The Ohio Family Trust Company Act Offers an Important Wealth Planning Tool

On June 14, 2016 Governor Kasich signed House Bill 229, which allows an Ohio family to establish its own trust company to serve as trustee for its family trusts.  The Act gives wealthy and ultra-wealthy families another way to preserve and grow their fortune for many generations.

Ohio now joins more than 15 states authorizing family trust companies (FTCs), which have become increasingly popular wealth planning tools. Before passage of the Act, an Ohio family selecting a trustee had to use either a commercial trustee, or one or more individuals.  This meant that an Ohio family that wanted to use an FTC was required to form and operate the FTC in another state.

The goal of most, if not all, families that have acquired substantial wealth is to preserve and grow their assets and transfer them to succeeding generations in a deliberate way that will avoid the proverb, “shirtsleeves to shirtsleeves in three generations.” [Note: This proverb is surprisingly common.  The Scottish version is "The father buys, the son builds, the grandchild sells, and his son begs."  The Japanese is, Rice paddies to rice paddies in three generations."  The Chinese state it plainly as, "Wealth never survives three generations."] Success is only possible if a family cultivates, across generations, positive and productive attitudes about money, responsibility, investing, planning, and risk and develops a resulting understanding of both the benefits and burdens of wealth. These values, skills, attitudes and insights sets families successful in managing wealth over generations apart from those that watch wealth dissipate over the generations.  

An FTC provides as framework for developing these values and educating generations of family members.  Of course, the wealthy and ultra-wealthy use trusts to hold their assets, to accomplish estate and tax law planning and to ultimately distribute those assets to family members and charity.  But trusts present challenges to the very wealthy.  Assets owned by a trust are often  illiquid (such as private  equity- interests in privately-owned businesses, or they are difficult to value (such as certain real estate, mineral, oil, and gas interests, life insurance, farms and ranches, loans and notes, collectibles, and intellectual property).  These assets comprise a substantial portion of the wealth of wealthy and ultra-wealthy families.  According to analysis of estate tax returns, real estate and other “unique assets” constitute roughly half of the affluent’s investment portfolios.

These assets are typically owned by the trustee of the trust, whether it is an individual trustee or a bank or trust company. These types of assets are appropriate, albeit aggressive, investments for the family. If a bank or trust company serves as trustee, the family is often in the position of having to justify keeping these investments because of their speculative nature. If an individual or series of individuals serve as trustee, they may have difficulty administering a trust involving a business or other hard-to-value assets. You can choose anFTC as trustee instead of an individual, bank or trust company.  

 An FTC allows families to establish long-term multi-generational trustee arrangements without using a bank, investment or trust company. This means greater privacy and control for the family. Often, families want to use individual trustees instead of a bank or trust company, but because of internal family dynamics and conflict, they are hesitant to name relatives. Appointing relatives, friends or business associates necessarily means divulging private information about your finances and family to others which can be uncomfortable for both you and your friends. An FTC can help alleviate the feeling that “there is no one to turn to” when selecting trustees of your various trusts.  

Typically FTC's are governed by a board of directors. One of the primary board functions is to create a discretionary distribution committee to make all distribution decisions from all trusts. Another important board function is to name an investment committee to make all investment decisions. Both the board and the committees can be populated with a combination of individual family members and independent individuals familiar with your family such as investment advisors, attorneys or  accountants.

Because the FTC is governed by a board, it brings formality and discipline to the family governance process. The Board can manage various trusts, oversee privately-held businesses, and insure and manage collectibles, mineral interests, and intellectual property rights and interests.  Formality means that meetings must be held and minutes taken.  Board members must be accountable and act in accordance with the family values, and decisions must be made regarding investments of assets in each trust and distributions of assets from those trusts. One board makes these decisions instead of a varied group of individual trustees of your family’s separate trusts.

An FTC is defined  as a corporation or limited liability company that (1) is organized in Ohio to serve only family clients, (2) is wholly owned by family clients and is exclusively controlled by one or more family members or family entities, (3) acts as a fiduciary, and (4) does not transact business with, propose to act as fiduciary for, or solicit trust business from, a person that is not a family client.  Ohio’s legislation allows for unlicensed and licensed FTCs.  

An unlicensed FTC  may provide services only to “family members,” and since the FTC will not be audited by the Department of Financial Institutions, it must abide by certain restrictive SEC rules in order to provide investment advice without registering with the SEC as a registered investment advisor. While an unlicensed FTC is not subject to banking regulations, it is required to submit an annual affidavit to the Department of Financial Institutions confirming its compliance with the statutory limitations.

