In collaboration with
EY Family
Ofce Guide
Pathway to successful family and
wealth management
Family ofce services
Contents
1EY Family Ofce Guide Pathway to successful family and wealth management
Contents
About us 02
Foreword 03
Introduction 04
What is a family ofce?
Section 06
1 Why set up a family ofce? 06
2 Family ofce services 09
3 The costs of running a family ofce 20
4 Family ofce governance 22
5 Constructing a business plan, stafng and strategic planning 26
6 Risk management 32
7 The investment process 35
8 IT, trading tools and platforms 41
Appendix 44
1 The legal setup (excluding the US) 44
2 US regulatory and tax considerations 60
Contributors 66
References 68
Contact us 70
2 EY Family Ofce Guide Pathway to successful family and wealth management
About our
research partners
Credit Suisse
Credit Suisse AG is one of the world’s leading nancial
services providers and is part of the Credit Suisse group
of companies (referred to here as “Credit Suisse”). As an
integrated bank, Credit Suisse is able to offer clients its
expertise on the issues of private banking, investment
banking and asset management from a single source.
Credit Suisse provides specialist advisory services,
comprehensive solutions and innovative products to
companies, institutional clients and high net worth
private clients worldwide, and also to retail clients in
Switzerland. Credit Suisse is headquartered in Zurich
and operates in over 50 countries worldwide. The group
employs approximately 46,300 people. The registered
shares (CSGN) of Credit Suisse’s parent company, Credit
Suisse Group AG, are listed in Switzerland and, in the
form of American Depositary Shares (CS), in New York.
Further information about Credit Suisse can be found at
www.credit-suisse.com.
The Center for Family Business —
University of St. Gallen
The Center for Family Business of the University of
St. Gallen (CFB-HSG) focuses on research, teaching, and
executive education in the context of family rms and at
international level.
The CFB-HSG’s work involves initiating, managing,
promoting and running training and transfer programs,
research projects and courses.
At the St. Gallen Family Ofce Forum, representatives of
German-speaking single family ofces meet twice a year
in a discrete and trustful setting. The aim is an intensive
exchange of experiences, best practice, and ideas.
www.cfb.unisg.ch
About us
EY Global Family Business
Center of Excellence
EY is a market leader in advising, guiding and recognizing
family businesses. With almost a century of experience
supporting the world’s most entrepreneurial and
innovative family rms, we understand the unique
challenges they face — and how to address them.
Through our EY Global Family Business Center of
Excellence, we offer a personalized range of services
aimed at the specic needs of each individual
family business — helping them to grow and succeed
for generations.
The Center, the rst of its kind, is also a powerful resource
that provides access to our knowledge, insights and
experience through an unparalleled global network of
partners dedicated to help family businesses succeed
wherever they are.
For further information, please visit ey.com/familybusiness.
EY Family Ofce Services
Our services for families and family ofces are a reection
of our broad range of expertise and a symbol of our
commitment toward family businesses around the world.
Our comprehensive and integrated approach helps
families to structure their wealth and preserve it for
future generations. Our goal is to unlock the development
potential of the family through a multidisciplinary
approach that scrutinizes operational, regulatory, tax,
legal, strategic and family-related aspects.
For more information about the full range of our family
ofce services, please visit ey.com/familyofce.
3EY Family Ofce Guide Pathway to successful family and wealth management
Dear Reader,
It gives us great pleasure to bring to you our 2016 revised edition of the EY Family
OfceGuide.
In the last decade or so, we have seen a distinct acceleration in the establishment of
family ofces around the world and even more so in the emerging markets. However,
irrespective of geography, there’s a certain consistency to the motivations behind setting
up a family ofce. Mitigating family conicts, preserving family wealth and ensuring its
inter-generational transfer, consolidating assets, dealing with a sudden liquidity inux, and
increasing wealth management efciency are some of them.
Another reason for the emergence of family ofces is families’ desire to have greater
control over their investments and duciary affairs while reducing complexity. This need
for a higher degree of control was partly provoked by the nancial crisis, in the aftermath
of which wealthy families wanted to ease their concerns about dealing with a wide range of
external products and service providers.
Family ofces are rather complicated structures, neither easy to understand nor simple to
implement. This publication will offer a step-by-step process that aims to demystify what’s
involved in setting up and running family ofces.
This revised edition of the guide, which was rst published in 2013, is certainly one of
the most comprehensive and in-depth ever published. It is designed as a learning tool to
provide guidance to families considering setting up a family ofce. They include business
families who wish to separate their family wealth and assets from the operating business,
and successful entrepreneurs looking to structure the liquidity gained from a highly
protable sale in order to further grow and preserve their wealth. It is also a useful guide on
the current leading practices for those who already have a family ofce.
While compiling this report, EY worked extensively with Credit Suisse, the University of
St. Gallen, and family ofces themselves. All these organizations and individuals have
provided invaluable insights into family ofces and their concerns, and the report would
not have been possible without their help.
We hope that you will nd this report helpful and illuminating for your decision-making as
you plan the path for your family into the future.
Foreword
Marnix Van Rij
Global Leader
EY Family Business
Peter Brock
Family Ofce Services
Leader, Germany,
Switzerland and Austria
Richard Boyce
Family Ofce Services
Leader, Asia-Pacic
Robert (Bobby) A. Stover
Family Ofce Services
Leader, Americas
4 EY Family Ofce Guide Pathway to successful family and wealth management
Introduction
What is a family ofce?
Family ofces have their roots in the sixth century, when a king’s
steward was responsible for managing royal wealth. Later on, the
aristocracy also called on this service from the steward, creating
the concept of stewardship that still exists today. But the modern
concept of the family ofce developed in the 19th century. In
1838, the family of nancier and art collector J.P. Morgan founded
the House of Morgan to manage the family assets. In 1882, the
Rockefellers founded their own family ofce, which is still in
existence and provides services to other families.
1
Although each family ofce is unique to some extent and varies
with the individual needs and objectives of the family it is devoted
to (Daniell and Hamilton, 2010), it can be characterized as a
family-owned organization that manages private wealth and
other family affairs.
Over the years, various types of family ofces have emerged.
The most prominent ones are the single family ofce (SFO) and
the multifamily ofce (MFO), but there are also embedded family
ofces (EFOs) linked to the family business, where there is a low
level of separation between the family and its assets. The SFOs
and MFOs are distinct legal entities and manage assets that are
completely separated from the family or the family business.
With the progressive growth of the family tree — owing to the birth
of children and grandchildren and the addition of in-laws — and
an increase in the complexity of the family’s asset base, families
usually professionalize their private wealth management by setting
up SFOs. As subsequent generations evolve, and branches of
the family become more independent of each other, investment
activities within the original SFO activities become separated. This
is the cornerstone for the emergence of an MFO. Sometimes these
ofces open up their services to a few non-related families.
