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In Fall 2008, I had the opportunity to join an ad hoc subcommittee comprised of members of the Tax and Real Property, Probate and Trust Law Sections of the Florida Bar to prepare and submit comments to the IRS in response to a proposed Revenue Procedure contained in IRS Notice 2008-63, which addressed the income, estate, gift and GST tax consequences of Private Trust Companies (also known as “Family Trust Companies” or FTCs). After submitting comments, the subcommittee extensively studied the existing legislation of other states which currently have statutes authorizing the formation and operation of FTCs. Members of the Business Law Section and Florida Bankers Association were added to the subcommittee along the way. Given the benefits offered by FTCs, the subcommittee concluded that Florida should pursue similar legislation.
In general, a FTC is a family owned entity (typically, a corporation or LLC) that provides fiduciary services to family members similar to those that can be provided by an individual or corporate trustee. An FTC may offer a full range of fiduciary services, such as acting as trustee of one or more trusts administered for the benefit of family members, providing investment advisory services, preparing trust accountings and tax returns, or providing other wealth management and agency services.
FTCs differ from public trust companies in at least two significant respects:
1. FTCs are prohibited from providing trust services to the general public; and
2. FTCs are subject to substantially less state regulatory requirements, such as reduced capital requirements and regulatory filings.
One primary purpose in utilizing a FTC to serve as trustee is to enjoy the advantages of a full service independent corporate trustee while maintaining the trust administration within the family. A FTC may prove especially useful where the trust assets include interests in a family business. Although a FTC can serve as an alternative to a corporate or individual trustee, it is generally not created to save on administrative expenses. In fact, the initial formation and ongoing administration of a FTC can be very expensive and will likely be one of the primary reasons their use will be limited to larger, wealthier families.
Currently, at least 14 states have enacted legislation authorizing the formation of FTCs. However, states are far from reaching a standardized approach. One significant legislative distinction lies in the scope of the term “Family Member”, which is generally the restricted class of persons to whom a FTC’s services are available. For example, Nevada has an extremely broad definition of the term “Family Member”, which includes (1) persons within the tenth degree of lineal kinship to a designated individual, (2) officers, directors and managers of a family affiliate, and (3) charitable entities of which a family member is an officer, member of the board or trustee. New Hampshire, on the other hand, defines “Family Member” to include persons within the fifth degree of lineal kinship and only charitable entities created by a family member. Moreover, New Hampshire explicitly permits a FTC to provide fiduciary services to up to 15 non-family member employees of the FTC or of a trust or company that otherwise qualifies as a “Family Member.” Most states do not permit a FTC to provide any fiduciary services to non-family members.
The subcommittee has nearly completed its draft of the proposed FTC legislation. In an effort to improve the quality and comprehensiveness of such legislation, and reduce future opposition, comments have been and continue to be sought from sources outside the subcommittee, including the Florida Office of Financial Regulation, Florida Bankers Association and John Duncan, who was a primary drafter of FTC legislation enacted in Nevada and North Carolina.
The subcommittee has focused considerable attention on distinguishing Florida as an attractive state for the formation and operation of FTCs. Specifically, the subcommittee has organized all proposed FTC statutes into a single, comprehensive chapter (i.e., Chapter 659) to aid individuals in understanding the applicable laws. Moreover, the minimum capital requirements have been set at levels competitive with popular FTC states. Additionally, many of the issues that other states have left to the discretion of state regulatory agencies have instead been expressly established within the statutory framework of the subcommittee’s proposed draft. Finally, the current draft explicitly permits two families to join together in the creation of a single FTC rather than restricting an FTC to merely one family, or, worse yet, not addressing how many families can join together in a single FTC.
The subcommittee plans to present its draft of proposed Chapter 659 at the Probate Roundtable breakfast at the RPPTL meeting scheduled over Memorial Day weekend. Provided all goes well, the plan is to have the proposed legislation in final form so that it can be voted on at the RPPTL Executive Council meeting in August in Palm Beach. If approved by the Executive Council, then the proposed legislation will be included in RPPTL’s Florida legislative agenda for 2012. Check back on this blog for periodic updates on the progress of these important legislative efforts to bring FTCs to Florida.