Multi-generational family engagement is difficult and has become increasingly more so for many reasons:
- The acquisition market activity has created more families with wealth but without an operating company as their “family glue”
- The ever-increasing use of long-term trusts has moved ownership from direct ownership to beneficial ownership
- The rising generation wants a seat at the table, shifting family dynamics
To overcome these factors, intentional choices in a family enterprise are increasingly important. Focusing on connecting and building can drive behaviors within families to hold both the family and the wealth together. However, families that do not take proactive steps can easily end up with depleted wealth and a disconnected family.
Family financial support structures are necessary to connect the family together, spanning generations and allowing wealth to continually 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, transitioning 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 just lineal descendants. However, an FTC cannot provide services to the public. 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.
Families Setting up a FTC
Families interested in transferring wealth across future generations – particularly using long-term trust planning – should consider forming an FTC. There are several key advantages to doing so.
The formation of an FTC can help families achieve a delicate balance between present and future by providing a flexible and adaptable structure and allowing family participation in controlling their wealth strategy. This flexibility permits individual family members to decide whether they choose to be actively involved or passively involved as a trust beneficiary or grantor. 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 and preserve family legacy. Additionally, family involvement in an FTC offers flexibility in managing concentrated positions and opens up opportunities to a broader spectrum of investing.
Additionally, an FTC is ideal for families focusing on multi-generational estate planning. When doing multi-generational estate planning, one of the key considerations is not only who will serve as the current trustee, but who will serve as future trustees. Grantors may have family members 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 an FTC serve as trustee encompasses the best of both worlds, including characteristics of both 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 insulates family advisors and family members from personal fiduciary liability while remaining personal and family-focused.
Another key advantage of an FTC is the ability for a family to keep family members engaged in the family enterprise. This can be accomplished by establishing a family governance platform that clearly defines 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 members. An FTC’s Board of Directors is frequently comprised of individuals from each branch of the family allowing them the opportunity to demonstrate or learn leadership skills. In addition, two optional committees – an Education Committee and a Family Engagement Committee – can educate family members and 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 skillset, providing them with 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 those gaps with incorrect information. As the family continues to grow, there are more family members that may have disparate information, potentially leading to distrust. The FTC’s reporting and family representation on their Board of Directors can quell the passing of misinformation. 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 provides a vehicle by which family members (usually the older generation) can guide the rising generation, engaging members through both social and educational opportunities. For example, an FTC can plan regular gatherings of family members, distribute a family newsletter, sponsor family trips, or encourage philanthropic endeavors – frequently though a Family Engagement Committee -creating the opportunity for the older generation to pass along family values, traditions, and heritage.
Wealth Transfer Questions to Consider
While they may serve similar roles, 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 the corresponding duty) 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.
Family Office vs. Family Trust Company
- How are you trying to keep your family engaged & harmonized across generations?
- What family dynamics exist that may threaten family harmony?
- Do you have a plan for the future in place that all family members understand?
- Have you thought about the legacy and support you want to provide for your grandchildren?
- 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!
Information provided in this article is general in nature, is provided for informational purposes only, and should not be construed as financial, tax or legal advice.