Since the individual services of a family ofce are tailored to the
clients, or the family, and are correspondingly costly, the amount of
family wealth under management is generally at least US$200m. It
is more revealing, however, to calculate the minimum wealth under
management in the light of return expectations and targets, and
the resulting costs of the family ofce. This shows that there is no
clear lower limit for a family ofce. The costs of the family ofce,
plus the return target, must be achievable with the chosen asset
allocation and structure.
1. For more information see
rockefellernancial.com.
5EY Family Ofce Guide Pathway to successful family and wealth management
Family ofces are arguably the fastest-growing investment
vehicles in the world today, as families with substantial wealth are
increasingly seeing the virtue of setting one up. It is difcult to
estimate how many family ofces there are in the world, because of
the various denitions of what constitutes a family ofce, but there
are at least 10,000 single family ofces in existence globally and at
least half of these were set up in the last 15 years.
The increasing concentration of wealth held by very wealthy
families and rising globalization are fueling their growth.
Particularly important in the years ahead will be the strong growth
of family ofces in emerging markets, where for the most part
they have yet to take hold — despite the plethora of large family
businesses in these economies.
2
This report attempts to dene the family ofce in authoritative
detail. It looks at issues such as the reasons for setting up a family
ofce; key stafng concerns; which services a family ofce should
cover and which should be outsourced; how to optimize investment
functions and to ensure they work for the benet of the family. The
report also looks at regulatory and tax issues in key markets, which
anyone considering setting up a family ofce needs to know. It also
addresses the relationship between the family and the external
professionals who are brought in to run a family ofce. It is crucial
for a family ofce to establish a balance between these two groups
if it is to function well.
Family ofces are complex organizations that require deep
knowledge — not just of investment variables, but also a host
of other factors. This guide is a detailed handbook for those
planning to set up a family ofce and also for those looking to set
benchmarks of leading practice within their existing family ofce.
As wealth grows, particularly
in the emerging markets, there
is no doubt that family ofces
will play an even bigger role in
the management of substantial
wealth in the years ahead.
2. CreditSuisseWealth
Report2015
6 EY Family Ofce Guide Pathway to successful family and wealth management
Section
1Why set up a family ofce?
As concerns about wealth preservation and succession planning
within family businesses continue to rise, wealthy families are
increasingly evaluating the benets of setting up a family ofce.
The reasons why
There are many reasons why setting up a family ofce makes
sense, but at the root of these is the desire to ensure smooth
intergenerational transfer of wealth and reduce intrafamily disputes.
This desire inevitably increases from one generation to the next,
as the complexity of managing the family’s wealth grows. Without
being exhaustive, the following points set out the reasons why a
family ofce makes sense:
• Privacy and condentiality
For many families, the most important aspect of handling of
their private wealth is privacy and the highest possible level of
condentiality. The family ofce often is, and should be, the
only entity that keeps all the information for all family members,
covering the entire portfolio of assets and general personal
information.
• Governance and management structure
A family ofce can provide governance and management
structures that can deal with the complexities of the family’s
wealth transparently, helping the family to avoid future conicts.
At the same time, condentiality is ensured under the family
ofce structure, as wealth management and other advisory
services for the family members are under a single entity owned
by the family.
• Alignment of interest
A family ofce structure also ensures that there is a better
alignment of interest between nancial advisors and the family.
Such an alignment is questionable in a non-family ofce structure
where multiple advisors work with multiple family members.
• Potential higher returns
Through the centralization and professionalization of asset
management activities, family ofces may be more likely to
achieve higher returns, or lower risk, from their investment
decisions. Family ofces can also help formalize the
investment process, and maximize investment returns for all
family members.
7EY Family Ofce Guide Pathway to successful family and wealth management
• Separation
Family ofces allow for separation, or at least a distinction, between
the family business and the family’s wealth or surplus holdings.
• Risk management
Family ofces allow for operational consolidation of risk,
performance management and reporting. This helps the advisor
and principals to make more effective decisions to meet the
family’s investment objectives.
• Centralization of other services
Family ofces can also coordinate other professional services,
including philanthropy, tax and estate planning, family
governance, communications and education, to meet the
family’s mission and goals.
• Focal point for the family
In cases where the main family business has been sold, a family
ofce can offer a new focal point of identication for the family
members, for example when the family ofce manages the
philanthropic activities of the family.
Why might there be doubts about setting up a
family ofce?
The establishment of a family ofce is a big undertaking, and there
have been cases when family ofces have not met the family’s
expectations. Some of the potential doubts and concerns about
setting up a family ofce are:
• Cost
The cost of regulatory and compliance reporting remains high,
which means that the level of assets under management that a
family ofce needs to underpin must be sufcient to offset its
xed costs.
• Market, legal and tax infrastructures
Family ofces function better when operating from centers where
there are sophisticated markets and legal and tax structures.
The absence of these in emerging markets has undermined the
development of family ofces there. This has often meant that
there has been little connection between the huge level of wealth
in some emerging markets and the number of family ofces.
Much of the wealth in emerging markets is still controlled by
the rst generation. This has also inhibited the growth of family
ofces, because many are launched during a wealth transition
from one generation to the next.
Main types of family ofces
Embedded Family Ofce (EFO)
An EFO is usually an informal structure that exists within
a business owned by an individual, or family. The family
considers private assets as part of their family business and
therefore allocates private wealth management to trusted
and loyal employees of the family business. Usually the
chief nance ofcer (CFO) of the family business and his
department’s employees are entrusted with the family ofce
duties. As not necessarily the most efcient of structures,
more and more entrepreneurial families are separating their
private from their business wealth and are considering taking
the family ofce functions outside the family business, not
least for reasons of privacy and tax compliance.
Single Family Ofce (SFO)
An SFO is a separate legal entity serving one family only.
There are a number of reasons for setting up an SFO:
• The retirement of the business-owning generation
• A greater desire to diversify and widen the asset structure
beyond the focal family rm
• A rising exposure to non-investment risks, such as privacy
concerns and legal risks
The family owns and controls the ofce that provides
dedicated and tailored services in accordance with the needs
of the family members. Typically, a fully functional SFO will
engage in all, or part of, the investments, duciary trusts
and estate management of a family; many will also have a
concierge function.
Multifamily ofce (MFO)
A multifamily ofce will manage the nancial affairs of
multiple families, who are not necessarily connected to each
other. As with an SFO, an MFO might also manage the
duciary, trusts and estate business of multiple families as
well as their investments. Some will also provide concierge
services. Most MFOs are commercial, as they sell their
services to other families. A very few are private MFOs,
whereby they are exclusive to a few families, but not open
to other families. Over time, SFOs often become MFOs.
