As a family grows and transitions toward succeeding generations, not all family members may be interested in or have the skills appropriate to managing the family's assets. At the same time, the family's assets may be chunky, or it may be difficult or undesirable to divide the assets to give each family member direct possession of his or her allocable share. In such cases, it often falls to one family member to manage the family's assets on behalf of all family members. In other cases, the family may hire professional help.
In this article, the "family office" under consideration is the entity, comprising family members or professionals or both, that provides such management services to the family members and their trusts or holding companies.
Purposes and Types of Family Offices
Family offices serve various purposes depending on the family--investment management, household and day-to-day concierge services, and coordination of philanthropic efforts. Some purposes relate to the family business, whereas others are personal. Each purpose may require differing levels of involvement from family members. Some family members may even be employed by the family office. Each option involves certain costs, and many families will seek to have as much of those costs as possible deducted against their taxable income.
Depending on the service, incurred costs may be charged to the recipients of the service on a pass-through basis or may be covered through income generated by the family office from various sources. For example, if a family member uses the family jet to take a vacation, the salary of the pilot the family office employs to fly the jet may be reimbursed by the family member out of his or her share of the family's assets.
On the other hand, if the family holding company hires an investment advisor to trade its assets, the resulting advisory fees may simply be paid by the family holding company. By extension, if the family office itself employs a portfolio manager and a staff of analysts, those persons could be paid by the family office out of advisory fees that the family holding company pays to the family office.
In these examples, the vacationing family member probably cannot deduct the pilot's salary, because vacation expenses are usually not eligible for a tax deduction. Similarly, the advisory fees paid by the family holding company, whether paid to an outside investment advisor or to the family office, are probably not deductible by the...