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 of family offices has grown significantly over the past several decades. It is estimated that there are more than 16,000 family offices globally, managing around $200 trillion in private wealth. Some of the most well-known offices include Jeff Bezos’ Bezos Expeditions and Bill Gates’ Cascade Investment.

You don’t have to be a billionaire to have a family office. The modern family office typically manages a diverse group of assets worth between $250 million to $500 million. There is no minimum asset value to establishing a family office. In many respects, it depends on its intended utilization. It is important to analyze the family needs and benefits compared to the time and energy expended to oversee the family office, the overhead incurred, and the alternative of participating in a multi-family office.

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

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

1. Build a Solid Foundation for the Family Office Structure

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 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, mission, scope, goals, and lines of accountability of the family office must be defined at formation and incorporated in the structure of the family office. Of course, these items may change from time to time.

2. Insulate Wealth

A family office will manage significant traditional assets and, in many cases, oversee unique assets such as residential and vacation real estate, fine art, luxury items (e.g., cars, boats, planes, and helicopters), 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, in the unfortunate event of a boat or a private plane incident, 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

Every family office is responsible for the cultivation of sustainable wealth for future generations. The structure should accommodate the utilization of generation-skipping trusts for purchases of real estate, direct private equity-style investments, and other alternative investments that deploy long-term capital. A family office may establish a subsidiary for each venture. The numerous separate entities created may eventually be organized under the umbrella of the generation-skipping trusts. When the generation in control of the family’s wealth passes away, having the assets held in trusts will minimize estate tax and bypass probate.

4. Establishment and Utilization of 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.

5. Family Office Compliance

A family office must be vigilant about compliance in order 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.

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.

[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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