This transition is often due to the success of the SFO,
prompting other families to push for access. Economies
of scale are also often easier to achieve through an MFO
structure, promoting some families to accept other families
into their family ofce structure.
• The MFO offering
To address the problem of the high operating costs of a family
ofce, families often set up MFOs, in which several families pool
their wealth together. Often these MFOs will be directed by the
“lead” family that initiated the ofce. In MFOs, all assets are
managed under one umbrella. But MFOs typically cater for a
range of family size, wealth and maturity levels. This means that
families can run the risk of not receiving the personalized advice
that they would have done in a dedicated family ofce setup.
When considering establishing a family ofce, some can see
potential positives as negatives. This tends to be particularly
prevalent in the following cases:
• The preference for privacy
Some families may be hesitant about consolidating their wealth
information through a centralized family ofce structure.
• Trust of external managers
Setting up a family ofce is typically contingent on the level of
trust and comfort families have with external asset managers.
However, trust typically stems from long-standing relationships
with external managers.
• Expectations on returns
Ultimately, family ofces rely on their longevity through
ensuring wealth preservation. This difculty of securing market
returns in recent years has led to some tension in this respect.
Furthermore, during generational transitions, family ofce
structures are tested, often to the point of destruction, as the
next generation presses for different goals and objectives to
manage the family’s wealth.
8 EY Family Ofce Guide Pathway to successful family and wealth management
Section
At the heart of any family ofce is investment management, but
a fully developed family ofce can provide a number of other
services, ranging from training and education to ensuring that
best practice is followed in family governance. This section looks
at the full range of services a mature family ofce could potentially
provide (see gure 2.1). These include:
Financial planning
Investment management services
Typically, this will be the main reason for setting up a family ofce,
as it is central to ensuring wealth preservation. These services
will include:
• Evaluation of the overall nancial situation
• Determining the investment objectives and philosophy of
the family
• Determining risk proles and investment horizons
• Asset allocation — determining mix between capital market and
non-capital market investing
• Supporting banking relationships
• Managing liquidity for the family
• Providing due diligence on investments and external managers
Philanthropic management
An increasingly important part of the role of a family ofce
is managing its philanthropic efforts. This will include the
establishment and management of a foundation, and advice
on donating to charitable causes. These services would
typically involve:
• Philanthropic planning and strategy
• Assistance with establishment and administration of charitable
institutions
• Guidance in planning a donation strategy
• Advice on technical and operational management of charities
9EY Family Ofce Guide Pathway to successful family and wealth management
Section
2Family ofce services
• Formation of grant-making foundations and trusts
• Organizing charitable activities and related due diligence
Life management and budgeting
Some of these services are typically dened as “concierge” in
nature, but they are broader in scope, inasmuch as they also
include budgeting services. Services under this heading will include:
• Club (golf, private, etc.) memberships
• Management of holiday properties, private jets and yachts
• Budget services, including wealth reviews, analysis of
short- and medium-term liquidity requirements and
long-term objectives
Strategy
Business and nancial advisory
Beyond the asset management advisory, family ofces will also
provide advisory services on nancing and business promotion.
These will include:
• Debt syndication
• Promoter nancing
• Bridge nancing
• Structured nancing
• Private equity
• Mergers and acquisitions
• Management buyouts
• Business development
Estate and wealth transfer
Family ofces will be involved in business succession and legacy
planning, enabling the transfer of wealth to the next generation.
These services will include:
• Wealth protection, transfer analysis and planning related to
management of all types of assets and income sources
• Customized services for estate settlement and administration
• Professional guidance on family governance
• Professional guidance regarding wealth transfer to succeeding
generations
Training and education
Much of this revolves around the education of the next generation
on issues such as wealth management and nancial literacy, as well
as wider economic matters. These services will include:
• Organizing family meetings
• Ensuring family education commitments
• Coordination of generational education with outside advisors
Governance
Reporting and record keeping
The maintenance of records and ensuring there is a strong
reporting culture is another core part of a family ofce’s services.
Key to these services is:
• Consolidating and reporting all family assets
• Consolidating performance reporting
• Benchmark analysis
• Annual performance reporting
• Maintaining an online reporting system
• Tax preparation and reporting
Administrative services
Administrative services, or back-ofce services, are essential to the
smooth running of a family ofce. These services will include:
• Support on general legal issues
• Payment of invoices and taxes, and arranging tax compliance
• Bill payment and review of expenses for authorization
• Opening bank accounts
10 EY Family Ofce Guide Pathway to successful family and wealth management
• Bank statement reconciliation
• Employee management and benets
• Legal referrals and management of legal rms
• Public relations referrals and management of public relations rms
• Technology systems referrals and management of these vendors
• Compliance and control management
Succession planning
Ensuring a smooth succession and planning for future generations
is integral to the long-term viability of the family ofce and the
family it serves. These services will include:
• Continuity planning relating to unanticipated disruptions in
client leadership
• Evaluation of the strengths, weaknesses, opportunities and
threats (SWOT analysis) of senior executives both within and
outside the family
• Re-evaluation of family board regarding roles of
non-family directors
• Structuring of corporate social responsibility platforms and
programs
• Development of formal knowledge sharing and
training programs
• Implementation of intergenerational estate transfer plans
• Adoption of a family charter or constitution, specically aiming to:
1. Formalize the agreed structure and mission of the
family business
2. Dene roles and responsibilities of family and
non-family members
3. Develop policies and procedures in line with family values
and goals
4. Determine process to resolve critical business-related
family disputes
Advisory
Tax and legal advisory
Tax, in particular, has become a much more important issue for
family ofces in recent years and as such has assumed a more
important part of the functions of a family ofce. Legal matters
are also important. A family ofce will typically employ a general
counsel and/or a chartered or certied accountant, or several
accountants and tax experts. These professionals usually provide
the following services:
• Construct a tax plan that best suits the family
• Design investment and estate planning strategies that take into
account both investment and non-investment income sources and
their tax implications
• Ensure all parts of the family ofce are tax compliant
Compliance and regulatory assistance
Family ofces need to ensure strict compliance with regulations
pertaining to investments, assets and business operations. These
services will include:
• Providing auditing services for internal issues
• Establishing a corporate governance mechanism
• Ensuring a high level of staff hiring
• Group performance monitoring and compliance
• Offering recommendations on independent and board advisory
formation
• Strengthening the regulatory investment process
11EY Family Ofce Guide Pathway to successful family and wealth management
12 EY Family Ofce Guide Pathway to successful family and wealth management
Risk management and
insurance services
This is a service that has assumed a more
important role in recent years because
of the nancial crisis of 2008–09 and
the subsequent fallout. It will be a crucial
service for family ofces in the future as
well. These services will include:
• Risk analysis, measurement and
reporting
• Assessment of insurance requirements,
policy acquisition and monitoring
• Evaluation of existing policies and
titling of assets
• Evaluation of security options for clients
and property
• Formulation of disaster recovery
options and plans
• Protection of assets, which could involve
the use of offshore accounts
• Development of strategies to ensure
hedging of concentrated investment
positions
• Physical security of the family
• Data security and condentiality
• Review of social media policy
and development of reputation
management strategy
Figure 2.1. Family ofce services
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13EY Family Ofce Guide Pathway to successful family and wealth management
Determining servicing priorities: the
make-or-buy dilemma
Even the largest family ofce, in terms of assets under
management, will need to assess whether or not to outsource
services. Outsourcing certain services can be benecial from a
cost efciency and know-how perspective, offering advantages to
family ofces that include:
• Reduced costs and overheads, and improved staff productivity
• Economies of scale, particularly for high-value professional
services, thus enabling lower prices for related services
• The benets of objective advice from experienced professionals
who possess specialized skills
• Help with defending the family ofce’s regulatory independence
when outsourcing investment management, by allowing
investment decisions to be made by external providers
• Due diligence and continuous monitoring can be carried out by
the directors of the family ofce to ensure performance and
security against risk
On the other hand, a number of key services are usually kept
in-house. The advantages of this are mostly related to condentiality
and the independence of the family ofce, and include:
• Higher levels of condentiality and privacy
• Assurance of independent and trusted advice
• Consolidated management of family wealth
• Development of skills specically tailored to the family’s needs
• Greater and more direct family control over its wealth
• Keeping investment knowledge within the family
• Assurance of optimal goal agreement, along with the avoidance
of conicts of interest with external providers
Given these considerations, it is crucial to obtain the right balance
and to identify those services best suited for management in-house.