One of the limiting features of an Ohio FTC is the definition of “family member.” This definition ensures that an FTC is not serving the general public (and, in fact, solicitation of trust business is explicitly prohibited by the bill). Family members are defined as a class, all of whom have a common ancestor who is not more than 10 generations removed. This so-called designated relative must be identified at the inception of the FTC and cannot be changed. Family members also include spouses, spousal equivalents, adopted children, stepchildren and foster children. The definition also includes the following related persons/entities: family charities, family estates, irrevocable trusts with family beneficiaries, key employees, trusts formed by key employees, and business entities wholly owned and operated by family members. These rules are intended to track the SEC’s definition of a “family office.”

A licensed FTC is subject to the following requirements: (1) it must have a minimum capital balance of at least $200,000, and up to $500,000, at the discretion of Ohio’s superintendent of financial institutions; (2) it may provide services to “family members,” certain non-family members and certain affiliated entities; (3) it must maintain office space and at least one part-time employee in Ohio; (4) it must hold at least two governing board meetings per year in Ohio; (5) it must perform certain administrative activities in Ohio; and (6) it must maintain a fidelity bond and directors/officers insurance, each in the amount of $1 million. A licensed FTC is also subject to supervision by Ohio’s Department of Financial Institutions and will be audited every 18 months.

For more about the Act, go here. 

Credit Card Debt Will Follow the Younger Generation to the Grave

Younger Americans not only take on relatively more credit card debt than their elders, but they are also paying it off at a slower rate, according to a first-of-its-kind study conducted by Ohio State’s Center for Human Resource Research.

The findings suggest that younger generations may continue to add credit card debt into their 70s, and die still owing money on their credit cards.

“If what we found continues to hold true, we may have more elderly people with substantial financial problems in the future,” said Lucia Dunn, co-author of the study and professor of economics at Ohio State University. Our projections are that the typical credit card holder among younger Americans who keeps a balance will die still in debt to credit card companies.”

The results suggest that a person born between 1980 and 1984 has credit card debt substantially higher than debt held by the previous two generations: on average $5,689 higher than his or her “parents” (people born 1950-1954) and $8,156 higher than his or her “grandparents” (people born 1920 to 1924).  In addition, the results suggest younger people are paying off their debt more slowly, too.  The study estimates that the children’s payoff rate is 24 percentage points lower than their parents’ and about 77 percentage points lower than their grandparents’ rate. 

But the study also did uncover some good news: Increasing the minimum monthly payment spurs borrowers to not only meet the minimum, but to pay off substantially more, possibly eliminating their debt years earlier.

The study underscores the challenges younger folks are facing that cause and encourage debt.  In addition to the economic woes under which we all labor, are cultural changes that encourage spending.  Stuart Vyse, professor of psychology at Connecticut College, describes them in his book "Going Broke: Why Americans Can't Hold On to Their Money."  Professor Vyse argues that the mountain of debt burying so many of us is the inevitable byproduct of America's turbo-charged economy and, in particular, of social and technological trends that undermine self-control, including the rise in availability and use of the credit card, increase in state lotteries and casino gambling, and expansion of new shopping opportunities provided by toll-free numbers, home shopping networks, big-box stores, and the Internet which create twenty-four hour instantaneous marketplaces.  Professor Vyse reveals how vast changes in American society over the last 30 years have greatly complicated our relationship with money. 

These trends and harsh realities should inform our financial, estate, and business succession planning. 

Beware Asset Protection Plan Scams

The following excerpt is reprinted from an excellent article written by Forbes contributor, Todd Ganos, and posted online here.  I am a firm believer in asset protection strategies as part of a comprehensive estate, financial, and/or business succession plan.  That being said, the number of dubious mass marketed and mass produced  "asset protection plans" is troubling. 

 I advise my clients that anything called an asset protection plan or asset protection trust should be considered critically and carefully.  Many of these mass marketed plans cannot survive scrutiny.  Remember, if it sounds too good to be true, it probably is. Remember also, that keeping your asset protection strategies secondary to other legitimate estate, financial, or business succession objectives is key to their success.  In this regard, see my article, "Asset Protection Planning- "Keep it Secret; Keep it Safe." 

Mr. Ganos writes:

Recently, a friend attended a seminar on asset protection.  Based on information that my friend provided to me, the seminar seemed to be what has become a disturbing trend.

