Family office… or family business?

A few months ago family office lawyers joined in a panel discussion in New York City.  I moderated that panel discussion, and even though I have plenty of experience in this field, I learned so much from coming together with others and sharing best practices.

One topic we discussed was “Family office…or family business?”. I’m pleased to share a taste of the wisdom that emerged as part of that panel discussion:

Though it may be tempting for simplicity’s sake, it’s highly risky to run a “de facto” family office through the family business.  The cost of violating tax rules takes its toll not only in monetary penalties but also in lost reputation.  Some estimates indicate that 15-20% of family offices in the U.S. are currently run this way – don’t let you or your clients be one of them (this type of setup is the norm in Asia, but it is a problem in the U.S.).  Potential problems include having company employees handle personal and family matters, which violates tax rules, and could have repercussions for bank covenants, investors, ERISA plans, future representations and warranties, and can raise issues about the truthfulness of tax returns.  

Also, expenses which could be deducted from a family office return cannot be deducted from a family business return; while the family office definition of its business covers these family activities and expenses, the family business definition does not.   There are ways to resolve this from a tax perspective, but the simplest strategy, going in, is to set up a family office, even a virtual family office. 

This is just one aspect of family offices that we discussed in the session. I hope this has been helpful, and look forward to sharing more in future newsletters.

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