Tennessee recently updated its private family trust company (PFTC) laws in 2016 to expand both the family clients and family office employees that they can serve. These changes can help ultra high net worth (UHNW) families and family offices meet their needs.
Expanded Universe of Family Clients
The 2016 PFTC law amendments dramatically expanded the universe of family members and family clients who may be served by a PFTC. In almost all other states that allow PFTCs, a PFTC is limited to a single “designated relative.” Essentially in other states, how closely an individual is related to this sole designated relative determines whether he’s in the “family” served by the PFTC. This limitation makes out-laws out of a significant portion of the designated relative’s in-laws by excluding more of the spouse’s extended family than the family of the designated relative. Tennessee eliminated this limitation because the state recognized that there are really two family trees in every family: the designated relative's and that of their spouse. The amended law also allows individuals who are or have been married to the designated relative whether living or deceased to be named the designated relatives of the PFTC. Further, there can even be more than two designated relatives if the additional designee is or has been married to one of the original designated relatives. This means that former spouses of a designated relative can be designated relatives.
Broader Definition of Family Member
The new Tennessee laws also recognize how the family unit has evolved and provides broader definitions of “family member” to include adopted children, stepchildren from either a spouse or former spouse, foster children or individuals who were minors when a family member was granted legal guardianship. Additionally, a new common sense provision in Tennessee ensures a family client continues to be a family client notwithstanding the cessation of the relationship due to death, divorce, retirement or a similar event.
Officers, Directors and Full-Time Employees Covered
Also included among those who can now be served by the PFTC are the people who work for the PFTC, the officers and directors of the family office itself and the businesses that the family controls. Furthermore, the new law allows the PFTC to serve people who are full-time employees of the family, that is, household employees, accountants, etc., as clients. In addition, because these UHNW families provide substantial support to non-profit entities, those supported entities and their directors and officers can also be served by the PFTC.
Other Family Clients
Family clients may also include the estate of a family member, trusts established by family clients or trusts that benefit family clients. Additionally, Tennessee expanded the definition of "family client" to include individuals who are related to the designated relative within the 12th degree of lineal kinship or the 11th degree of collateral kinship — including spouses and former spouses. These changes set Tennessee’s laws far apart from and ahead of other state PFTC laws. The graphic below gives concise depiction of Tennessee expanded universe of family members.
Securities and Exchange Commission Rules
With respect to the Securities and Exchange Commission and the Federal Regulated Investors Act of 1940, Tennessee PFTCs are supervised by the state’s banking regulators. The SEC has adopted a “single-family office rule” to exempt some single-family offices and unregulated PFTCs (allowed by some states) from registration, but its definition of family members who may be served is more limited than Tennessee’s PFTC law. Tennessee PFTCs, on the other hand, extend the class of family members to a much more extensive group than previous Tennessee law did, or the SEC rule does, that is, those persons most families would regard as “family.”
The Growing Family
Following is a brief overview of additional provisions of Tennessee’s updated laws that effectively doubled the size of family for the purposes of a PFTC.
- Individuals who are relatives of the spouses or former spouses of the family member(s) who are related within the fifth degree of lineal or collateral kinship of the spouse or former spouse may be family clients.
- Family clients also include those charitable and not-for-profit organizations in which a family client is an organizer, officer, board member, trustee or donor, who alone or in combination with other family clients contribute a substantial portion of the organization’s assets. Family clients can include the officers, directors, trustees or managers of these organizations.
- A family client can include a “family affiliate” and its directors, officers, trustees and their immediate family. A family affiliate is defined as an entity in which family member(s), directly or indirectly own a majority interest of the family affiliate, or direct or cause the direction of management or policies alone or in conjunction with others.
- PFTCs can also provide services to a “family services” provider. Family service providers are full-time employees of the PFTC and full-time employees providing personal services to a family member such as household, or legal or accounting services.