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Emerging Issues for the Family Office – Wealth Strategies Journal

Sep 20, 2019

Paul S. Labiner

Paul Labiner



Family offices come in all shapes and sizes and the differences from one to another can be vast. And, yet family offices have common challenges—and opportunities—especially in today’s dynamic business environment. From addressing the complexities of taxation to tackling the risks of cyberthreats, many family offices are wrangling with shared issues. In this article, Randy Abeles, tax partner, RSM US LLP, discusses five of these emerging concerns and possible steps to address each.

Family offices come in all shapes and sizes and the differences from one to another can be vast. It’s been said that if you’ve seen one family office, you’ve truly seen just one family office. From single-generation members focused on mutual goals to a multigenerational family with complex interests and diverging investment and philanthropic objectives, variations of the family office construct are endless.

However, due to the nature of their operations and business strategies, many family offices have common challenges—and opportunities—as well, especially in today’s dynamic business environment. From addressing the complexities of taxation to tackling the risks of cyberthreats, many family offices are wrangling with shared issues. The following are five of these emerging concerns. Is your family office affected by these issues, and more importantly, what are you doing to address them?

Growing complexity of taxation

By some estimates, the federal tax code and its accompanying regulations is approximately 10 million words in length. It is a behemoth of a document. To say taxation considerations are complex is a gross understatement, for certain. And for family offices, there are a variety of unique tax issues to weigh, from estate and succession planning tax needs to key state and local tax issues. Since the Tax Cuts and Jobs Act (TCJA) was passed in 2017, one of the most significant income tax issues that family offices are faced with is the lack of deductibility of their direct and indirect investment management expenses. This has created some unique opportunities for families. The entity structure a family office selects is now more important than ever.

Considering the C corporation structure

With the TCJA’s disallowance of itemized deductions including investment management fees, some families have structured their family offices as a corporate general partner or a corporate managing member of a partnership or limited liability corporation (LLC). This structure involves use of a C corporation as the general partner or managing member to take advantage of the 21% flat tax rate. However, there are additional concerns under the C corporation structure, including:

  • Ownership of this critical family entity
  • Cash versus accrual method of accounting
  • Personal holding company rules
  • Accumulated earnings tax rules
  • Personal service corporation rules
  • Qualified personal service corporation rules
  • Closely-held corporation rules

Funding through profits allocations

Family offices are considering newer ways to fund their organizations. Funding via a profits allocation is one strategy gaining favor. For families implementing such a structure, there are a number of considerations, including understanding the nature and amount of the family’s expenses, having a game plan for funding the family office in a down market and weighing those risks, as well as a variety of important tax and key governance considerations. Family offices looking at a profits interest structure must be able to substantiate the profits interest allocated to the family office. Such a restructuring allows families to take a fresh look at the family’s governance, as well as potentially provide income tax benefits in light of the TCJA changes.

Migrating toward direct investing

According to Jason Kuruvilla, RSM US LLP financial services industry analyst, in his recent The Real Economy blog post, “Family offices have historically entered deals as limited partners in funds, relying on asset managers to perform due diligence on would-be investments. But larger family offices are now building out their investment infrastructures in-house to assimilate professional investment firms, giving them greater control of their money and the ability to make their own investment decisions.” In support of this trend, over the last decade, direct investing by family offices has grown more than 100%. PitchBook, a deal tracker resource, reports that deals by family offices have been trending higher since 2008 with deals spanning all industries, many focused on health care and information technology.

Why are family offices interested in direct investing? Many like the options and flexibility this strategy offers, such as the opportunity to co-invest with another family office. In addition, family offices enjoy the level of control and diversification direct investment provides. Families interested in direct investing should consider the following possible benefits and opportunities:

  • Income tax planning
  • Estate planning
  • Reduction of fees from outside sponsors
  • Prosperity of future generations

Understanding cyberthreats

In today’s data-filled, technology-driven business environment, every organization is at risk for a security breach or some type of cybercriminal activity. Family offices are especially at risk because information from high net worth individuals is extremely valuable to nefarious elements. The key to addressing this threat is to understand where your possible exposures are and then fortify systems to protect your organization. To that end, family offices should implement preventative, detective and corrective controls to reliably secure their critical data and systems. Some measures could include vulnerability assessment and management, access authentication, intrusion prevention and defense systems, database activity monitoring, compliance assessment, network alerts, incident response protocols and more.

Addressing the issues and opportunities above can contribute to your growing family office now and for generations to come.

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