04 November 2019
When significant wealth is created, it can open up new opportunities as well as new challenges for individuals and their families as they acclimatise to the increased complexities that come with this new world. One of the challenges faced by almost every family and their family office is balancing the desire to preserve wealth through the generations with the income needs and ambitions of the current generation. A family office could be a holistic full-balance-sheet wealth management solution for an affluent individual, family or few families.
Family offices have been around for a very long time, in all size and forms, but since the beginning of this century, they have come more into focus. As families differ from each other, so do their family offices – each with a different family specific service package. Therefore, it is hard to give a general definition of what a single-family office is exactly.
A family office could be considered as a privately controlled (group of) staff employed within (or outside) a dedicated structure that supports a multi-generational wealthy family (group of) with the organisation, management and maintenance of their assets, needs and wishes.
A family office can be a multi-family office or a single-family office.
A multi-family office supports a (large) number of wealthy families.
A single-family office supports just one wealthy family.
Multi-family office is considered as entity established by wealthy families to manage their wealth, plan for their families’ financial future, and provide other services to family members.
Single-family offices come in all sizes and forms, depending on the actual wealth and composition of a family. They can offer just investment services to a relatively small family or provide a much broader range of services, with a sizeable team, to a large, diversified multi-generational family.
In both the single and multi-family offices, what is really being offered is a full balance sheet financial management solution to ultra-high net worth individuals and families. It is hard to nail down a single template for a family office as every family office is a reflection of its need and desires.
Activities of single-family office
Many single-family offices are established when the family business is sold and there is suddenly a large amount of free investable assets. Therefore, the primary role of a single-office is the management of a family’s wealth in most cases and it can be anything a family wishes it to be. It is important to create a set of policies, guiding documents, and rules by which a family office will operate. A single-family office is often in legal and tax advice, to a certain extent, and the implementation of estate and succession planning for a smooth transfer and preservation of assets for the next generation.
The activities of a single-family office can consist of managing investments traded on stock exchanges, executing investments in private equity, acquiring commercial real estate, lifestyle management, etc. The implementation, management and administration of wealth planning structures such as trusts, foundation, life insurance solutions and corporate entities can also be part of the family office activity. Each family office develops its own focus in this respect.
The family office is not only focussed on the day-to-day management of the family wealth but is also specifically focussed on preserving and growing that wealth over generations and safeguarding the family values. Something which was crucial in building the family wealth a priority for parents and grandparents in a family, may be lost in translation as the next generation inherits wealth or control of the family business unless it is written and communicated repeatedly in many ways.
The larger a family’s wealth, the more often its family office is also involved with lifestyle management. The family office can be responsible for assets such as foreign homes, art, yachts and aircraft. It can organise travel and act as a private secretary for family members. It can also be involved in philanthropic activities and the education of the next generation.
In summary, a single-family office could provide a small number of specific services or a very wide range. Many families talk about all the stated activities, but never document them or put them into writing and this leads to misunderstanding. Thus, control and oversight should be one of the framework by which you can guide your family office through any issues.
Making the decision to establish a family office
This is a big step, and one that involves many logistical, operational, and even emotional considerations. Yet more and more wealthy families have made this move in recent decades, taking more hands-on control over investment policy decisions as a result of continued capital market uncertainty and their desire to commit resources to making an impact in the world now and in the future. And in an era of increasing risk, investment fraud, and cybercrime, more families are adopting an institutional approach to family risk management, aided by the advancement of and growing reliance on technology in family financial affairs.
In practice, the flexibility when establishing a family office is where it often goes wrong. As there is not a set framework of services to be provided, families often forget to put enough thought in what the family office will actually provide to the family once established. It is therefore highly advisable to plan right from the start.
For effective activity of the family office it is categorically important to understand the family’s current understanding of what a single family office is, consider factors that have contributed to the success of other family offices, and formulate a plan that leads to the creation or expansion of their own family office.
A written Family Charter should be created, in which the family objectives are stated, akin to a Company’s Memorandum and Articles of Association. This will avoid future conflicts of new members joining the family, who must adhere to the rules.
Some aspects to consider for planning the family office structure
Family office key elements
- characteristics and goals of a family office;
- managed assets;
- services to be provided;
- tax strategies and consequences;
- the right time to set up the office.
Operational considerations
- governance;
- cost structures;
- recruitment;
- technology.
Management fundamentals
- risk management and control;
- legal, tax and regulatory;
- involvement of foreign structures for management.
Other vision to consider
- investing and managing family wealth;
- philanthropy;
- the impact of global reach.
Some considerations to review from a family office context
The concept of substance is not new and family offices must carefully consider the jurisdictions for their structures for a number of years ahead. These substance rules serve to reinforce the importance of that process and family offices should continue to consider the following points:
To identify entities within a structure which are tax resident in one of the EU substance jurisdictions and which undertake an activity in the relevant sector. The adoption of the OECD model multilateral convention to implement tax treaty related measures to prevent BEPS, by 88 countries as of 1st June 2019, now have a substance test requirement to prevent BEPS (Base erosion and profit shifting).
For many offshore companies, the jurisdiction of tax residence may not have historically been particularly important (as they may not be subject to tax in any event). For many groups, there is a preliminary tax residence review that needs to be undertaken as initial housekeeping before the substance analysis is completed. E.g., from April 2013 the UK now have an annual complicated statutory residence test, for individuals.
Holding companies, fund managers, service centres and financing entities are examples of entities undertaking activities in a relevant sector in family office structures. For example, holding company investing into the UK may suffer UK withholding tax and the paying subsidiary restriction on the deductibility of interest paid to the holding company or other associated companies.
The rules generally allow outsourcing and therefore consideration of how the family office interacts with the structure (in particular where entities are located in different jurisdictions) forms a key part of this analysis. This may include consideration of the resources provided by third party trust and company service providers.
Family offices will probably want to be able to demonstrate (and document) compliance with these rules, in order to avoid the penalties and reputational impact of non-compliance.
These competing, sometimes conflicting, imperatives drive decisions and investment strategies and can extend beyond financial parameters. Achieving the right balance demands a clear, long-term vision, a detailed understanding of the needs and goals of the family and the expertise, experience and reach to develop and implement these strategies.
Establishing and operating a family office, or expanding the services of an existing family office, requires careful analysis and planning to properly manage, protect, and grow a family’s wealth.
If you believe you need professional advice to set up family office or would like an impartial second opinion, please contact Dr. Frank on clifford.frank@lexefiscal.com.
How we can help
Drafting family Charter;
Review and analysis of effective jurisdiction;
Tax residency (Corporate/ individual);
Tax domicile;
Setting up corporate structure (To comply with substance requirement);
Trust; and Trust Management;
Banking; Corporate or Individual – with Private and or commercial banks;
Accounting;
Concierge (building team of professionals to administer the office).