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.
