The Family Office: Centralized Asset Management and Potential Tax Planning Opportunity

“Family Office.” The phrase is relatively simple, yet non-descript and has become common parlance for wealthy families and their advisors in recent years as American wealth continues to grow.

Simply put, a family office provides a variety of wealth planning and asset management services to affluent families, such as oversight of investment advisory services, charitable, income tax and estate planning services, risk mitigation, fiduciary services, “next-gen” education, and much more. Family office services are often more customized and flexible than standard retail investment services. As part of these services, the family office often coordinates with various advisors, such as attorneys, accountants, and professional money managers. 
Two primary types of family offices exist. The first is the multi-family office. These are typically a division of, or a spectrum of services provided by, retail investment and wealth firms to multiple affluent families. However, there are stand-alone companies that specialize in providing multi-family office services as well. 
The second type is the single-family office. Here, one affluent family’s wealth is managed in one centralized office. Often there are one or more family members plus unrelated employees overseeing the management of family assets and related wealth planning endeavors.

Under the right circumstances, the single-family office may provide a significant tax planning opportunity for wealthy families.

Under the Tax Cuts and Jobs Act of 2017 (the “Trump” tax bill), significant changes were made that eliminated the ability to deduct miscellaneous itemized expenses on individual income tax returns through the year 2025. This includes no deduction for investment advisory fees.

Although the deduction of investment advisory fees has been eliminated for individuals, the general deduction of ordinary trade or business expenses under I.R.C. § 162 was not affected. To deduct expenses under § 162, the taxpayer must conduct a “trade or business.” Like many aspects of the tax law, there is not a bright line of what constitutes a trade or business—the analysis is conducted based on pertinent facts.

In Lender Management, LLC v. Comm’r, the Tax Court conducted such an analysis in the context of Lender Management, LLC, a family office entity for the Lender family—of the popular Lender Bagels fame. Here the Tax Court found that Lender Management was engaged in the trade or business of asset and investment management. Importantly, the entity had employees and received compensation for the services it provided. A single-family office could be the solution to the loss of being able to deduct your investment advisory fees. Please contact us to see if one is feasible for your situation.