Many factors involved in the make-or-buy decision are specic to
the setup chosen for the family ofce, in particular:
• The size of the family and how many family members want to use
the family ofce
• The net worth and complexity of the family wealth
• The family’s geographical spread
• The variety of assets, both liquid and illiquid, under
management
• The existence of a family business and the link between this and
private wealth management
• The skills and qualications of family members
• The importance of condentiality and privacy
• The consideration of whether the family ofce should be a cost
or a prot center
This variety of factors highlights how vitally important it is for
the family to clearly determine its expectations and address key
questions prior to creating the business plan for the family ofce.
These include priority setting and scope denition for the services
to be offered from the family ofce:
• Who should be the beneciaries of the family ofce and what
is the overall strategy of the family to secure and expand its
wealth over generations?
• Is the family’s priority traditional asset management of liquid
funds, with or without a portfolio of direct entrepreneurial
investments? And where does philanthropy t into the
mix, if at all?
• Should the family ofce act as the asset manager for all family
members, or should it just be an advisor for some specic
services to selected family members?
• Is the family ofce’s core task that of a nancial advisor, or
more that of an educational facilitator for the next generation
of family members?
• What services should the family ofce offer from the range of
asset management tasks, controlling and risk management, tax
and legal advice to concierge services and educating the next
generation?
Although the make-or-buy decision must be based on the specic
setup of the family ofce, some general considerations can help
to determine the optimal solution. Best practice is based on the
goal of obtaining the most effective services in an efcient way
and avoiding potential operational risks.
14 EY Family Ofce Guide Pathway to successful family and wealth management
Table 2.1. Key determinants of the make-or-buy decision
Cost and budget
Escalating costs can pose a serious challenge to family ofces. Clearly, it is unreasonable to insource the whole range of potential
services without considering the economic benets. Appointing an outside provider can ensure quality, and possibly cost savings, as the
family ofce would benet from economies of scale.
Expertise
The priority services as dened by the family will most likely be covered in-house in order to ensure independent expert advice to the
family. However, the family ofce will gain from outsourcing certain selected services that require specic expertise.
Regulatory restrictions
A family ofce should consider all regulations, depending on its distinct legal structure. While SFOs are signicantly less regulated, as
they deal with issues within the family, MFOs often fall under specic regulatory regimes. In the absence of professional management, a
family ofce runs the risk of serious fallout from negative publicity. Legal action could also be costly and harmful to reputations.
Technology and infrastructure
The technology employed by an external provider can serve the family ofce effectively. Buying in these services has become even
more of a priority as nancial operations become more complex.
Complexity
If the family’s assets are substantial and complex, the family ofce will have to hire more staff or outsource services. At the same
time, the in-house decisions on all matters have to be nal — so internal staff have to maintain the ultimate overview and
decision-making process.
Data condentiality
If condentiality is a prerequisite, then services where this is a priority should be brought in-house. Non-critical systems and
infrastructure can be outsourced.
The traditional model
Typically, nancial planning services, asset allocation, risk
management, manager selection, and nancial accounting and
reporting services tend to be provided in-house. Global custody,
alternative investments and private equity, and tax and legal
services are often outsourced.
However, families should be aware that the greater the level of
outsourcing, the less direct inuence the family will have over
the decision-making process within the family ofce, and the less
exclusive the products and services will be. Table 2.2 provides
an overview of selected family ofce services, which can be
categorized as in-house or outsourced based on market analysis.
