Ohio Family Trust Company’s Educational Series – Issue 4

Welcome to the fourth installment in CLS Consulting, LLC’s email series regarding the Ohio Family Trust Company Act.  We hope that you are both enjoying and learning valuable information regarding the use of Family Trust Companies (“FTCs”) as a shareholder transition strategy  – particularly under Ohio law.  This installment will address one of the solutions a FTC can provide, serving as Trustee for a Dynasty Trust, including an example of how a family utilized a FTC specifically around the concern of different trustees for Family Dynasty Trusts.  Our next installment will focus on how a FTC can allow a family to maintain oversight of the assets transferred into trusts.   

As a starting point, what is a Dynasty Trust?  It is an irrevocable trust designed to pass wealth through succeeding generations without incurring transfer taxes such as estate and gift taxes.  A Grantor can currently pass $11.4M into the Dynasty Trust without paying gift taxes.  Once the asset has been transferred to the Dynasty Trust, it is no longer subject to estate or gift taxes regardless of how much the assets appreciate.  A Dynasty Trust is typically set up to have no termination date, but to have the assets continue to be held for the benefit of the grantor’s lineal descendants “forever.” 

Dynasty Trusts are a beneficial shareholder transition method in situations where fewer family members are working in the business, but where the traditional exit strategies – such as selling the family business or buying out family members not working in the company  –  are not consistent with the family’s mission, vision and values.  For example, family members may want to stay connected to the family legacy as a shareholder accruing the company’s economic benefit (i.e. dividends), but do not want to be involved in the day-to-day operations of the family business.  In addition, the formation of a Dynasty Trust also reduces redemption pressure on the family business at the death of a shareholder with an estate tax bill related to the family business as an illiquid asset.

When establishing a Dynasty Trust, one of the considerations is not only who will serve as the current Trustee, but future Trustees given the “forever” nature of a Dynasty Trust.  Grantors may have family members and/or advisors they are comfortable with serving today, but who will serve as Trustee for family members in the future?  Traditionally, Trustee choices consisted of either a corporate trustee or an individual (frequently a family member).  Having a Family Trust Company serve as Trustee may encompass the “best of both worlds” including characteristics of a corporate trustee and individual trustee.

Below are some characteristics of each trustee option.

Traditional Corporate Trustee
Regulated
Professional
Rigid Policies
Conservative
Changing Personnel
Expensive
Accountable
Impersonal

Individual Trustee
Sensitive and knowledgeable about family
Flexible/Subjective – saying “no” is difficult
Private
Not Expensive
Not Permanent
Individual Fiduciary Liability
Family Dynamics

Private Family Trust Company
Confidential
Permanent Trustee Solution
Institutionalize the personal, business & investment matters for a family
Personalized Service
Liability Protection
Flexibility in Managing Concentrated Positions
Infused with Family Vaules   

Forming a FTC to serve as the trustee for a Dynasty Trust serves to institutionalize the personal, business and investment matters for a family while also preserving and instilling family values in those matters.  Most, if not all, of the benefits of a FTC discussed in our first email installment equally apply to Dynasty Trusts.  It is a permanent trustee solution.  Additionally, a FTC offers personalized service, flexibility in managing concentrated positions and liability protection. 

From a Case Study perspective – consider the family with seven siblings at the second generation (“G2”).  Each of the G2 siblings owned shares of the family business and wanted to set up Dynasty Trusts to pass the shares of the company to future generations.  They quickly realized that each G2 sibling could select a different trustee.  Each trustee could have a different perspective on the desired performance of the family business, have varying knowledge about the company and/or family, and have a different perspective on their willingness to hold a concentrated asset in the trust.  The impact of separate trustees could result in additional distractions to management at the family business as the different trustees reach out requesting information or questioning management decisions.  Instead, the family established a Family Trust Company with a Board consisting of Family Branch Representatives as well as some independent, trusted advisors.  The trusted advisors also served on various committees of the FTC.  The Family Trust Company Board elects the Directors on the Board of the family owned business as well as oversees the Committees responsible for i) directing the investing of any liquidity in the trusts; ii) distributing assets from the trusts; and iii) providing educational programming to the beneficiaries of the trusts (family members).

Therefore, through establishing a FTC to serve as Trustee of the family’s Dynasty Trusts, the family members remain the dominant voice in guiding the family and the family business across generations.