As families experience transitions and growth, they often look for new options for coordinating wealth management, philanthropy and family needs. As the family or the wealth expands, many families explore creating a single family office to handle these needs.
Recently, I spoke at the 62nd Annual Probate and Estate Planning Institute about family offices. In my presentation to these attorneys, I provided some basic information about family offices, which I am also sharing in this post, as it may be helpful to families who are considering a more structured or coordinated wealth strategy.
So What Is a Family Office?
A single family office is an entity created by a family of wealth to serve the needs of and protect the family. It employs staff to help a family manage and grow their wealth, in all of its forms, and across its generations, by providing a variety of services to the family members and the family-controlled entities.
A single family office can range in size from two to three people serving the needs of a relatively small family (for example three to six households) to complex organizations serving more than a dozen households, employing more than one hundred people and overseeing billions of dollars of assets. It typically has its own office space and employees, but it could share some employees with other family entities, such as a business or foundation.
Why Would a Family Want a Single Family Office?
Families will consider creating a family office for a variety of reasons, including:
- A belief that the family will be stronger if they work together than if they act separately, and a family office will facilitate their joint action.
- To fulfill a need for the coordination and delivery of the wide range of services that are needed to manage the complex assets and needs of wealthy families.
- To create a buffer between the family and others.
- To preserve and grow family financial capital.
- To facilitate growth of the family’s other capital (human capital, social capital, intellectual capital).
- To make the lives of the family easier.
What Services Does a Family Office Provide?
No two family offices are the same – the services provided are based on the needs of the family and the decisions the family makes. A family office could:
- Oversee investments, strategies, advisors and private equity.
- Coordinate tax planning and compliance for all family members.
- Manage estate plans and trust administration.
- Develop and facilitate family governance (often helping the family develop governance structures and policies and coordinating family meetings).
- Manage family development and wealth education for the next generation.
- Oversee risk management, such as insurance and security services, for the family and its entities.
- Centralize and coordinate philanthropy.
- Provide bill pay and recordkeeping services for family members.
- Manage and schedule family properties, vehicles, planes, helicopters and yachts.
- Provide family concierge services.
What Are Common Triggers for Forming a Family Office?
Often the impetus for considering a family office is a liquidity event in the family that unlocks significant wealth or an event that creates more wealth owners in the family. Examples of events that cause families to consider forming a single family office include:
- The sale of a family business which creates liquidity and a need for a mechanism to maintain shared assets or create family governance.
- A desire to improve family privacy by removing activities related to the family from administration by individuals working inside the family business.
- The family has been served by a multi-family office but wishes to “take off the training wheels” and have an office dedicated solely to the needs of the family.
- The need for family and financial services that coordinate across family units and geographies.
What Does a Family Office Cost?
Forming and operating a family office is not cheap. It is not uncommon for a family to pay $1,000,000 per year to operate a modestly-sized family office. The wages, benefits, employment taxes, occupancy costs, business insurance, technology costs and the costs of outside professional services are significant. Keep in mind that the staff costs are driven by the relatively small pool of individuals with the needed skills, and the high demand from other offices and professional firms for the talents of these individuals.
Some experts suggest that family wealth of at least $100 million is required to make a single family office worthwhile for a family, while others suggest the requisite wealth level is closer to $150 million to $250 million. Nevertheless, families with a lower level of wealth do operate some kind of family office if the office makes sense for noneconomic reasons.
How Is a Family Office Structured?
Single family offices are created as either corporations or as limited liability companies (LLCs), and they can be owned by a trust, a family member or multiple members of the family. There are numerous considerations in choosing the office structure, and no one size fits all, but it also is important to analyze what makes sense for the family from a taxation perspective. Understanding the taxation of a proposed single family office is quite complex, but it is vitally important to get this right in the design and structure of the office.
If structured correctly, a family office can qualify for an exemption from registering with the SEC as an investment adviser.
Are There Other Coordinated Structures for Wealth Management?
A single family office is only one structure for managing the family’s wealth and other needs. Affiliation with a multi-family office is a viable alternative for many families, especially if their wealth, while significant, is not enough to justify the costs and complexities of establishing and administering their own family office. Still other families may commit to a “virtual” family office structure to provide services to the family.
If your family is experiencing growth in size, complexity or assets, and you are ready to explore options for coordinating your family’s needs, contact your Warner attorney or contact Mark Harder at mharder@wnj.com or 616.396.3225.
