Some families have business interests that are so vast that the family could easily keep a team of bookkeepers and accountants busy full-time. These families also tend to have substantial investment portfolios. So substantial, in fact, that they can hire a team of in-house investment managers. When a family hires a team of accountants, bookkeepers, and investment managers to work exclusively for the family, it has a family office.
Conventional wisdom is that the costs of a family office are affordable if the family has $100 million or more in assets. But few families have that level of wealth. What about families that are wealthy but shy – even way shy – of the $100 million target? Their financial lives are complicated, too. There may be estate taxes, federal income taxes, state income taxes, family businesses, partnerships, trusts, more trusts, donor-advised funds and family foundations, marriages, second marriages, prenuptial agreements, maturing children, step-children, and grandchildren (let’s not forget about the generation-skipping transfer tax). For families in this wealth range, there often is a need for family office services, but the cost of hiring a full-time staff is prohibitive.
The multi-family office is designed to satisfy the family office needs of a few wealthy families who share the family office costs. While there is no set structure for family offices, they typically assist a few families with their tax planning, estate planning, investment management, and philanthropic strategies.
The family office provides some services directly to the family, such as wealth transfer planning, tax planning, bill payment, and record keeping. Other services are provided indirectly, by working with the family’s accountants, lawyers, and other professional advisors. In this latter sense, the family office serves as the liaison to coordinate the efforts of all the family’s advisors.
The family office generally is paid an annual fee or on assets under management. That empowers the family office to be proactive in anticipating potential opportunities and challenges and to tailor solutions to meet the family’s distinctive needs. The benefits of being proactive cannot be overstated. It takes planning to maximize the benefits of a transaction, sometimes months or even years of planning. It is not unusual for the tax savings that result from a single well-planned transaction to more than cover the cost of the family office. But there are two other benefits, both less quantifiable, that can be even more valuable than saving taxes.
The first is preparing the younger generations to receive their inheritances. Receiving an inheritance can be a great blessing or a great spoiler. Dealing with significant sums of money does not come naturally to some people. They need training in budgeting and investing, and an understanding of how the family’s trusts, partnerships, and businesses work. This has to be explained in a way that is meaningful to them. For some people, spreadsheets are clearest. For others, a flowchart or video is better. And the younger generations also should know something about asset protection, including prenuptial agreements.
The second benefit is organization. In many families, there is one person who handles the family’s complex finances. That one person understands the interrelationships among the family members, the partnerships, the trusts, and so on. That one person has the relationships with the attorney, accountant, and other professional advisors. If that one person dies or becomes incapacitated, the family enterprise is at risk. For family offices, “organization” includes understanding the complexity of the family’s finances and participating in the professional relationships. If there is a death or incapacity, the family office can assist the surviving spouse and the younger generations in maintaining the organizational structure and navigating the complications of the family’s wealth network.
One last thing: philanthropy is hard. It takes a lot of work to ensure that the family’s charitable efforts and money are not wasted, and it takes planning to get the greatest possible tax benefit from charitable giving. Philanthropy, done well, can serve as a family’s rallying point. Done poorly, it’s just a sideshow. A family office can help a family make its charitable giving as helpful, satisfying, and tax effective as possible.
If you would like to learn more about Indie Asset Partners’ Family Office, please contact me by phone 317.428.6610 or email.