Florida family trust companies: tax and nontax considerations.

• Author: Malec, Brian M.

On June 13, 2014, Governor Scott signed the Florida Family Trust Company Act, creating F.S. Ch. 662. The act, which becomes effective October 1, 2015, governs the formation and operation of family trust companies (FTC) in Florida. At least 14 other states (1) currently have legislation authorizing FTCs (private trust companies). The act, together with favorable trust law and the absence of a state income tax, should allow Florida financial, banking, accounting, and legal service providers to gain a share of the growing FTC business. However, unresolved federal income and transfer tax issues continue to loom over the use of FTCs, whether in Florida or elsewhere. This article provides an overview of the act and discusses key tax and non-tax considerations related to FTCs.

FTC Basics

The purpose of an FTC is to provide fiduciary services to a limited class of family members or trusts created by or for the benefit of family members. Common FTC services include serving as trustee, investment adviser, agent or personal representative, as well as tax planning, tax preparation, budgeting, and family wealth education and management. In general, an FTC is similar to a public trust company, except that it does not provide fiduciary services to the public. As a result, an FTC is typically subject to less regulation and lower capitalization requirements than a public trust company.

Under the act, a "family trust company" is specifically defined as 1) a corporation or limited liability company (LLC); 2) that is exclusively owned by family members; 3) that is organized or qualified to do business in Florida; and 4) acts as a fiduciary for family members. (2) An FTC may not serve as a fiduciary for nonfamily members other than up to 35 individuals who are current or former employees of the FTC or a trust or entity that is a family member, as families utilizing FTCs often have longtime employees they wish to treat as part of the "family."

The term "family member" is defined broadly under the act. Relatives within the sixth degree of lineal kinship or ninth degree of collateral kinship to a designated relative (3) are included, as well as spouses and former spouses of a family member and relatives of such spouses within the fifth degree of lineal kinship. Trusts are included as "family members," provided they are created and funded exclusively by family members or all noncharitable qualified beneficiaries are family members. A trust composed exclusively of charitable beneficiaries qualifies as a family member if all of the beneficiaries are charitable entities in which a majority of the governing body is composed of family members. Family entities in which one or more family members own, control, or have the power to directly or indirectly vote more than 50 percent of a class of voting securities of that entity are included as family members, as well as charitable entities in which a majority of the governing body is composed of family members. (4)

The term "family member" is also defined under the act to include the probate estate of a family member or of a nonfamily member if all noncharitable beneficiaries of the estate are family members. (5) An FTC is specifically prohibited, however, from serving as a personal representative or co-personal representative of a probate estate administered in Florida. (6)

Importance of FTCs

FTCs are often utilized when a family needs an independent trustee, but does not wish to designate an unrelated individual or public trust company. An FTC may have several advantages, including: Protection of family privacy; limited liability for decisionmakers who would otherwise be personally liable if serving individually; continuity of trustee upon the death, resignation, or removal of a decisionmaker; quick decisionmaking; flexible fee schedules (often designed to break even); and establishment of a resident trustee in a state with favorable trust law and no state income taxes. An FTC may also be preferred where closely-held businesses are involved, as ownership can be managed by a team of trusted family members and advisers through the formal structure and protection of an entity.

FTCs have some notable disadvantages, however. The largest deterrent is the expense. The team of professionals for an FTC often will include attorneys with expertise in fiduciary and trust law, tax law, business law, banking law, and securities law, as well as accountants. Financial professionals also play a vital role if the FTC will provide investment services in-house. Another disadvantage is the depth of expertise in an FTC may not be as extensive as a public trust company, as an FTC is limited to its relatively small team of professional advisors. Finally, the tax issues involved in structuring and operating an FTC are complex and unsettled. As discussed below, the Internal Revenue Service (IRS) has yet to issue final guidance clarifying the tax treatment of an FTC as trustee, and has suspended private letter rulings on this issue.

Unlicensed Versus Licensed FTCs

A Florida FTC must be licensed or unlicensed. The choice often will depend on the scope of services the FTC intends to provide. As discussed below, the Securities and Exchange Commission (SEC) regulates investment advisers. If an FTC will provide investment services, then, under SEC rules, the FTC must either register with the SEC or qualify for an exemption. An FTC that satisfies the SEC definition of a "family office" is exempt from registration and may choose to be unlicensed. If an FTC will not fall within the family office exception, then it is more likely to seek licensing under state law in order to qualify for the SEC exemption for FTCs operating under state license. An FTC that will not provide investment services should be outside the scope of SEC regulation and is, therefore, more likely to be unlicensed.

Both licensed and unlicensed FTCs are required to maintain a minimum capital account of at least $250,000; have a principal office in Florida; maintain a minimum of three directors (if a corporation) or managers (if...