Table 2.2. Family ofce services: in-house or outsourced
Type of service Service category In-house Outsourced
Investment management
and asset allocation
Financial planning Basic nancial planning and asset allocation decisions
should be provided in-house
The more complex, specialized and diverse assets
make outsourcing a practical option
Tax and legal advisory
Advisory Selectively done in-house Often outsourced to a trusted advisor to ensure
state-of-the-art quality of service
Reporting and record
keeping
Governance Record keeping and documentation demand condentiality
and so this should ideally be done in-house
Basic reporting tools and software may be provided
externally
Philanthropic
management
Financial planning In-house expertise should serve to assist with
philanthropic activities
Setting up a foundation and related activities often
outsourced to a consultancy
15EY Family Ofce Guide Pathway to successful family and wealth management
Type of service Service category In-house Outsourced
Compliance and
regulatory assistance
Advisory Size of family ofce might require full-time legal and
accountancy expertise
Full-time legal staff will be an unnecessary and costly
addition to family ofces, which are not large enough
to require them, so can be outsourced when needed
Risk management and
insurance services
Advisory Some risk management skills should be provided in-house,
in order to ensure ultimate peace of mind
Can be outsourced, as external risk and insurance
professionals can offer trusted expert advice
Life management and
budgeting
Financial planning Should be done in-house if information condentiality is
a priority
Only specialized services would tend to be brought
in-house, less specialized services can be outsourced
Training and education
Strategy Can be done in-house, as identifying suitable options for
education is by its nature an internal process
Can be outsourced if expert opinion on higher
education is required for training and development
Business advisory
Strategy Often the general counsel or the nance director of the
family business is involved in the setup of the family ofce
The services of an external expert can offer a
competitive edge
Estate and wealth
transfer
Strategy In-house expertise is required as data condentiality is
vital
The family can consult external legal advisors for
procedural and legal issues
Administrative services
Governance Administrative services require daily monitoring and so
can be done in-house
Outsourcing could lead to greater costs
Succession planning
Governance Clarifying level of interest of next generation members
with regard to the business and family ofce
Education, objective assessment of managerial skill,
and denition of entry path of next generation family
members
Benets of in-house
• Highest level of condentiality and privacy
• Independent and trusted advice to the family is ensured
• Total and consolidated management of family wealth
• Family ofce can develop distinct skills, specically tailored to the
family’s needs
• Greater and more direct family control over its wealth
• Keeps investment knowledge within the family
• Ensures optimal goal agreement and avoids any conicts of
interest with external providers
Benets of outsourcing
• Helps a family ofce reduce costs and overheads, helps with staff
productivity
• Helps deliver economies of scale, particularly when it comes to
high-value professional services, thus enabling lower prices for
related services
• Offers the benet of objective advice from experienced
professionals who possess specialized skills
• Outsourcing investment management may help a family ofce
defend its regulatory independence by allowing investment
decisions to be made by external providers
• Suggests less direct control, which implies due diligence and
continuous monitoring can be carried out by the directors of the
family ofce to ensure performance and security against risk
16 EY Family Ofce Guide Pathway to successful family and wealth management
Philanthropy: moving from giving to creating impact
The world, and the challenges it faces, are changing rapidly.
Growing inequality, the forces of climate change, rapid urbanization
and resource scarcity are increasingly putting pressure on the
world’s most vulnerable people, both at home and abroad.
1
We
need new strategies to meet these challenges — strategies that
involve a fundamental rethink of the nature of philanthropy.
Traditional paradigms of philanthropy are evolving. With a
focus on creating impact, they are becoming more accessible,
sustainable and effective. Reective of the social and technological
changes happening around the planet, this evolution reminds
us that, in a globalized world, small groups of people can have
profound impacts.
Philanthropy is one of the most rewarding, and distinctively
different, activities that can be undertaken from a family ofce.
As with all family ofce activities, philanthropy too deserves to
be conducted with total professionalism and commitment. Its
challenges and rewards should be acknowledged.
It has also been found that philanthropy is an integral component
of many wealthy families’ lives. For example, America’s 50 most
generous donors increased their giving by 33% last year.
2
There
has also been a rise in the number of technological entrepreneurs
under 40 using their wealth to engage in philanthropic work.
While some of the trends in philanthropy are changing, the level of
commitment to give back to society and create a positive impact
remains the same.
How can a family ofce help the family achieve its
philanthropic goals?
One common question facing family ofces and family members is
how to structure philanthropic endeavors to achieve tax, economic
and long-term charitable goals. Many families see philanthropy
as a way to not only make a lasting impact on their communities,
their countries, or the world, but also as a way to connect with and
guide the principles that will impact the multiple generations that
have either beneted or may benet from the family wealth. The
form of charitable giving may vary from a direct gift to a charitable
organization to a donation to a charitable vehicle (discussed below)
established by the family for ongoing philanthropic activities.
Philanthropy as a way to guide future generations
Many families view philanthropy as a long-term mission that is
critical to teaching future generations responsibility and the impact
wealth can have on society. They believe philanthropy can teach
younger family members valuable life and business skills, enabling
them to develop their passions and nd fullment in working for
something they believe in. In some of these families, the future
generations will even get to decide which charities should receive
benets, how much and for how long.
A family ofce should memorialize the family’s philanthropic goals
in the family mission statement or the family constitution. It should
make sure the charities qualify for tax-exempt status and that
charitable pledges are fullled in a timely manner. It is the family
ofce that will likely be involved in deciding which assets to donate
to charity. In the US, for example, the type of asset donated can
impact the amount of the eligible deduction as well as the potential
yearly deduction limitations.
Philanthropy through investment choices
Wealthy families have made substantial charitable donations
in recent years. There is also a trend for families to align their
investment choices to their charitable motives. Families are
increasingly making investments that can be categorized as impact
investing or socially responsible investing. Both of these strategies
seek to further philanthropic goals on the basis of how, and in which
companies, the family invests.
Impact investing seeks to make a difference to communities by
choosing to invest in companies that align prots with charitable
intentions. For example, a family may decide to invest in a
company that will produce methods to purify water in economically
challenged regions.
1. EYMegatrends2015
2. “The 2015 Philanthropy 50”, The Chronicle of Philanthropy
Philanthropy
17EY Family Ofce Guide Pathway to successful family and wealth management
Socially responsible investing seeks to maximize delivery of
philanthropic goals, even at the cost of potentially higher returns.
An example of socially responsible investing may be divesting your
portfolio of all shares of Company X stock if they are producing
goods in a manner that is not environmentally safe or if their
chairperson makes a public statement on a position that the family
does not agree with.
Family identication with philanthropy can be a means of honoring
the family’s founder. It can be a vehicle for nding new roles for
family members — including those who might feel that their skills
and interests may not lie in the family business. A systematic
program of philanthropy can be both a shield (offering a proper
process for responding to the many unsolicited and perhaps
inappropriate requests for funds commonly received by high-prole
families) and a sword (enabling the family to have a signicant
positive impact on an issue of concern to it). Most importantly,
philanthropy can provide a family with at least one notable
commonality — acting as “the glue that holds the family together” —
especially as a family increases in size and diversity.
Philanthropy can expand a family ofce’s networks, add skills,
generate employee satisfaction, and offer new and post-career
options. Family ofce or business involvement in philanthropy
can be a tangible demonstration of corporate citizenship and can
enhance the prole of the family.
Denition and change over time
The goal of philanthropy has always remained the same, to promote
the welfare of society and to increase the business’s public value.
However, the means of achieving this goal have undergone rapid
transformation.
Traditional notions of philanthropy emphasized doing good through
donations or through the establishment of charitable foundations.
This approach, born of social obligation, was free from the
expectations of measurable impact, accountability, transparency
and direction. In this traditional approach, philanthropy was also
seen as exclusive — only accessible to those with enough money to
give away — or organized through religious or political institutions
with specic interests and agendas.
