Some Q&A on Family Offices

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Managing wealth is a job, and one that takes time and attention. We frequently hear comments from clients along the lines of, “Making money is one thing. Managing it is another.” Clients at times complain about the complexity of their investments or their planning. This is often more a comment on the lack of a process for reviewing and managing these items than on the actual complexity of them.

For some clients, a family office can be an effective way to manage family matters and family wealth. Here are some questions and answers regarding family offices.

What is a family office?
A family office is usually established as a business entity, such as a limited liability company, with the purpose of managing the affairs of the family. A family office is not intended to manage a “family business” that is an operating business. Rather, the family office manages the business affairs of the family itself.

Why would I create a family office?
Some commentators on family offices reference a certain level of wealth a family may have before considering creating a family office, such as $50 million. From the authors’ perspective, creating a family office is more a question of when the family is ready to hire one or more employees for the role of managing the family’s affairs, or where it otherwise makes sense to have a business entity (or an independent third party) for this purpose.

Reasons that a family may create a family office entity include the following:

  1. To employ a family member who will manage family investments and be paid compensation and benefits, or to employ a family member who is dedicating himself or herself to family matters beyond his or her own affairs. Family offices can use incentive compensation structures to reward investment or other performance.
  2. To employ non-family members for specific roles.
  3. To centralize management of family assets, trusts, family planning and events, and have a dedicated team to manage this.
  4. To train and groom up and coming family members; to implement succession planning.
  5. To pool assets for better investing.
  6. To improve communications among the family members.
  7. To ensure privacy through the centralized handling of information.

What are typical jobs done by a family office? 

Jobs of a family office may include: 

  1. Managing investments, including reviewing asset allocations and third-party investment managers.
  2. Bookkeeping and managing personal or family business, including routine paying of bills, handling insurance, tax and other regular payments, ensuring business and trust distributions are completed, coordination among professionals, planning for expenditures, such as family retreats, holiday events, galas, education, health planning, and other large purchases.
  3. Managing family properties.
  4. Centralize family decision-making.
  5. Periodic review of:
    a. Banking, credit availability, liquidity.
    b. Tax strategy.
    c. Insurance planning, including life insurance and also property and casualty.
    d. Estate planning, trust administration.
  6. Family education planning.
  7. Family charitable planning.
  8. Family governance and education on wealth management and business.
  9. Lifestyle.
  10. Caring for aging family members and management of medical issues.

Can I hire an outside firm, or a “multi-family office,” to do this for my family?

There are numerous accounting and financial advisory firms that have a family office practice and can provide the types of services described above. Paying an outside firm can be effective, and the family can avoid the administrative burden of managing the business itself, paying rent for an actual office, having a payroll, etc.

On the other hand, the third party family office generally needs to make a profit and may charge more for the services provided than the family itself would charge. It is common that a single family office entity runs as a “breakeven” business, and does not need to make a substantial profit.

There is not a “one size fits all” answer to this question, and someone considering a family office should make a detailed list of the services needed, who will provide the services, and a budget in order to make this determination. Sometimes, the determining factor comes down to: Do I want to pay for office space and do I want to have my own payroll?

What are the steps in starting and running a family office?

To start a family office entity, the family can work with its professionals to create the legal entity (state filing, obtain a tax id, etc.) and governing agreements, including any agreements as to how the entity will be funded. The family can open a bank account, buy any needed insurance, lease space if necessary and hire staff. It is prudent to have a business plan. The family also should consider who will manage the entity, and whether it should have a board of directors.

The family office management team should have regular meetings with a chosen group of family members and also professional advisors to monitor progress.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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