If you own a business, especially if that business has been successful and you intend to pass down ownership of that business to your children, you may want to familiarize yourself with the concept of a family office. A family office is a specialized company that’s focused on managing the wealth and the personal affairs of a family. Family office services are typically offered by large CPA firms and include financial advisory services and even tax planning services. For families that have assets like real estate, businesses, and trusts, setting up a family office can provide you with useful services such as:
- Investment advisory and management
- Personal assistance and concierge services
- Administrative and financial support
- Family governance and education
Traditionally, family offices were set up by established, high-profile families that may have held their wealth for three or four generations. However, family offices are becoming increasingly popular in recent years and bringing the concept more into the public eye.
What are the main reasons for establishing a family office? Common motivators include:
- Preserving family wealth
- Ensuring business and family succession
- Fostering family leadership and legacy
- Facilitating multi-generational wealth transfers
- Establishing governance and control
Preserving Family Wealth
A family office can help safeguard financial assets, as well as emotional ties within the family. Family office services often include budgeting, financial advice, managing insurance and compliance, and even managing household staff. If you need support managing your charitable giving to maximize impact and tax advantages, you can receive support through a family office.
Ensuring Business and Family Succession
Family office service can help you plan for a smooth transition of leadership and ownership of your business. This support can extend even generations after you have passed the business along.
Fostering Family Leadership and Legacy
In addition to managing finances and running a good business, a family office can be a vehicle for making sure that the family’s educated on how the trust you have established works, what beneficiaries will have to do to receive their inheritance, or how family members can receive financial support for their education via the family office. Some requirements like a certain level of education may need to be in place to ensure that if a family member is going to inherit the business that they are qualified to run it. Altogether, the planning and organization involved can help you build and sustain a lasting family legacy.
Facilitating Multi-Generational Wealth Transfers
A family office can help you strategize for effective wealth transfer across generations. By taking advantage of financial advisement and investment strategies, you can receive expert advice on handling transfers of wealth and the tax implications.
Establishing Governance and Control
With a family office in place, you can maintain some level of founder influence even after passing. If it is important to you to develop leaders in successive generations of the family, you can build out a plan for how that will take place. A skilled attorney with family office experience can advise on what to include in the governance document and in a trust agreement to make sure the future is secure.
Benefits of a Family Office
A primary benefit of setting up a family office is privacy. When you have a family office and everybody is working under one roof, this can simplify things. Typically a family office will be set up by one firm that employs all of the players like KPMG or Pricewaterhouse. The responsibility of protecting family assets, tax planning, and safeguarding personal information from public exposure is all handled by one firm.
Second, a family office can facilitate the creation of a unified strategy. The family office can help align family investment and philanthropic goals for consistent and harmonious decision-making. Similarly, your team can ensure that the interests of multiple generations are aligned and that the parties responsible for carrying out that vision in the future will not fundamentally change it.
Third, this setup lends itself to structured governance. Governance documents and an independent management structure simplify handling family and investment complexities, ensuring all members are on the same page to avoid future conflicts. This setup helps ensure that business, family, and advisors are all working towards the same goals, preventing misaligned advice that can occur when multiple advisors are involved.
Next, a family office can help streamline advisory. Centralizing your financial advisement team eliminates redundancy, overlap, and conflicting advice from multiple advisors. Rather than having to sort out who is qualified to handle what among independent and unrelated parties, you will have a single firm providing experts and capable assistance in each arena.
Finally, a family office can be cost-efficient. A family office has the potential for lower overall professional fees and higher investment returns. If we have one quarterly meeting and everyone is there—financial advisors, attorney, insurance manager, house manager, and the family members themselves—we eliminate time spent playing telephone between parties to relay decisions and updates on outcomes. Instead, your team will oversee regular meetings and record meeting minutes that you can always refer to later.
Drawbacks to a Family Office
Despite the benefits above, there are a number of potential drawbacks to the family office setup. First, setting up and maintaining a single-family office can be expensive. Consider adopting this structure gradually to offset costs. Second, if you do not already have governance documents, the process of creating these can result in significant disputes. You will also want to ensure your governance documents include provisions for potential family separations.
Third, family and investment complexities may be a bigger undertaking than you initially realized. A structured governance framework and independent management are essential to navigating these complexities and ensuring all members are aligned to avoid future disputes. Similarly, management interference can become an issue. This can especially impact entity type, since a family office cannot simply change structure on a whim—legally, we have to follow the governance documents. For instance, if the grantors decide that the youngest generation will just have profit shares and will not have voting rights until they reach age 30, this may be difficult to implement if you have an S corporation. However, an LLC could accommodate these requirements.
Lastly, with any investment setup, you will run into the issue of expectations versus reality. Investment returns and economic efficiencies might not meet the expectations of all family members. Goals and objectives may also vary across different generations.
Summary
For families looking to pass down their business and their legacy to future generations, a family office can be a highly beneficial setup. To determine what type of entity to establish and what the governance documents should include, you will want to work with a knowledgeable financial advisory team, including someone who can guide you in finding tax savings opportunities. Get started by connecting with a certified tax planner today.