Modern philanthropy, however, is decidedly different. Today’s
philanthropists use innovative solutions to solve specic problems,
with approaches that are targeted and selective, and impacts and
outcomes that are measurable. Philanthropy is also not seen as
exclusive anymore. Now, philanthropists come from a wide range of
ages and backgrounds, ranging from individuals and businesses to
NGOs and not-for-prots, all of whom are brought together by one
common goal, to help fellow human beings.
Leading practices — the building blocks of an
effective, family ofce-based philanthropy
Creating an effective, ofce-based philanthropic program requires
decisions to be made on matters such as:
• Should there be a mission statement for the philanthropic
strategy?
• Should the overall program be thematic or general and, if
thematic, what should the priority issues be?
• What should the geographic reach of the program be?
• Should the program be proactive (programs to be funded and
initiated by the ofce) or reactive (inviting applications from the
community)?
• Will the funding be short-term or long-term?
• Will funding be directed at projects or general organizational
support?
• Should there be a few large grants or several smaller grants?
• Should there be public guidelines and an annual report?
• What should the internal decision-making process be?
• How will the directors be chosen and what succession
arrangements should be made?
• What is the role of non-family members as professionals and
directors?
• Are professional advisors involved and is the philanthropic
strategy carried out professionally to optimize tax and legal
implications?
18 EY Family Ofce Guide Pathway to successful family and wealth management
• Will collaboration with other funders be sought in order to gain
the benets of collective impact?
• What priority should be given to impact and public value
assessment, and by what means?
• Is there an investment charter to direct the length, asset type and
risk of the corpus funds?
These are only some of the matters to be considered and only a few
of these questions can have simple right or wrong answers. It is the
nature of the philanthropic sector that much remains ambiguous
and subject to different approaches. This, however, makes it all the
more important that the commitment to, culture of, and processes
for, reective and systematic philanthropic practice be in place
in a family ofce. Fortunately, the philanthropic sector is rich in
accessible and helpful written resources, and personnel who are
willing to advise, collaborate and share.
Top trends
1
2
3
4
Seeking to align
their established
philanthropic
activities with
strategy and values
Looking for
strategic direction
with their
philanthropic
activities
Evaluate impact of
established
philanthropic
portfolios
High-impact
philanthropic
investment
Creating societal
value and addressing
complex challenges
19EY Family Ofce Guide Pathway to successful family and wealth management
There are a number of global trends shaping the modern
philanthropic landscape.
The role of technology
Technology has impacted every aspect of modern philanthropy.
The internet has given people access to a wealth of information
on virtually every topic imaginable. This power not only enables
light to be shined on otherwise ignored topics, but also provides
access to the information needed to make contributions. While
modern technology enhances the ability to form local and global
partnerships more effectively, it also ensures that in some small
measure, any individual can be a philanthropist.
Socially conscious businesses
Philanthropy is increasingly seen as core to modern businesses’
operations, crucial to their social license to operate and enhanced
by the entrepreneurial spirit. Modern philanthropic activities take
many forms, including donations, charitable projects and social
ventures. However, they can also take a sustainable and protable
form, such as through impact investments that are targeted
toward specic program-related social objectives. Many of the
largest companies in the world have philanthropy built into their
business plans, and the trend is increasingly turning toward seeing
nancial performance as just one of the many measures of a
business’s success.
Impact investing
Impact investments are as those that set out to achieve positive
social and environmental impacts, in addition to nancial return,
while measuring the achievement of both. Impact investing
dismisses the notion that protable investments and giving money
to charitable work are separate activities, distinguishing it from
other forms of philanthropy. Impact Investing Australia suggests
that the market for such investments is expected to reach US$500
billion to US$1 trillion globally over the next decade.
Collective impact
No single policy, program or organization can tackle the
increasingly complex problems the world faces today. Collective
impact refers to the commitment of a group of important actors
from different sectors to a common agenda for solving a specic
social problem. The collective impact approach was rst discussed
by John Kania and Mark Kramer in the 2011 StanfordSocial
InnovationReview. They identied ve key elements of an effective
collective impact approach, including a common agenda, the
consistent measurement of results, mutually reinforcing activities
and the use of a backbone organization.
Responsible investment framework
A responsible investment framework helps organizations use
their wealth to make socially ethical investment decisions, often
based on environmental, social and governance (ESG) factors.
Such frameworks will commonly involve thorough monitoring
practices, rigid reporting policies and a great deal of accountability
and transparency. For many organizations that are using part of
their portfolio for ethical or impact investments, a responsible
investment framework can ensure that the remainder of their
portfolio is aligned to the same goals and does not deter or diminish
the impact outcomes sought by part of their portfolio. An example
of this is the Rockefeller family’s decision to sell their investments in
fossil fuels to reinvest in renewable energy.
20 EY Family Ofce Guide Pathway to successful family and wealth management
Section
3
Family ofces are unique to the family that sets them up. And,
to dene what an “average family ofce” should look like is not
meaningful. Their size may vary from 1 employee to up to 50 or
more, depending on the services provided, the number of family
members to be served, and how the services are to be delivered.
Despite there being no standard denition of a family ofce,
anecdotal evidence suggests that a full-service family ofce will
cost a minimum of US$1m annually to run, and in many cases it
will be much more. This would suggest that for a family ofce to be
viable, a family should be worth between US$100m and US$500m.
Of course, a family ofce can be set up with US$100m or even less,
but the service range will probably be limited to administration,
control of assets, consolidation and risk management. A fully
integrated family ofce will require a great deal more wealth.
Table 3.1 breaks this down in more detail.
Figure 3.1. Family ofce types based on assets and costs
Family ofce type Assets (US$m) Overhead cost per year (US$m)
Administrative
50 to 100 0.1 to 0.5
Hybrid
100 to 1,000 0.5 to 2.0
Fully integrated
> 1,000 1.0 to 10.0
Source: TheGlobalStateofFamilyOfces,Cap Gemini, 2012.
Staff costs
Research from consultancy Family Ofce Exchange has found that a
signicant portion of the total costs of a family ofce are allocated
to staff compensation and benets.
1
Figure 3.2 illustrates this cost breakdown in more detail.
A fully integrated family ofce — providing most, if not all, of the
services mentioned in section three — would have a typical staff
structure represented in Figure 3.3.
Setup costs would also include the employment of headhunters for
recruitment, compensation specialists, relocation costs, legal setup
costs, and the search for infrastracture such as ofce space and
technology solutions.
1. Family Ofce Primer,
FamilyOfceExchange,
2013.
The costs of running a
family ofce
21EY Family Ofce Guide Pathway to successful family and wealth management
Figure 3.2. US family ofce costs
Oversight ofce with staff of 12 and internal
Chief Investment Ofcer
Figure 3.3. Family ofce staff
2. TheGlobalFamilyOfce
Report, Campden
Research/UBS, 2015.
