Welcome to the first installment in CLS Consulting, LLC’s email series designed to educate subscribers on the basics of the Ohio Family Trust Company Act. This installment will provide an overview on what exactly a family trust company is, families who should consider forming one (or at least understand the option) and the key advantages in doing so. We hope to provide you with additional installments on a two-week cycle.
A family trust company (“FTC”) is a family owned and controlled entity which limits its activities to the management of assets for the benefit of a single-family lineage. Although the focus is on a single-family lineage, the technical definition of a Family Client under the statute expands beyond lineal descendants (as further defined below). In essence, the FTC institutionalizes the personal, business and investment matters for a family while also striving to preserve the characteristics and intrinsic values held by individual families as they prepare for the future. Most notably, the FTC acts as a fiduciary for a particular family group and cannot provide services to the public.
While FTCs have been around since the 1990s, Ohio only recently codified their existence in 2016 with its passage of O.R.C Chapter 1112. Specifically, Ohio law authorizes an FTC to operate as a corporate trust company (corporation or LLC) and to serve as a trustee for “Family Clients.” Family Members are determined by degree of kinship to a Designated Relative and generally consist of spouses, spousal equivalents, former spouses, adopted children, step children and foster children. Ohio further expands allowed Family Clients to also include family charities, family estates, trusts set up for family members, key employees and entities owned and operated by family members. Once selected, the Designated Relative may not be changed under Ohio law.
In short, families interested in transferring wealth across future generations, whether liquidity, a family-owned business, real estate holdings or partnership interests (particularly if held in trust) should understand and consider forming an FTC. There are several key advantages to do so. First, an FTC is ideal for families wanting to remain involved in and maintain control over family assets held in trust while also seeking to prepare for the future of both the family and the family business. In an FTC, family members remain involved as members of both the board of directors and committees. Therefore, family members can continue to influence important trust decisions including investment and shareholder decisions. This involvement places an FTC in the unique position to assure family values and goals inform trust decisions helping to preserve the family legacy. And, moreover, it can do so while insulating family advisors and family members from personal fiduciary liability if serving on the board or committees.
Second, an FTC is ideal for families doing multi -generational estate planning as well as family business succession planning. Indeed, a properly formed FTC can provide stability to the often chaotic and contentious transition of ownership in and management of the family business by establishing transparent transition and succession plans. Specifically, an FTC accomplishes a permanent trustee solution by standardizing the family’s trustee succession plan across all family members’ trusts. A key aspect of an FTC is its ability to provide transition or succession options even if not all members of succeeding generations have an interest in actively participating in the family business, but they still want to continue to own shares and be a part of the wealth distribution. By openly addressing and preparing for these difficult issues, an FTC can preserve the family, protect its assets and businesses through multiple generations into the future.
An FTC also strives to educate and engage family members across all generations. As compared to other trustee options, an FTC has a greater appreciation for a family’s often special relationship with its assets as well as the needs of particular family members. As a result, an FTC can provide tailored education opportunities for all family members including the rising generation as well as offer appropriate engagement opportunities for a wider number of family members. Consequently, an FTC is an opportunity to keep the family cohesive and working together across all generations.
One final note, it is important to distinguish an FTC from a “family office.” Both an FTC and a family office can provide services such as tax, accounting, financial, legal and investment services, among others to a single family. An FTC, however, also acts as a trustee with fiduciary powers (and corresponding duty) to the family and must be established in a state that has specific statutes that authorize family trust companies. The family office does not have any fiduciary powers and can be set up in any state. In short, a family office is not an FTC, but an FTC may also operate as a family office.