Welcome to the second installment in CLS Consulting LLC’s email series designed to educate subscribers on the basics of an Ohio Family Trust Company (“FTC”).  This installment will highlight some staggering statistics regarding family businesses in America.  These statistics demonstrate the importance of understanding the FTC option as well as the rising popularity of FTCs today.  This installment will then 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 t$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, I 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.   

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.