In recent years, tax planners have increasingly been recruited to work alongside family offices. If you’ve heard about this trend or received an invitation yourself, you may be wondering what exactly working with a family office would entail. First, let’s start with a simple definition of a family office: A family office is a specialized company that is focused on managing the wealth and the personal affairs of a family. Many large CPA firms offer financial advisory services including family office services for high-net-worth families. Adding a knowledgeable tax planner to their team can greatly increase the value the firm provides its clients.
Typically, family offices are set up by established, high-profile families that may have held their wealth for three or four generations. The trust may originally have been established by a great grandmother and great grandfather, but now that you also have the grandparents, parents, and adult children included in the mix, you may have 40 or 50 owners involved in this business. This is what a traditional family office looks like.
To understand what your role might look like in a family office, let’s review typical services this type of company might offer:
- Investment advisory and management
- Personal assistance and concierge services
- Administrative and financial support
- Family governance and education
Investment Advisory and Management
A family office service may offer tailored investment strategies and portfolio management. A family office itself will often be structured as a pass-through entity. The office will typically have an asset protection attorney involved who can look at their investment plans and advise on when to create a new entity and who the owners of that entity should be.
If you are approached with the opportunity to work with a family office, there are some key questions you can ask to weigh the pros and cons:
- What services are provided? Ask the firm to give you an example without disclosing or breaching privacy. You can also ask for examples of other clients they already work with in this style.
- How many family members are there? Tax planners should be aware that the smaller the family office is, the more problematic it becomes from a tax perspective.
- How do the family members participate in this arrangement? Do they all do the same investment strategy, or is it different depending on the person? If some family members are more risk-averse and others are more focused on growth and expansion, they may not all have the same stake in the businesses and investments involved.
Personal Assistance & Concierge
A family office may also offer support with scheduling, bill payments, managing domestic staff, travel planning, and overseeing property management—which can include real estate, aircraft, and art collections. This may be similar to what an administrative assistant would do—booking a private jet or a high-profile restaurant reservation, making sure there is a house manager and team to support multiple homes, or handling general planning via email. If you or your office can take on tasks like these, that can establish the foundation for a relationship with these clients.
Administrative & Financial Support
Moving into the realm of finances, a family office may handle bookkeeping, legal and estate planning oversight, cash flow management, financial advice, insurance management, accounting and tax filing oversight, and charitable giving management. In addition to helping implement a budget, you may also be asked for advice on financial decisions. For instance, a family may have a daughter who is turning 16, and they want to get her a car. What type of budget should they establish? Should they lease or buy the car? What is wisest from a tax perspective?
Insurance management may mean determining if the family has adequate coverage. You may work in tandem with an asset protection attorney to review insurance policies, price those policies out, make sure that they’re current and paid, and ensure that records are easily locatable in the case of an emergency.
On the tax filing and compliance side, you might produce financial statements for that family on a regular basis. This may operate similarly to an enterprise. When the adult participants in the family’s affairs show up, it is similar to a quarterly board meeting. Team members from the family office would review the financial results from the previous quarter, review current and potential investments, and talk about the plans for the upcoming year. Your tax filings and related documentation might be relevant, so you would need to ensure that household payroll tax returns are filed, for example.
Lastly, charitable giving management is often a major component of family office services. From a tax planning perspective, careful charitable planning opens the door to great tax reduction strategies. For instance, think of a charitable trust—by transferring appreciated assets or property to a charitable remainder trust, the donor receives a tax deduction for the same year the donation was made. Individual retirement account holders can also receive a deduction if they donate the funds from their required minimum distributions to charity. By managing the gifting process, you can effectively mitigate taxes
Family Governance & Education
Ideally, the family will have a family governance document that establishes what the family’s guiding values are and what they want to see happen for younger generations. This document can generate key topics for discussion when you participate in those quarterly meetings. Since you are dealing with a high net worth family, their primary focus is likely to safeguard the financial assets and the emotional ties within the family. If you’ve ever been involved in a situation where a family is trying to settle an estate, the stress and trauma of the loss of a family member, even if it is somewhat expected, can change people’s behavior. Settling someone’s financial affairs tends to result in a lot of infighting, whether the person has $100,000 or $100 million in their estate. Establishing a family office can help prevent some of those disagreements from fracturing a family because the family matriarch and patriarch have a document that clarifies their vision for the estate, and the family office team facilitates the communication and enforcement of that vision.
On the tax side, you can advise on whether the family should establish a revocable or irrevocable trust. High net worth individuals will often want to consider an irrevocable trust to help reduce estate tax and shift taxable wealth outside of the taxable estate. A detailed trust document will be needed to establish this.
Summary
For taxpayers, working alongside a family office can be a valuable opportunity if you understand the needs at play and want to help fill them. By guiding clients on what type of entity to establish and what the governance documents should include, you can help ensure they achieve maximum tax savings. To learn more about how to support family offices and other unique company types, become a certified tax planner today.