To be certain, asset protection is an important discipline within the field of wealth management.  Asset protection might also be called risk management.  As one might imagine, there are a number of ways to implement asset protection/risk management.  And, it is not uncommon for asset protection/risk management issues to intertwine with other disciplines, such as estate planning and tax planning.

So, how might a seminar on asset protection be a scam?  Perhaps you have heard the saying: if all you have is a hammer, everything looks like a nail.  What typically occurs in one of these seminars is that the presenter whips up fear about gold-diggers filing frivolous lawsuits attempting to get at your hard-earned money.  Typically, the presenter’s solution is not an interdisciplinary approach to an individual’s circumstances.  Instead, the presenter’s solution seems to always lead to a family limited partnership, a Nevada “secret” company, or an asset protection trust in a favorable jurisdiction . . . which is what the presenter specializes in.  And, whatever the solution is, it is cloaked in an aura of “only the elite know about this.”

Private Nurses for Home Care

Patricia B. Gray, contributing writer for Money Magazine has written an excellent article regarding private nursing for home care.  She introduces this increasingly common alternative to institutional care for seniors:

You may think of private nurses as a luxury for the ultra-rich, like a butler or personal chauffeur. But hiring in-house medical care has become an increasingly viable option for regular folks too.

You can use a nurse to ease the transition from hospital to home after surgery or a major illness, or even to administer chemotherapy if you want to stay out of a clinic or hospital. Visits from a private nurse can help your elderly parent remain in his or her own house safely.

Care at home can be a less expensive option than an extended stay in a nursing facility, says Kathleen Kelly, executive director of the Family Caregiver Alliance, a San Francisco nonprofit. Still, the cost can add up quickly, and you may have to cover most of it yourself. So it pays to know whether you need a nurse and how to pick one.

Estate Tax Uncertaintly Continues

The most common question I have been asked as we start the year 2011, is whether the new tax law ends the uncertainty regarding estate taxes.  Unfortunately, despite the new law reducing the federal estate tax, uncertainty continues as a planning variable. 

For most of the year 2010, we expected 2011 to usher in a fifty-five percent (55%)  federal estate tax on all assets over one million dollars. Toward the end of 2010, President Obama signed legislation reducing this exorbitantly high death tax to thirty-five percent (35%) on assets exceeding five million dollars in value.  However, the reduction only applies for the years 2011 and 2012.

If you plan on dying in the next two years, you are probably relieved. If you plan on living well past 2012, uncertainty regarding the marginal rate and exemption amount remains.   Unless changes are made to the law,  the estate tax rate for 2013 will revert to fifty five percent (55%), with only a one million exemption amount.

When planning, although we hope for the best, we must plan for the worst.  The worst case planning scenario, then, would assume that you survive until January 1, 2013, at which time you pass and realize a fifty-five percent (55%) tax on all assets (including the value of life insurance payable as a consequence of your death), in excess of one million dollars in value. 

So, here are my rules of thumb (my thumb, my rules :-)).   I generally recommend that my clients consider setting up an Irrevocable Life Insurance Trust (ILIT) for all life insurance policies over two hundred and fifty thousand dollars ($250,000.00) and consider setting up a Bypass or Credit Shelter Trust for all marital estates that exceed one million dollars. A fifty-five percent (55%) tax means a substantial loss of wealth, and a substantially reduced inheritance.  Most people will want to plan to reduce that tax burden as much as possible. 

As the estate laws change, I will continue to update you so that you may better serve your clients and protect yourself and your family.

A Dramatic Loss of Wealth: Seniors Scramble for Solutions

A recent study suggests that current economic woes affecting the value of real estate will strip most people of wealth, with the hardest hit being those currently poised to retire.

The Center for Economic and Policy Research extrapolated from data from the 2004 Survey of Consumer Finance to project household wealth under three alternative scenarios. The first scenario assumes that real house prices fall no further than their level as of March 2008. The second scenario assumes that real house prices fall an additional 10 percent as a 2009 average. The third scenario assumes that real house prices fall an additional 20 percent for a 2009 average.

The projections show that the vast majority of families between the ages 49-54 will have little or no wealth by 2009 in any of these scenarios and that those persons who just be approaching retirement will have very little to support them-selves in retire-ment other than their Social Security.

The projections also show that a large number of families will have little or no equity in their homes by the end of 2008. Finally, the projections show that the renters within the same wealth categories in 2004 will have more wealth in 2009 than homeowners in all three scenarios.