Overall costs
Family ofces typically have operating costs of between 30 basis
points and 120 basis points. A recent report by Campden Research
and UBS
2
states that family ofce costs are on the rise globally,
approaching the 1% mark as ofces employ more staff. The report
concludes that the costs of running family ofces has increased
as a percentage of Assets Under Management (AUM) over recent
years and that the costs remain on an upward trend. Ofces with
the lowest running costs focus primarily on a limited number of
wealth management services, such as handling real estate holdings.
However, there is no strong correlation between the size of AUM
and the operating costs.
Oversight ofce with staff of three
External investment fees
External professional fees and owner education
Office operations
39%
9%
27%
25%
External investment consulting fees
External investment management and
custody fees
External professional fees and owner education
Office operations
Staff compensation
16%
32%
10%
14%
28%
Source: Thecostofcomplexity,understandingfamilyofcecosts, Family Ofce Exchange, 2011.
Source: Aguidetotheprofessionalfamilyofce, Family Ofce Exchange, 2013.
Chief
Financial Officer
Chief
Investment Officer
Chief
Operating Officer
Accountants
Controllers
Lawyer
Investment
analysts
Administrative
staff
Information
technology
Chief Executive Officer
22 EY Family Ofce Guide Pathway to successful family and wealth management
Section
4Family ofce governance
Dening governance structures
Family ofce governance is often ignored as a topic because
families usually focus on managing their nancial assets and
investments and overlook the importance of implementing good
governance practices in their private family ofce. Below is a guide
to major issues regarding family ofce governance.
Strategic planning
It is important to start the initial discussion with the family
participating in a long-term review of their vision and strategy for
the future. Such an exercise is very helpful in capturing the wishes
and vision of the family as well as informing the management so
they can develop a long-term strategic plan.
Board of directors
As family ofces usually stem from the desire of the founders
to preserve the family wealth and protect the future of the next
generation, they often tend to depend on trusted advisors whom
they know well and have been working with for several years.
Accordingly, the concept of a board of directors managing the
strategic direction of the family ofce is often neglected. However,
when the wealth is transferred to the next generation, managing
the family ofce in the same manner may be a cause of conict and
dispute between family members.
There is a need to dene a proper governance structure that takes
into account the requirements of all family members. Electing a
strong and active board that follows the direction of the family and
takes into consideration the interests of all family members, not just
a few, is very important. Moreover, including independent directors
who add their experience and provide independent advice to the
family is crucial in enhancing, strengthening and diversifying the
family ofce investments and operations.
In many cases families are very reluctant to include independent
directors and open their books to outsiders because of privacy
issues. Those families may choose to appoint an interim advisory
board with no voting powers to help strengthen the board and
provide advice on specic topics. This step helps the family prepare
and be more comfortable with including independent board
members in the future, to create a fully functional board.
23EY Family Ofce Guide Pathway to successful family and wealth management
Accountability
Founders are often reluctant to share much nancial information
with their children, in an effort to shelter and protect them
from being accountable for their nancial decisions. This is not
a sustainable model; with responsibility comes accountability,
and the family members need to be prepared from an early age
to be responsible for their actions and understand that they will
be accountable to the rest of the family. In order for them to be
successful in the stewardship of wealth, they need to create the
process and the opportunity for family members to grow and
develop their skills and talent, as well as manage their nancial
affairs responsibly.
Developing a proper structure
It is important for every family ofce to develop a proper
management and legal structure to protect the operation of
the family ofce and the assets of the family. Developing proper
policies and procedures, and identifying key talents capable of
leading the ofce are important factors in the successful operation
of the family ofce. Moreover, in order to protect the family from
any unnecessary tax implications and legal impact, it is also very
important to select the right legal structure and jurisdiction for
setting up the ofce.
Block-holder and double agency costs
A crucial point for family ofces to take into account when
considering governance is that they are often exposed to
substantial agency costs that result from managing nearly every
aspect of the ofce.
As a result of the two main functions family ofces serve, i.e.,
managing complex asset bases and aligning family interests,
family ofces encounter family block-holder as well as double
agency problems that can result in additional costs (Zellweger
and Kammerlander, 2015). Family block-holder costs can emerge
when not all family members agree on the strategy of the
family ofce. For example, one member of the family might be
interested in short-term liquidity to nance lifestyle ambitions,
whereas other members might be more interested in holding onto
investments for potentially better long-term gains. This can lead to
a misalignment of interest, which is a “cost” to the efcient running
of the family ofce.
24 EY Family Ofce Guide Pathway to successful family and wealth management
Double agency costs, similarly to family block-holder costs, can
emerge when the interests of the family conict with the interests
of those non-family members hired to manage the family’s wealth.
An example of this is when the family is more concerned with the
long-term outcomes of managing their wealth, compared with the
often short-term outlook of family ofcers and their subordinated
asset managers who look to maximize their own nancial benets
to the detriment of the family’s wealth. This leads to a misalignment
of interests, which is a “cost” to the efciency of the family ofce.
Family block-holder costs
Families do not necessarily act in a unied way. Rather, family
dynamics might counteract interest alignment and lead to conicts
involving costs that are referred to as family block-holder costs. A
lack of governance of the family owners opens up the possibility of
negative family dynamics.
Particularly destructive effects are expected in an EFO, which
is characterized by the absence of formal and unambiguous
governance instruments, such as boards, regulations and statutes.
There are no clear responsibilities in controlling the EFO that
shares part of its resources, staff and command structure with
the operating business, which in turn could increase the possibility
of family block-holder conicts and the related costs compared
with an SFO.
An increase in conicts and struggles between family members
can lead to particularly severe effects on family wealth, since
conicted family block-holders might be tempted to engage
in spendthrift lifestyles. This could split the family wealth and
consequently prevent the cohesion of the family and its assets
across generations. Also, the absence of clear responsibilities,
accountabilities and rules of engagement on the part of EFO
employees who serve two masters could even aggravate the effects
of family block-holder conicts and their consequent costs.
Double agency costs
Costs resulting anytime authority is vertically delegated down
two tiers of hierarchies, are referred to as double agency costs.
Double agency creates problems of control and accountability
when two sequential sets of control relationships are involved,
such as from the family as wealth owner to the family ofcer
and the subordinated asset managers.
The principal’s (i.e., the family’s) loss of control over its agents
(the family ofcers and the advisors) follows from incentives for
opportunistic behavior. The striving for more autonomy and the
behavior by agents to receive a remuneration is a major problem.
The principal is increasingly exposed to biased information passed
on from asset managers to the family ofcer and subsequently
from the family ofcer to the family.
