From the Rockefellers to the Guinnesses, family offices have long been used to protect and increase wealth of a family as it passes down through the generations. However, they are no longer the preserve of the oligarch-style ultra-rich – even families with significantly less capital and assets to manage can take advantage of the administrative and investment management advantages they offer.
There is no ‘one-size-fits-all’ family office. At one end of the scale, a family office may simply be a means to manage a family business and employ just one or two people to deal with administrative issues, from paying the nanny to booking flights.
More sophisticated family offices can resemble a small corporation, staffed with advisers, lawyers and property managers, and with specialists to help with philanthropic or artistic interests. At each stage, the appropriate structure will depend on the level of wealth and individual needs of the family, but certain elements of the family office concept have universal appeal.
Wealthy families are often spread widely around the world, with members subject to different tax jurisdictions. Managing the reporting and taxation requirements of a family in multiple countries can be complex and expensive. A family-office structure can ensure reporting, both to the family itself and the tax authorities of each country, is managed centrally and efficiently.
Co-ordinated investment approach
A family office can co-ordinate the development of an investment and asset allocation strategy. It can establish a single investment policy, outlining the goals, attitude to risk, time frame and investment preferences as part of a strategy developed with the family and reviewed periodically to ensure it remains appropriate.
The investment policy will never meet the exact needs of each family member, but a coherent strategy means each individual can adjust their other investments in the knowledge of how this part of their wealth will be managed.
Some family offices have their own investment committee made up of both family and external members. Its role is to ensure the investment policy is followed, the right external advisers are used, and appropriate checks and balances are in place.
Each country has its own tax and reporting regime, which can be extremely complex for a large and disparate family.
Tax is where the family office concept really comes into its own. Each country has its own tax and reporting regime, which can be extremely complex for a large and disparate family, particularly where a member has US connections. In this case, it can be a considerable challenge to avoid investments classified as passive foreign investment companies and controlled foreign corporations, which attract onerous tax treatment. Getting tax considerations wrong can severely eat into any investment gains.
Inheritance tax considerations are important, too. Depending on the regime to which individual family members are subject, it may be possible to use the family office for long-term succession planning. Transfers into the family office may help move money out of the scope of inheritance tax because they have a legal personality distinct from any individual. This can be particularly beneficial where company assets are involved. Where individuals benefit from specific business property tax relief, the family office can facilitate retaining those benefits efficiently.
Financial adviser or family office?
What does a family office provide that a capable adviser cannot? In general, financial advisers offer some investment management, tax planning and structuring expertise, whereas a family office goes a step further, blending lifestyle and financial needs into a single package.
Family offices combine comprehensive wealth management with administration of household expenses and employees, the needs of a family business, overseeing rental properties, artworks or other assets, and conducting employment and background checks for au pairs or other household staff; it can ensure the lifestyle requirements of each individual are aligned with their financial arrangements.
Family office activities have been regulated in Luxembourg since legislation was passed in December 2012 to create a legal framework for the sector.
Regulatory framework in Luxembourg
Family office activities have been regulated in Luxembourg since legislation was passed in December 2012 to create a legal framework for the sector. Under the law, family offices may be operated only by members of certain regulated professions, including investment advisers, wealth managers, lawyers, notaries, accountants and specialist family office professionals.
This legislation principally deals with multi-family offices, which are currently the most common form of family office in the grand duchy, offering services to a restricted number of families. Family offices created by or serving a single family do not fall within the scope of the law, nor does it cover activities relating to non-financial assets, such as the management of buildings or artworks.
Luxembourg’s family wealth management company
Luxembourg’s legal regime for family wealth management companies (known by their French acronym, SPF), was created in May 2007 specifically for the management of individuals’ private wealth.
It is a straightforward, flexible wealth management vehicle that conforms with EU regulatory requirements, with the share capital requirement depending on the legal form chosen. The shareholders may be individuals managing their own wealth, or structures acting on behalf of multiple individuals (who do not have to be family members).
SPFs enjoy certain tax advantages – they are exempt from corporate income tax, municipal business tax and corporate net worth tax. However, they are excluded from double taxation avoidance treaty benefits, and may not undertake commercial activity or be involved in the management of a company, so they are only useful for certain types of family office activity.
Since 1 July 2021, the SPF is subject to certain additional restrictions on the holding of real estate through Luxembourg or foreign partnerships (“sociétés de personnes”), or through common funds (“Fonds Commun de Placement”).
The right family office structure
A rule of thumb is that a family office typically costs about 1% of the assets under administration annually. This would imply that a family with around €10m should consider a small team to carry out a restricted range of activities, bringing in specialist third-party service providers where necessary.
Another consideration is the type of what kind of expertise to hire. Lawyers and investment professionals are expensive, and smaller family offices may opt for external providers rather than recruiting in-house professionals. Meanwhile, an external investment management firm will likely offer a wider breadth of knowledge and experience than any single employee. However, the choice will ultimately depend on the level of the family’s wealth and the size of the family office. It also depends on how the various specialists work together.
The additional knowledge of the members’ circumstances enjoyed by an in-house lawyer may be invaluable in a family with complex legal requirements, trust arrangements and tax planning needs. In each case, the family will have to decide whether they will get the best service from a dedicated individual or by engaging third-party providers.
Does a multi-family office make sense?
There are distinct cost advantages to a multi-family office structure, which has greater capacity to pay for the best investment and legal expertise, and can therefore draw on a broader range of capabilities. Families may also receive more objective advice from a multi-family office because the fortunes of advisers are not tied to a single client.