC can serve as the trustee for multiple family trusts, centralizing administration and reducing complexity compared to managing each trust separately.
• Details: A family with several trusts (e.g., a dynasty trust, a pet trust, and a charitable trust) can appoint the FTC as the trustee for all, streamlining decision-making, record-keeping, and compliance.
• Example: An FTC can manage a dynasty trust for the family’s main assets, a pet trust for a beloved horse, and a charitable trust for a family foundation, all under one entity with consistent governance.

Why Not Just a Private Dynasty Trust?

A private dynasty trust is a powerful tool for generational wealth transfer, designed to hold assets for multiple generations while minimizing estate taxes and protecting assets from creditors. It has limitations, however, that an FTC can address, making the two structures complementary rather than mutually exclusive. Here’s why a family might prefer an FTC over, or in addition to, a dynasty trust:

Control and Customization:

• Dynasty Trust Limitation: A dynasty trust is typically managed by an individual trustee (e.g., a family member) or a corporate trustee (e.g., a bank). Individual trustees may lack expertise or create conflicts of interest, while corporate trustees often charge high fees and follow conservative investment strategies that may not align with the family’s goals.
• FTC Advantage: An FTC allows the family to control the trustee entity itself, appointing family members or trusted advisors to manage the dynasty trust. This ensures that trust administration reflects the family’s values and investment preferences, rather than an external trustee’s priorities.
• Example: A dynasty trust managed by a bank might invest only in low-risk bonds, while an FTC managing the same trust can invest in a family business or real estate, aligning with the family’s risk tolerance and goals.

Succession and Longevity:

• Dynasty Trust Limitation: A dynasty trust relies on individual trustees or corporate trustees, which can lead to succession issues. If an individual trustee dies or becomes incapacitated, appointing a successor can be contentious or delayed. Corporate trustees may change ownership or policies over time, disrupting the trust’s administration.
• FTC Advantage: An FTC, as a corporate entity, has perpetual existence and can serve as the trustee for the dynasty trust indefinitely. This eliminates the need to appoint new trustees as individuals pass away or resign, ensuring continuity across generations.
• Example: A dynasty trust set up in 2025 might outlive its original trustee by 50 years; an FTC ensures there’s no gap in administration, while a new individual trustee might need to be appointed multiple times over that period.

Cost and Administrative Efficiency:

• Dynasty Trust Limitation: Managing a dynasty trust with an external trustee can be expensive, with corporate trustees often charging 0.5%–1.5% of assets annually, plus additional fees for investment management or legal services. If the trust holds complex assets (e.g., a family business, real estate), administrative costs can escalate.
• FTC Advantage: An FTC reduces costs by keeping trust administration in-house, avoiding external trustee fees. It also centralizes management of multiple trusts, reducing administrative overhead. For Ohio families, the OFTCA eliminates the need to operate out-of-state, saving on travel and legal expenses.
• Example: A $100 million dynasty trust might incur $1 million/year in fees with a corporate trustee, while an FTC could manage it for a fraction of that cost by using family members or in-house staff.

Flexibility in Investment and Management:

• Dynasty Trust Limitation: Traditional trustees (especially corporate ones) often follow strict fiduciary standards that limit their ability to invest in riskier or family-affiliated assets, such as a family business or startup. This can restrict the trust’s growth potential or conflict with the family’s investment strategy.
• FTC Advantage: FTCs have broad powers under the OFTCA to invest in family-affiliated entities, use family brokers, or make loans to family members, allowing for more tailored and aggressive investment strategies. The family can also customize the FTC’s governance to reflect their priorities.
• Example: A dynasty trust managed by a bank might avoid investing in a family-owned vineyard due to risk concerns, while an FTC can allocate trust funds to the vineyard, supporting the family business and potentially increasing returns.

Privacy and Regulatory Oversight:

• Dynasty Trust Limitation: A dynasty trust managed by a corporate trustee may require public filings or audits, depending on the trustee’s status and jurisdiction. If the trust operates in a state with strict regulations, privacy can be compromised.
• FTC Advantage: Unlicensed FTCs in Ohio are not subject to banking regulations or oversight by the Ohio Superintendent of Financial Institutions, enhancing privacy and reducing administrative burdens. They only need to file an annual affidavit confirming compliance.
• Example: An unlicensed FTC managing a dynasty trust can operate without public disclosure, while a corporate trustee might need to file reports that reveal trust details.

Education and Family Governance:

• Dynasty Trust Limitation: A dynasty trust managed by an external trustee offers little opportunity for family involvement or education. Beneficiaries may remain disconnected from the trust’s management, potentially leading to mismanagement or lack of financial literacy in future generations.
• FTC Advantage: FTCs provide a platform for family members to participate in trust administration, learn about wealth management, and develop governance structures (e.g., investment committees, family councils). This ensures the family’s legacy is preserved through active engagement.
• Example: A dynasty trust beneficiary might receive distributions without understanding the trust’s purpose, while an FTC can involve them in board meetings, teaching them fiduciary responsibility.

Scalability for Multiple Trusts:

• Dynasty Trust Limitation: A single dynasty trust can only manage the assets it holds, and if a family has multiple trusts (e.g., for different purposes like charity, pets, or business succession), each may require a separate trustee, increasing complexity and costs.
• FTC Advantage: An FTC can serve as the trustee for multiple family trusts, centralizing administration and ensuring consistency in management. This is particularly useful for families with diverse assets and goals.
• Example: A family with a dynasty trust, a pet trust, and a charitable trust can appoint the FTC as the trustee for all, streamlining operations and reducing administrative costs.

Why Use Both an FTC and a Dynasty Trust?

Rather than choosing between an FTC and a dynasty trust, many families use them together for maximum benefit:

• Complementary Roles: A dynasty trust can hold and protect assets across generations, leveraging Ohio’s favorable trust laws (e.g., perpetual duration, strong creditor protection). An FTC can serve as the trustee for the dynasty trust, providing the control, flexibility, and continuity that a traditional trustee might lack.
• Enhanced Asset Protection: A dynasty trust offers strong asset protection against creditors and divorce, while an FTC adds a layer of control and privacy, ensuring the trust is managed according to the family’s wishes.
• Long-Term Strategy: The dynasty trust ensures wealth preservation for future generations, while the FTC ensures that the trust’s administration remains in the family’s hands, adapting to changing circumstances over time.

Example Scenario:

A family with $200 million in assets sets up a dynasty trust to hold their wealth, taking advantage of Ohio’s perpetual trust laws and estate tax exemptions. They establish an unlicensed FTC under the OFTCA to serve as the trustee for the dynasty trust. The FTC, controlled by family members, invests trust assets in the family’s real estate and farming businesses, educates the next generation through board participation, and manages additional trusts (e.g., a pet trust for the family’s horses, a charitable trust for a foundation). This setup combines the dynasty trust’s asset protection and tax benefits with the FTC’s control, flexibility, and cost efficiency.

Conclusion

Family Trust Companies offer significant advantages over relying solely on a private dynasty trust, including greater control, perpetual existence, cost savings, flexibility in investment and management, privacy, and opportunities for family education and governance. While a dynasty trust is excellent for preserving wealth across generations and minimizing taxes, it lacks the administrative control and scalability that an FTC provides. For high-net-worth families, using an FTC to manage a dynasty trust (and other family trusts) combines the best of both worlds, ensuring long-term wealth management that aligns with the family’s values and goals.