Multigenerational Trust Planning—Thinking Out of the Box

MULTIGENERATIONAL TRUST PLANNING:  THINKING OUT OF THE BOX ABOUT TRUST PROVISIONS AND TRUSTEE OPTIONS CONSIDERING AN OHIO FAMILY TRUST COMPANY

Based on a webinar presented by the author, Cindy Steeb, MBA, JD for OSBA-CLE

Introduction

When doing multigenerational planning and drafting trusts that go on in perpetuity, a deeper consideration of standard trust provisions, providing a method in the trust for input from a beneficiary and determining trustee options are all important. Even definitions that seem “standard” like lineal descendant deserve a closer look when contemplating medical technology and its advancements over time. To address this, and other challenges, building some flexibility into trust documents to handle unforeseen circumstances can prevent family disharmony and potential litigation in the future. In addition to planning for unforeseen circumstances, another concern with long term planning is many beneficiaries exclaim they “hate” being a beneficiary of a trust. When digging deeper, the disdain frequently revolves around the beneficiary feeling they have no “say” in decisions related to the trust. Essentially, they don’t feel treated as an adult by the trustee even long after reaching the age of majority. So, in addition to building in flexibility to address unknown issues of the future, when doing long term trust planning consider creating a “voice” for a beneficiary with built-in checks and balances to alleviate some of these beneficiary concerns. Finally, thinking through trustee options for the future may be challenging. Grantors frequently have family members or trusted advisors they have confidence in serving now as trustee but establishing a process for selecting trustees over time for a long term trust can stymie a Grantor. For families doing multigenerational planning, an Ohio family trust company may be the solution to solve this quandary since as an entity it goes on in perpetuity!

Dynasty Trust (or Perpetuity Trust or Multigenerational Trust) Planning

As a starting point, what is a Dynasty Trust (sometimes called a Perpetuity Trust or Multigenerational Trust)? It is an irrevocable trust designed to pass wealth through succeeding generations without incurring transfer taxes. Currently, a Grantor can pass $11.7M of assets to future generations using a Dynasty Trust without paying gift taxes. Once the assets have been transferred to the Dynasty Trust, they are no longer subject to estate or gift taxes regardless of how much the assets appreciate. The assets continue to be held “forever” for the benefit of, typically, the Grantor’s lineal descendants.

Dynasty Trusts can be a favorable shareholder transition method for family businesses in situations where fewer family members are working in the business, but where the traditional exit strategies—such as selling the family business or buying out family members not working in the company—are not consistent with the family’s mission, vision and values. For example, family members may want to stay connected to the family legacy as a shareholder and continue to receive an economic benefit from the company (e.g., dividends), but not want to be involved in the day-to-day operations of the family business. In addition, transferring some ownership of the family business to a Dynasty Trust reduces redemption pressure on the family business at the death of a shareholder that owes estate taxes related to the family business as an illiquid asset.

Asking a family business owner questions regarding the ownership of the family business may be a starting point for a discussion around creating a Dynasty Trust to hold ownership of the family business. Some starting point questions may be:

• Is there a potential for ownership in your family business to be fragmented in the future so no one person or small group is in control to make shareholder decisions?
• Is there a potential for ownership in your family business to be fragmented in the future so no one person or small group is in control to make shareholder decisions?
• Is the future ownership of your family business clearly defined? How will shares pass through future generations in various family branches?
• If you unexpectedly died, would your business have to be sold to pay estate taxes?
• Have you projected the value of shareholder ownership into the future based on current growth?• Have you thought about the legacy and support you want to provide for your grandchildren?

When creating a Dynasty Trust it helps to hit the “pause” button and look more closely at template trust provisions to ensure the provisions strive to harmonize the family, consider medical advancements and acknowledge family values. For example, the definition of a lineal descendant, once thought to be simple, has become more complex over time. Far beyond the standard consideration of the age by which a child must be adopted to be considered a lineal descendant, the lineal descendant definition should now contemplate intentional parentage. Births as a result of surrogacy should be excluded as should DNA test evidence resulting from reproductive technology such as sperm donation that doesn’t involve the intention of parenthood. However, a couple striving intentionally to create a parent/child relationship through the use of assisted reproductive technology should be encompassed by the definition of lineal descendant. With the rapid advancement of technology, allowing for the trustee to make a determination of inclusion as a lineal descendant may also be considered. Family values play a role in expanded definitions so reviewing definitions with the Grantor is imperative.

Similar to the definition of lineal descendant, when a spouse is a beneficiary of a trust, the definition of spouse should be reviewed. With over 50% of marriages ending in divorce and recognizing that a marriage is over long before a final decree is issued, the question of when a spouse should cease being a trust beneficiary needs addressed. One approach to the definition of spouse considers the inclusion as a trust beneficiary only a spouse that is married to and not living separate and apart (except for medical or professional reasons) with no legal action initiated to terminate the marriage. Further, if the spouse was not living separate and apart (except for medical or professional reasons) at the person’s death, the spouse would cease to be a beneficiary upon remarriage.

Another provision that allows for flexibility and unforeseen circumstances is including powers of appointment to adjust the disposition of the assets. Careful consideration needs to be given and discussed with the Grantor as to the universe a beneficiary can appoint assets to including, but not limited to, lineal descendants of the Grantor (the Grantor’s parents depending on the size of the family), spouses and/or charity. Considering if assets must remain in trust or if they may be directed to be distributed outright is part of the consideration. For example, a power of appointment may distinguish between the disposition of non-family business assets and family business assets. Non-family business assets may be distributed outright or held in further trust while family business assets must remain in trust to protect the family business across generations.

