Ohio Family Trust Companies—Operational Requirement

This article addresses the operational requirements of an innovative estate planning tool, an Ohio licensed family trust company.  Even if launching an unlicensed family trust company, it is considered “best practice” to implement at least some of these operational requirements for fiduciary protection and situs nexus.

Before discussing the key operational requirements of operating a licensed FTC in Ohio, it is helpful to first discuss the importance of conducting pre-formation due diligence.  Steps to take during the due diligence period include reviewing any applicable trust documents for successor trustee procedures, any limitations to corporate trustees (i.e. capital or asset under management requirements) and the beneficiary relationships to the proposed Designated Relative.  To the extent not included in the aforementioned documents, language restricting the transfer of shares of the family-owned company should be considered as well as administrative terms addressing trustee removal, waiver of the duty to diversify family business asset, trust termination provisions and precatory language to guide the FTC as to the Grantor’s distribution intentions.   Lastly, clear communication and education with family members regarding the forthcoming formation of the FTC is vital to a successful transition.  This can be done in various ways including, but not limited to, family meetings, utilizing a task force, newsletters, educational videos and individual shareholder meetings.

Now to the nuts and bolts of operating a licensed FTC in Ohio.  As promised in our last edition, here is a list of the key requirements of a licensed Ohio FTC

• Complete an application and submit to the Ohio Division of Financial Institutions with a $5,000 application fee;
• Maintain capital of at least $200,000, but not more than $500,000 as determined by the Ohio Division of Financial Institutions
• Pledge to the treasurer of Ohio $100,000 in an account of the treasurer of Ohio
• Maintain a fidelity bond of not less than $1M
• Secure Directors & Officers insurance of not less than $1M
• Maintain office space in Ohio
• Have a minimum of three directors or managers, at least one of which is an Ohio resident
• Hold at least one regular meeting during each calendar quarter with at least two board meetings at which a quorum of board members is physically present and are held in Ohio
• Board of Directors must quarterly review financial statements or, in the alternative, an annual financial audit must be performed
• Board of Directors must take an oath to administer the Family Trust Company affairs diligently & honestly
• The name of the company must include “family trust company” or “FTC”; Note, an unlicensed family trust company may not include these terms in its name
• Employ or contract with at least one individual on a part-time basis to provide services to the FTC
• Perform at least three of the following trust administration activities wholly or partially in Ohio:
  • Annual account reviews
  • Annual investment reviews
  • Trust accounting
  • Account correspondence
  • Completion of trust tax returns
  • Distribution of account statements
• Prepare (and follow) a Policy & Procedure Manual outlining the FTC’s operations
• The Department of Financial Institutions will audit the activities of the FTC not later than 18 months after receiving its license and thereafter at least every 36 months

Some additional statutory highlights of the Ohio Family Trust Company Act to keep in mind are the following:

• FTCs are taxed under the Commercial Activity Tax (“CAT”)
• Transactions between the FTC & related parties must be disclosed to the FTC Board
• FTC may have only one office location in Ohio
• FTC licenses are not transferrable
• Information relative to Ohio FTC’s is to be treated as confidential unless needed for an investigation
• FTCs may not:
  • Accept deposits
  • Provide mortgages
  • Hold itself out to the public or advertise services to the public

Once your FTC is officially licensed and operating there are several ongoing operational considerations that should be highlighted as well.  Possibly of utmost importance is the need for documentation of all FTC activities and decisions.  For example, thorough minutes, all investment decisions, distribution decisions and policy decisions should be documented in writing. Simply put, document, document, document!

^{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.}