Ohio FTCs—Formation and Governance

Given the staggering statistics regarding family businesses in America, it's important for family business owners to learn about and consider the option of an Ohio Family Trust Company (“FTC”). It's not surprising that FTCs are rising in popularity today. Below we provide basic information regarding the formation and governance of an Ohio FTC.

Studies have shown that the greatest part of America’s wealth lies with family-owned businesses. In fact, family firms comprise 80% to 90% of all businesses in North America. It has been estimated that 40.3% of family business owners expect to retire within the next several years. Interestingly, 70% of family businesses owners indicate the desire to “pass on” the business to the next generation. Looking further ahead, only 12% of businesses survive into the third generation and a mere 3% into the fourth generation and beyond. These statistics should be a wake-up call to all family business owners desiring to have the family business continue across generations. Forming an FTC can bridge this gap between what family business owners want for the future and what is actually happening in the family business and family today.

Now recognizing the need to understand the basics of an FTC, let’s consider the formation, operation and governance of an Ohio FTC. Ohio allows both licensed and unlicensed FTCs (although for fiduciary protection most unlicensed FTCs adhere to a majority of the licensed requirements). The decision as to whether to form a licensed or unlicensed FTC depends on the needs of the particular family as well as the ‘clients’ anticipated to be served by the FTC. Unlicensed FTCs are not regulated or audited by state banking regulators. However, a licensed FTC will be audited regularly by state banking regulators – some families may prefer having this degree of external oversight. Another determinative factor in the licensed versus unlicensed FTC discussion is understanding who the FTC seeks to serve. A licensed FTC has a slightly broader definition of who can be considered a Family Client (as defined in the Ohio Family Trust Company Act). However, both licensed and unlicensed FTCs can serve family members defined to include lineal descendants, adopted children, stepchildren, foster children, and spouses/spousal equivalents of a Designated Relative. In addition to the Family Members outlined above, the following are allowable clients while still being an unlicensed FTC (defined as the Family Clients):

• Former Family Members
• Key Employees
• Estates of Family Clients
• Charitable Entities w/all contributions from Family Clients
• Irrevocable Trusts funded by Family Clients w/defined current beneficiaries
• Revocable Trusts w/Family Clients as grantors
• Business entities owned & for the benefit of Family Clients

Legal formalities of a licensed FTC include, but are not limited to: completing an application and submitting it to the Ohio Division of Financial Institutions with a $5,000 application fee; maintaining office space in Ohio; maintaining a fidelity bond of not less than $1M; securing directors and officers insurance of not less than $1M; and pledging to the Ohio Treasurer $100,000. An FTC must also maintain capital of at least $200,000, but not more than $500,000. An Ohio FTC must perform at least three of its trust activities in Ohio as well as hold two of its quarterly calendar meetings with a quorum of directors physically present in Ohio. Further, in Ohio, the Board is required to have a minimum of three directors and at least one of them must be an Ohio resident. The Ohio Department of Financial Institutions will audit the activities of a licensed FTC not later than 18 months after receiving its license and thereafter at least every 36 months. The only statutory requirement for an unlicensed FTC is submitting an annual affidavit with minimal information to the Ohio Department of Financial Institutions.

Once formed, an FTC operates similarly to a “regular” commercial trust department/institution. The governance structure of an FTC typically consists of the following components if established as a corporation (a LLC structure is also permissible under Ohio law): Board of Directors (comprised of family members as well as Independent Directors), Distribution Committee(s), Investment Committee and an Amendment Committee. However, an FTC is very flexible in responding to the specific ‘personality’ or needs of an individual family. For example, we have clients with one or more of the following committees: a) Education Committee; b) Family Business Asset Committee; or 3) Engagement Committee. These Committees were created in response to specific needs of a family ranging for the oversight of the family business asset to educating family members on a wide range of topics to the planning of ‘family glue’ events to harmonize the family. Designing the structure of an FTC responding to the unique challenges of each family can be key to the long-term success of the FTC.

 

^{Disclosures: The information provided is general in nature, is provided for informational purposes only, and should not be construed as financial or legal advice. The views expressed by the author are based upon the data available at the time the article was written. Any such views are subject to change at any time. Clearstead disclaims any liability for any direct or incidental loss incurred by applying any of the information in this article. All financial decisions must be evaluated as to whether it is consistent with your objectives and financial situation. You should consult with a financial, tax, or legal professional before making any decisions.}