Legacy Across Generations: Utilizing a Family Trust Company in a Family’s Wealth Strategy

Legacy Across Generations: Utilizing a Family Trust Company in a Family’s Wealth Strategy

Multi-generational family engagement is always difficult and has become more challenging due to many factors, but a few stand out:

o   The speed of market change has created more families of wealth that no longer have an operating company as a center of focus

o   The prevalence of trusts as the primary vehicle for intergenerational wealth transfer – which has created a generation of beneficial owners

o   Expectations for interactions are different—the rising generation wants a seat at the table

 To overcome these factors, intentional choices in a family enterprise are becoming even more important. Connecting and building are two focuses that can drive behaviors within families of wealth to hold the family and the wealth together. Most family enterprises want to keep the family connected, while simultaneously building their wealth together. However, families that do not take provocative steps can easily end up with depleted wealth and a disconnected family.

Family financial support structures are necessary to connect the family together to span generations allowing the wealth to continue to build.  A family trust company (“FTC”) is a structure that can bring multiple generations “under the same roof” and provide the constructs for the senior generations to “sit at the same table” with the rising generation to transition wisdom infused with the family values.

What is an FTC?

An FTC is a family owned and controlled entity authorized by certain state statutes 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, most states have definitions that expand beyond simply lineal descendants. In essence, the FTC institutionalizes the personal 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.

Families Setting Up an FTC

Families interested in transferring wealth across future generations – particularly if using long-term trust planning – should consider forming an FTC. There are several key advantages to doing so.

First, the formation of an FTC can help families achieve the delicate balance between the present and future by providing a flexible and adaptable structure, allowing family participation in controlling the family’s wealth strategy. This flexibility permits individual family members to decide whether they want to be actively involved or to choose passive involvement as a trust beneficiary. Family members can influence important trust decisions including investment strategies. This involvement places an FTC in the unique position to assure that family values and goals inform trust decisions to help preserve the family legacy. Additionally, the FTC offers flexibility in managing concentrated positions and opens up opportunities in a broader spectrum of investing since the family can directly control these decisions through the FTC as trustee of family trusts. 

Second, an FTC is ideal for families doing multi-generational estate planning. When doing multi-generational estate planning, one of the considerations is not only who will serve as the current trustee, but future trustees given the “forever” nature of multigenerational planning. 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 FTC serve as trustee may encompass the “best of both worlds,” including characteristics of a corporate trustee and an individual trustee. An FTC accomplishes a permanent trustee solution by standardizing the family’s trustee succession plan across all family members’ trusts. And, moreover, an FTC can insulate family advisors and family members from personal fiduciary liability if serving as an individual trustee.

Thirdly, a key advantage of an FTC is the ability for a family to keep family members engaged in the family enterprise.  One way an FTC can accomplish this is by establishing a family governance platform that can clearly define the process for developing the next generation of successors through leadership roles in the FTC or educational programming sponsored by the FTC.  Typical roles in an FTC include Directors, Officers and Committee membership.  FTC Board of Directors are frequently comprised of Family Branch Directors who are given the opportunity to demonstrate, or learn leadership skills.  In addition, two optional committees for an FTC – an Education Committee and a Family Engagement Committee – can help, respectfully, educate family members as well as plan ‘family glue’ activities to keep the family connected. With this broader breadth of opportunities, more family members may find an opportunity of interest that matches their skills to provide them a platform to engage and ‘shine’ within the family enterprise.  When it comes to family governance, transparency and consistency of shared information can go a long way in creating family harmony.  Humans have a tendency to “fill in the gaps” when they don’t have complete information – frequently “filling in the gaps” with incorrect information.  When you reach the “cousin consortium” level, there are more family members that may have disparate information potentially leading to distrust.  The FTC’s reporting and family representation on the FTC’s Board of Directors can quell some of the passing of misinformation as the FTC provides consistent reporting.  Under the FTC umbrella, a family governance plan can define the family’s mission, vision and values and set forth specific family by-laws or code of conduct.  In addition, an FTC also provides a vehicle by which family members (usually the older generation) can guide other family members (typically the rising generation).  The FTC does this by engaging members through both social and educational opportunities.  For example, an FTC can plan regular gatherings of family members.  An FTC – frequently through a Family Engagement Committee - may also distribute a family newsletter, sponsor family trips and encourage philanthropic endeavors.  All of which create the opportunity for the “older generation” to pass along family values, traditions and heritage of the family to the rising generation.

Family Office vs. Family Trust Company

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.

Wealth Transfer Questions to Consider

1. How are you trying to keep your family engaged & harmonized across generations?

2. What family dynamics exist that may threaten family harmony?

3. Do you have a plan in place that all family members understand?

4. Have you thought about the legacy and support you want to provide for your grandchildren?

5. Do you have a Family Governance Plan?

Depending on the answers to the above questions, an FTC may help your family achieve the connect & build focus!

^{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.}