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A Family Trust Company Provides Stewardship Education & Enhanced Transparency

During his earlier years, Ned, a G2 family member had the unfortunate, negative experience of a family dispute that necessitated he buyout his sibling’s stake in the family business. His father had created the business, and Ned had worked in it his entire life. However, his sibling had not worked in the business nor had the sibling developed a long-term commitment to keeping the family business private which resulted in wanting his company ownership liquidated. Ned struggled to buy out his sibling’s ownership, but he did. Because of this difficult scenario, Ned developed a heightened awareness of the need for proactive planning to avoid similar conflicts among his children as well as future generations. His primary objectives were to consolidate ownership of the family business for future generations and instill a sense of stewardship among family members, transitioning from direct ownership to a trustee/beneficiary model of beneficial ownership. Ultimately, Ned also wanted to protect his children from the conflict he experienced with his sibling.

One of the main challenges Ned faced was not uncommon for many successful businesses. In recent years, the business had experienced substantial growth, making it financially challenging for the next generation to buy out non-participating family members without hampering the company’s potential for growth. After researching various shareholder transition options, Ned settled on creating a Multigenerational Trust with an unlicensed Ohio family trust company (FTC) as the Trustee. The FTC’s Board, which meets twice a year, is comprised of Ned and his children (the beneficiaries of the Multigenerational Trust) along with two trusted advisors. Notably, Ned’s spouse is not included on the Board due to her history of keeping her distance from ownership of the business. As a result, the FTC’s governing documents were drafted with the criteria that spouses are not eligible to serve on the Board, but can serve on Committees. This reflects the current family culture and values, but can also be updated in the future. The FTC started with only one trust under its management, but with a broader plan of adding trusts over time, plus the FTC was named as the successor trustee in Ned’s revocable documents.

At his passing, a significant ownership stake of the family business will be held in trusts under the FTC’s management. Ned’s goal was to familiarize his family with the trustee function and provide transparency into how his estate plan will flow at his passing.

Then three committees set up were:

  • An Investment Committee consisting of Ned, his wife, and his children, as well as one trusted advisor with investment expertise. This committee determines how to invest the dividends that flow into the trust.
  • A Discretionary Distribution Committee comprising two Independent Directors. This committee makes decisions regarding the distribution of dividends from the family business that flow into the trust. Following best practice, the committee keeps clear meeting minutes regarding the distribution decisions made.
  • An Amendment Committee is tasked with approving changes to the FTC’s governing documents affecting tax-sensitive powers. This committee must be comprised of independent persons and is comprised of the then-serving Independent Directors.

The FTC’s governing documents also provide for a Family Business Asset Committee to be created when Ned passes since the FTC will then oversee voting shares in the trusts under the FTC’s management. This smaller subset of the Directors will be delegated the shareholder decisions of the family business thus vesting these important decisions in a group best situated to make decisions.

Notably, Ned’s story demonstrates how an FTC can evolve over time as the needs of the family and trusts under management increase. However, in the meantime, this simple FTC structure is providing the educational opportunities and family engagement Ned desires for his children to prepare to be good stewards as the future beneficial owners of the family business upon his passing.

The information provided is general in nature and is not a testimonial or endorsement by any existing or potential client. No compensation was provided directly or indirectly for use of the information. The information provided is generalized based on hypothetical backgrounds that led to the approach discussed.

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