Turning to beneficiaries’ concerns over lack of a “voice” in trusts, an area of the trust where a “voice” for the beneficiary can be included is the removal of the trustee. One method of including a check and balance is to require the beneficiary to secure the approval of a Trust Protector in the removal of a trustee. Further, another technique is to require a “cooling off period” (e.g., 3 months or 6 months) during which the beneficiary, Trust Protector and trustee try to work out differences before the removal is effective to mitigate possible damage related to family disagreements. Another check and balance is to create a list of characteristics to “box in” the requirements of a successor trustee. The beneficiary, with the Trust Protector’s approval, and based on specific requirements can select the successor trustee. Similarly, allowing a beneficiary to select the Trust Protector they work with within a “box” of characteristics provides the beneficiary with more engagement with the trust.

Additional provisions for careful contemplation include, but are not limited to, the following: basket versus separate trusts, trustee compensation limitations, anti-contest, notice waiver (or designating a surrogate), waiver of the duty to diversify, and indemnification of trustee. Also, particularly for trusts that provide the trustee with wholly discretionary distribution authority, having the Grantor document intention language that provides non-binding guidance to the trustee can be an invaluable resource as the trustee considers discretionary distributions.

Beyond the trust provisions an important consideration is not only who will serve as the current trustee, but future trustees given the “forever” nature of a Dynasty Trust. 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 family trust company serve as trustee may encompass the “best of both worlds” including characteristics of a corporate trustee and individual trustee.

Below are some characteristics of each trustee option:

Traditional Corporate Trustee

• Regulated so oversight of decisions
• May have rigid policies
• Conservative in considering assets under management
• More potential for changing personnel
• Can be expensive
• Accountable providing beneficiary reports and notices
• May appear impersonal with less knowledge of family

 Individual Trustee

• Sensitive and knowledgeable about family
• Flexible/Subjective, but saying “no” may be difficult
• Provides privacy
• Not expensive
• Not a permanent solution since people pass away
• Takes on individual fiduciary liability
• Understands family dynamics

Private Family Trust Company

• Confidential with significant privacy
• Permanent trustee solution
• Standardizes the trustee across family branches
• Personalized service customized to the family vision and values
• Liability protection
• Flexibility in managing concentrated positions
• Infused with family values

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 Ohio Family Trust Company Act (Ohio Revised Code Chapter 1112) expands beyond strictly lineal descendants. 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 codified their existence in 2016. Specifically, Ohio law authorizes an FTC to operate as a trust company (corporation or LLC) and to serve as a trustee for “Family Clients.” The definition of a Family Client starts with the definition of a Family Member. A Family Member is determined by degree of kinship to a Designated Relative and generally consists of spouses, spousal equivalents, former spouses, adopted children, stepchildren and foster children. Ohio further expands allowed Family Clients to include family charities, family estates, trusts set up for family members, key employees and entities owned and operated by family members.

Families doing long term trust planning who are interested in transferring wealth across future generations, whether liquidity, a family-owned business, real estate holdings or partnership interests should understand the FTC as a trustee option. 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 ensure 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 carefully designed 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 working in the family business, but they still want to continue to own shares and be a part of the wealth distribution. By addressing difficult issues in its design, an FTC can harmonize the family and protect the family business or other assets through time over multiple generations.

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 special relationship with its family business or other assets balanced with the needs of individual 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 with multiple generations working together alongside trusted advisors.

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 (family offices can serve multiple families). An FTC also has fiduciary powers to act as trustee for family trusts and must be established in a state that has specific statutes that authorize FTCs. 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.

Case Study

From a short case study perspective—consider the family with five second generation siblings (“G2”). Each G2 sibling owned shares of the family business and wanted to set up a Dynasty Trust to pass the shares of the company to his lineal descendants. The family quickly realized that each G2 sibling could select a different trustee. Each trustee could have a different perspective on the desired performance of the family business, have varying knowledge about the company and/or family, and have a different perspective on their willingness to hold the family business as a concentrated asset in the trust. The impact of separate trustees could result in additional distractions to management at the family business as the different trustees reach out requesting information or questioning management decisions. Instead, the family established an FTC with a board consisting of Family Branch Representatives (one from each of the five family branches) as well as some independent, trusted advisors. The family and trusted advisors also served on various committees of the FTC. The FTC Board elects the Directors on the family business board as well as oversees the Committees responsible for i) directing the investing of any liquidity in the trusts; ii) distributing assets from the trusts; and iii) providing educational programming to the beneficiaries of the trusts (family members). Therefore, through establishing an FTC to serve as Trustee of the family’s Dynasty Trusts, the family members remain the dominant voice in guiding the family and the family business across generations. It is important to note that the operations of the family business remain separate from the FTC and does not change.

Conclusion

Creating solutions for families doing long term trust planning is more involved and moves the thought process for planning on a continuum from revocable planning to irrevocable planning. The irrevocable planning can be viewed as legacy planning necessitating the creation of entities and structures that are designed to keep a family together across generations. Taking the time to contemplate family values and incorporate these values as the family’s vision for the future can also help avoid probate litigation in the future.

Reprinted from Probate Law Journal of Ohio available in print and on Westlaw with permission from Thomson Reuters. Copyright © 2021. Further use without permission of Thomson Reuters is prohibited. For further information about this publication, please visit https://store.legal.thomsonreuters.com/law-products/Newsletter/Probate-Law-Journal-of-Ohio/p/100028597.

^{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.}