Financial Poise
Family Offices and Managing Private Wealth

5 Rules for Building a Solid Family Office Structure

When a Mistake Can Cost Millions, Developing a Strong Family Office Structure is Crucial

The number and sophistication of family offices has grown substantially over the past several decades. In fact, some estimates suggest that there are more than 15,500 family offices globally, managing around $206 trillion in private wealth. Currently, some of the most well-known offices include Jeff Bezos’ Bezos Expeditions and Bill Gates’ Cascade Investment.

But you don’t have to be a billionaire to have a family office. While the modern family office is typically established to manage a diverse group of assets worth a minimum of $250–500 million, there is no real requirement to starting a family office, other than to actually start one.

The growing prevalence of family offices has fueled a surge in demand for highly-trained professionals who are capable of handling the complex financial, tax, legal and managerial challenges of family office structures—many of which are unique to the wealth and dynamics of the family being served.

In order to achieve meaningful returns on investment while protecting the wealth that a family has already accumulated, a family office staff must work within a legal and organizational structure that suits the particular demands and risks inherent to that family office. And while no two family offices are alike, there are five key considerations to keep in mind when structuring a family office.

1. Build a Solid Foundation for the Family Office Structure

First, it is essential that a family office is created in close consultation with experienced legal counsel and accountants. From private equity to venture capital, real estate investment to debt finance, a family office will likely navigate a variety of investments, legal needs and tax strategies. The office should work closely with tax experts and transactional lawyers to ensure that there are no inadvertent estate or tax risks to the current family members or future generations.

Additionally, the staff must make sure the goals and lines of accountability for the office are well defined. The office’s role, mission, scope and accountability should be determined at the outset. This will help further define the family office structure.

2. Insulate Current Wealth

In addition to a significant amount of liquid assets, the family office is likely also  responsible for managing real estate, fine art and other collectibles (e.g., cars, boats, planes and helicopters). Given this range of assets, family office structures must insulate the family’s wealth from all potential liabilities.

To do so, a family office can put the bulk of a family’s cash and securities into a trust for investing through an LLC subsidiary vehicle. However, personal property items, such as vehicles, should be kept separate  and owned directly by family members.

If structured appropriately, this will help protect the family’s wealth. For example, in the unfortunate event of a boating or a plane crash, a third party pursuing a claim against the family will not be able to reach the investment trust holding the bulk of the family’s wealth.

3. Cultivate Sustainable Wealth

When structuring a family office, a key focus should be on cultivating sustainable wealth for future generations. One approach is to create a generation-skipping trust for purchases of real estate, direct private equity-style investments and other long-term deployments of capital.

A family office might use a subsidiary entity for each of these ventures. That way, hundreds of separate entities may eventually be organized under the umbrella of the generation-skipping trust. When the generation in control of the family’s wealth passes away, the assets held in trust can pass outside of probate to future generations.

4. Procure an Excellent Management Company

A management company entity, which is used to employ staff and provide an array of services to the rest of the family office’s corporate entities, is a key element of sound family office structure.

The management company will 1) handle operating expenses; 2) perform professional, consulting and administrative services to family office entities; and 3) pay out salaries and bonuses to the family office staff. This entity should be organized to achieve a wide range of operational and management goals.

5. Remain Vigilant as the Family Office Structure Evolves

Over time, most family offices create a vast legal structure with a breadth of inter-company transactions. A family office must remain vigilant about its compliance with governance requirements. For example, the family office should maintain separate and distinct bank accounts for each of its various entities.

With an experienced team of professional advisors, a family office can establish, maintain and evolve a structure that maximizes short and long-term investment possibilities for family wealth. In doing so, they will simultaneously mitigate risk exposure.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Estate Planning & Asset Protection-101, The Legal & Tax Aspect of Investing: Asset Protection, Estate Planning, and Tax Efficiency. This is an updated version of an article originally published on July 9, 2018.]

©All Rights Reserved. February, 2021.  DailyDACTM, LLC d/b/a/ Financial PoiseTM

About Michael Katz

Michael Katz is an associate at Nixon Peabody’s Private Equity & Investment Funds practice. He handles a full range of corporate transactions, including acquisitions, mergers, joint ventures, financings and complex licensing and commercial negotiations. In addition, Mike serves as counsel for companies, assisting with entity formation, corporate governance and contracting matters. He also advises companies…

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About Gary Levenstein

Gary Levenstein concentrates his practice in the areas of corporate and family office counseling, mergers and acquisitions, private equity, corporate finance, securities regulation and corporate governance. He represents privately and publicly held corporations, private equity funds, financial institutions, family offices and boards of directors. He has a vast network that has enabled him to connect…

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