Recent developments for Florida family trust companies

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Stephen G. Vogelsang

On June 13, 2014, Governor Rick Scott signed into law the Florida Family Trust Company Act (the “Act”) establishing a statutory framework authorizing the organization, operation, and regulation of family trust companies (“FTCs”) in Florida. An FTC is an entity which provides trust services similar to those that can be provided by an individual or public financial institution, such as serving as a trustee of trusts held for the benefit of family members, while at the same time providing services typically provided by a family office including investment advisory services, wealth management, and general administrative services. Several family offices have identified shortcomings in the Act which will be remedied in a so-called Glitch Bill which has been introduced for consideration in Florida’s next legislative session.

Families form FTCs for myriad reasons including, for example, (i) managing assets which public trust companies aren’t interested in managing like closely held businesses or real estate; (ii) providing a corporate liability shield for individual fiduciaries who may be reluctant to serve for liability reasons; and (iii) creating a platform for engaging and educating younger generations in the management of family wealth. The Act allows for the formation of “Licensed” FTCs and “Unlicensed” FTCs. Many families considering forming an FTC have expressed some reluctance to organize in Florida because they believe that the Act provides for too much regulation of Unlicensed FTCs and not enough regulation for Licensed FTCs. The Glitch Bill will remedy both of these perceived shortcomings.

Florida’s Office of Financial Responsibility (“OFR”) is charged with supervising banks and trust companies in Florida. The Act requires OFR to conduct mandatory examinations of every Unlicensed FTC once every 18 months. In addition, OFR may examine an Unlicensed FTC at any time it suspects the FTC to be operating in violation of the Act. OFR has not indicated how it intends to conduct examinations of Unlicensed FTCs but at a minimum an examination would necessarily require a review of private family trust instruments, financial arrangements between the FTC, and the trusts for which it serves as a fiduciary and perhaps the propriety of the investments an FTC implements on behalf of its family trust clients. An overwhelming majority of family offices considering forming an FTC will organize as Unlicensed FTCs specifically because they do not want their private family matters subject to intrusive examinations. Other jurisdictions which offer an unlicensed or unregulated FTC option, most notably Nevada and Wyoming, do not subject unlicensed FTCs to examinations and will likely remain the jurisdiction of choice for unlicensed FTCs if the Glitch Bill is not ultimately enacted. The Glitch Bill will eliminate mandatory OFR examinations of Unlicensed FTCs.

A small number of FTCs may choose to become Licensed FTCs because they desire OFR supervision for any of a number of reasons, including family governance issues and federal estate and gift tax considerations. The majority of FTCs which choose to become Licensed FTCs, however, are likely to do so in order to secure exemption from SEC regulation as an “investment adviser” under the Investment Advisers Act of 1940 (the “1940 Act”). A family office which falls outside the SEC definition of “family office” would be required to register under the 1940 Act subjecting it to burdensome filing requirements, SEC inspections and surprise examinations. Families that aren’t able to structure their family offices within the SEC family office exemption will seek alternative exemptions from SEC regulation. One such alternative is the so-called “bank exemption.” Banks are specifically excluded from the definition of “investment advisers” which are required to register under the 1940 Act. Although the Act was intended to permit Licensed FTCs to qualify for the “bank exemption” from SEC regulation under the 1940 Act, many prominent securities lawyers now believe the examination framework for Licensed FTCs isn’t sufficiently burdensome to qualify for exemption. The Glitch Bill will substantially expand the scope of OFR examinations of Licensed FTCs so that Licensed FTCs will almost certainly qualify for the “bank exemption” from regulation under the 1940 Act. Although examinations of Licensed FTCs would be more rigorous, the Glitch Bill provides that the examinations would occur only once every 36 months rather than once every 18 months, making the prospect of intrusive examinations somewhat more palatable.

CONCLUSION

Florida will become a preferred destination for FTCs because of its favorable tax and trust laws and geographic desirability. Existing FTCs and families considering forming a new FTC will find initial compliance with the Act simple and straightforward because Florida is one of only a handful of states which offers a standalone statutory framework for the formation, operation, and regulation of FTCs. The Glitch Bill will make Florida’s FTC legislation competitive with or superior to FTC legislation anywhere.

Stephen G. Vogelsang is a Shareholder in Gunster’s Private Wealth Services Department. Mr. Vogelsang practices in the areas of Estate Planning and Administration, Trust Planning and Administration, and Gift and Estate Tax controversies with the Internal Revenue Service. Mr. Vogelsang has been certified by the Florida Bar Board of Certification as a Specialist in Tax Law.