As a central control position for financial assets, family offices manage investments and trusts by preparing tax returns, handling bill pay and/or overseeing financial controls.
Floyd Trouten, a director of tax at SS&G, says families that use these private companies typically have an excess of $10 million in investable assets. However, no family office is alike because they are very customizable and offer a high level of service.
“A well-run family office minimizes taxes and maximizes cash flow to family members. It maximizes the amount of wealth that can pass from one generation to another. It provides a control point where assets are housed, managed and invested,” he says. “But the biggest thing is you can sleep well at night, knowing things are under control.”
Smart Business spoke with Trouten about how family offices work and why this might make sense for your family.
Why are family offices so different?
Each family has specific needs. Some may already have a third-party investment group that manages the money, so family members don’t care about investment advice if they are getting tax returns prepared. Other family offices include estate and tax consulting to maximize benefits to beneficiaries and minimize potential taxes.
With another type, the family may ask the financial advisers to be trustees. As the trustee of a family trust, the office may do bill pay and investment review. For example, if a granddaughter has an idea for an investment, it could be easier to have her bring it to the third party for review. The family office provides objective advice and lessens hurt feelings.
As another example, if a family member wants to buy into operating companies as a member of the board of directors, under the family office, the financial adviser might be asked: ‘Is this a good company to buy?’
In what areas do families with concentrated wealth typically fall short?
Some potential problems are having:
- No financial controls on what different family members can spend.
- Too much money not invested, and not earning anything.
- Investments so far spread out that you really don’t know what you have.
Another area to watch is bill pay. If a family member has the tendency to give to every charity that sends a request, the family office can provide guidance to the member regarding legitimate charities and charitable goals.
Many family assets may be flow-through entities — partnerships, trusts, LLCs or S corporations, which are taxed on an individual’s return. Family offices can help ensure there’s money for the appropriate tax payments as family members may have filing requirements in multiple states, as well as the U.S. and foreign countries.
What are some other ways families can utilize accountants through a family office?
If a patriarch or matriarch has sold a company for $100 million, for example, and wants to leave money for grandchildren and children, family office advisers can help ensure inheritances are fair and reasonable. It’s important to remember that fair doesn’t necessarily mean equal. Giving more to one child than another can create difficulties, but it may be for good reason, such as health, martial circumstances, etc. Combined legal and financial counsel can help you come to sound decisions.
In addition, you must take asset protection into account. If a beneficiary receives assets outright, he or she could have those threatened in a lawsuit, divorce or bankruptcy. A family office trust, administrated by a family member trustee and a third-party trust protector, safeguards assets from being awarded to another in a legal settlement.
Each family member’s individual needs can be so diverse that it may make sense to have separate trusts for each family member, which could be more easily administered from a central point. This scenario minimizes family disputes and provides individual privacy.
There are $46 trillion in assets housed in family offices today. If your family has complex tax return and financial scenarios, then it’s worth exploring whether you fit into this space. Find out more at the Family Office Association by visiting www.familyofficeassociation.com. ●
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