Four Rules for Building a Solid Family Office Structure

Why Developing a Strong Family Office Structure Is Crucial

The number of family offices has grown significantly over the past several decades. It is estimated that there are 10,000 to 20,000 single-family offices globally, managing around $5.9 trillion in private wealth.

You don’t have to be a billionaire to have a family office. While a majority of family offices globally manage assets of $500 million or more, approximately 45% manage assets between $50 and $500 million. There is no minimum asset value for establishing a family office. In many respects, it depends on the intended utilization of the family office. It is important to look at the family’s needs versus the energy required to oversee the office and the overhead incurred through running it. A multi-family office can be a great alternative if you find yourself unable to sustain a single-family office.

The prevalence of family offices has fueled a surge in demand for highly trained professionals with the ability to handle complex financial, tax, legal, and managerial challenges — many of which are unique to the needs of the family being served.

To achieve the benefits of owning and operating a family office, the management must work within a structure that suits the family. The following four key elements should be considered when structuring a family office.

1. Building a Foundation

A family office should be created in close consultation with experienced legal counsel, accountants, and advisors. Based on a variety of investments, which may include private equity, venture capital, real estate, and debt finance, a family office will have to address legal needs and tax strategies. The office should work closely with tax experts and transactional attorneys to structure most investments, analyze and negotiate the terms and conditions of an opportunity, and minimize any adverse tax consequences.

The role and mission of the family office must be defined at formation and incorporated into the structure of the family office. Of course, these items may change from time to time.

Part of that foundation is establishing a management company. A management company will employ staff to provide an array of services. The management company administers the operations, performs and/or oversees professional and consulting services, and handles many other matters.

2. Insulate Wealth

A family office will manage significant traditional assets and oversee unique assets such as residential and vacation real estate, fine art, luxury items, and collectibles. The assets must be insulated from potential liabilities. A family office may transfer cash and securities into a trust for investing through an LLC subsidiary vehicle.

Certain personal property items, such as vehicles, should be kept separate and owned directly by family members or an entity. For example, if an incident occurs, a third party pursuing a claim against the family must not be able to pierce through to the assets of investment entities.

3. Cultivate Sustainable Wealth

Succession and legacy planning are among the most important functions of a family office. The structure should accommodate the utilization of trusts, partnerships, and other corporate structures. This structure should support the family by developing human capital, creating carefully crafted wealth transfer and asset protection plans, and succession plans to facilitate ownership transitions from generation to generation.

Dynasty trusts are often used for real estate purchases, direct private equity-style investments, and other alternative investments that deploy long-term capital. These trusts are designed to provide long-term asset protection and transfer tax benefits.

The family office may establish a subsidiary for each venture or investment, and each such subsidiary may have a variety of different family members and/or trusts as its investors. When the generation in control of the family’s wealth passes away, trusts can be especially useful in passing along family wealth, mitigating transfer tax and administration expenses, and allowing for the smooth transition of control to the next generation.

4. Family Office Compliance

A family office must be vigilant about compliance to insulate each entity from liabilities that may be incurred by other holdings. Compliance will include required filings and maintaining books and records for each family member and related entities.

Of particular note is the Corporate Transparency Act (CTA). Enacted in 2021, the CTA took effect on January 1, 2024. The CTA is intended to combat a wide range of financial crimes by requiring entities to disclose information about their owners and the people who exercise control over the entities to the Financial Crimes Enforcement Network (FinCEN). There are exceptions to the reporting requirements under the CTA, but they are limited in scope. Virtually every corporate entity formed in conjunction with a family office will be required to comply with the CTA.

With an experienced team of professional advisors, a family office can create and maintain a dynamic structure that maximizes short and long-term investment possibilities with minimal exposure to extraordinary liabilities, so family wealth is safeguarded.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Where Did All My Profits Go? Mastering the Concept of Working Capital
2. Understanding Risk Management Basics for Business Owners
3. Marketing Mastery: Crafting a Message that Resonates

This is an updated version of an article originally published on March 24, 2021.]

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