This phenomenon gains particular intensity in the family ofce
environment, where the principal family usually lacks the
sophisticated nancial and investment knowledge that family ofce
staff have, thereby increasing the probability of agents’ empire-
building at the expense of the principal. Because the family ofce
often serves as the trusted advisor of the family for much of the
family’s nancial affairs, and given the limited insights and know-
how of the family into the complexity of these affairs, the family
ofce is potentially well placed to act opportunistically if it is not
properly monitored or incentivized.
Incentives for opportunism arise particularly in family ofces
since the family as principal may have difculties in controlling the
activities of a family ofcer and even more difculties in supervising
asset managers who are often external experts that are not part
of the family ofce’s own staff. Monitoring the family ofcer and
his or her dealings with the asset managers is particularly difcult
in SFOs. The formal setup and hierarchies often serve as barriers
preventing the family from closely monitoring family ofce staff,
accessing rst-hand information on an ongoing basis, supervising
asset allocation decisions, and controlling the efciency of the
family ofce operations.
If the family fails to provide adequate oversight, family ofce
staff will be more prone to engage in collusive agreements with
external asset managers and service providers or “self-dealings,”
where family ofcer and asset managers internally agree upon
opportunistic dealings to the detriment of the family’s wealth. Such
conduct by family ofcers and asset managers undermines the
preservation of wealth and generates potential reductions of the
wealth and inefciencies for the family.
Family versus non-family members
The extent of double agency costs certainly depends on whether
family ofce staff are composed of family or non-family members.
It reects the dilemma that families usually have to deal with-
25EY Family Ofce Guide Pathway to successful family and wealth management
employing as family ofcer a non-family member who is well-versed
in nancial matters, or relying on a family member as family ofcer
who might not have that competence but is trustworthy, thus
diminishing double agency costs.
Successfully navigating concerns between principals and agents is
not an easy task for families. But, they can mitigate these tensions
by implementing appropriate governance structures and incentive
contracts. Selecting appropriate benchmarks is also important,
as poorly designed benchmarks may cause fund managers and
external partners to work against what families wish to achieve.
Families should also consider establishing formal processes to make
investment decisions, as this can help family ofces to set clearly
dened boundaries and goals, and avoid ad hoc decisions that are
not in line with the broader mandate or long-term strategy.
The family ofce dilemma
Ultimately, family ofces face a dilemma: on the one hand, the
family as the ultimate asset owner wishes to appoint the most
qualied people to run the family ofce. Sometimes, a competent
person is available within the family, but this is not often the case.
Then, a professional non-family family ofcer has to be appointed.
The benet of doing so is that family block-holder conicts can be
mitigated through the non-family member running the family ofce.
But a natural consequence of such delegation of control is the
risk of losing control altogether. This is particularly true for wealth
structures that involve trusts and foundations, but the problem is
also apparent in the case of SFOs.
In light of this dilemma between professionalization and loss
of control, families with a family ofce will have to nd ways
to combine the best of both worlds, achieving professional
management while maintaining control.
Boards, investment advisory committees, the personal involvement
of family members in selected activities, incentive systems for the
managers and monitoring systems are often put in place to tackle
the challenge.
26 EY Family Ofce Guide Pathway to successful family and wealth management
Section
5
Constructing a business plan,
stafng and strategic planning
Planning a strategic way forward
If a family decides that it needs a family ofce, what are the
next steps?
It is an increasingly widely held view that a family ofce — even
an SFO — should not operate in the longterm on a decit basis,
i.e., purely as a cost center. Most successful entrepreneurs would
not start a business without a written business plan. Once the
business is running, these entrepreneurs generally create and
update short- and long-term strategic plans for the business.
Leading family ofces provide that same level of diligence for
themselves. A crucial part of the strategic plan is stafng, which is
discussed in the section 5.1, Familyofcestaff.
Business plan
The rst step in creating a business plan is understanding the
vision for the family (usually described in a family charter), and
subsequently the vision for the family ofce. Here are some of the
key components of such a plan:
Summary
It is important to describe the vision for the family ofce, explain
why it is being created, whom it is designed to serve and how it is
expected to evolve. Is there an intention to serve other families,
thus becoming an MFO, or just to serve the single family?
Family business
Is there a business linked to the family ofce, or has the business
been sold? Family ofces often start as an EFO within the business,
and become a separate entity when the family, its complexity and
its risks outgrow the business staff.
27EY Family Ofce Guide Pathway to successful family and wealth management
Structure
What type of entity will house the ofce, and who will own it? What
is the plan for passing ownership across generations (assuming the
ofce is intended to support more than the rst generation)? Will
the ofce support businesses, with the potential of having some
expenses deductible against business income? It is important to
discuss the intended tax impact of the structures to ensure that
the family understand their potential consequences. Tax and legal
advisors generally have a signicant advisory role on structure and
jurisdiction.
Jurisdiction
Global families need to consider which country the ofce will be
based in, but this decision goes much further. Within specic
countries such as the US, states have vastly different tax, legal, and
judicial benets. The business plan should specify where the ofce
and entities will be based.
Governance
Governing boards or councils need to be dened, including how
they will work. This structure often includes a family council,
investment committee and even a philanthropic committee. The
plan should dene what boards will exist, how board members will
be selected, how the boards will change over time, how decisions
will be made within them, and whether they will include non-family
participants.
Services
There needs to be a description of the services the ofce will
deliver, and for which family members or generations. In some
cases, there is a list of base services available to all family members,
with additional services available on an à la carte basis.
Stafng
This section will need to discuss the types and number of staff in
the ofce, in addition to the organization or reporting structure.
Often, the family ofcer reports to a family council or perhaps to
a particular family member. It also helps if this section discusses
conditions under which family members may be permitted to work
in the ofce.
Operations
How will the services be delivered, and what technology is required
to support them? The team should be able to delve into the key
types of technology, either selecting the specic tools or narrowing
them down to two or three providers. This section also describes
which services are intended to be outsourced and which should be
delivered directly by family ofce staff.
Financials
There should be pro forma budgeting for the ofce, including
staff, facilities, technology, and outsourced services. This section
describes how the ofce will be funded, whether through business
activities, billing family members, a charge on investments, or some
other mechanism.
28 EY Family Ofce Guide Pathway to successful family and wealth management
Workplan
There needs to be a detailed plan of how the ofce will be implemented. Services may be rolled out in phases, or perhaps outsourced
initially and brought in-house later (see gure 5.1).
Figure 5.1. Family ofce implementation plan
Test systems and
processes and
implement
Review business
continuity needs
and develop
emergency plans
Consider disaster
risks (cyber attack,
theft, personal
security, etc.)
Fine-tune hardware
and software
Assess initial
governance, and
determine if additional
efforts are needed
Create policy and
procedure manuals
Perform final review of
processes
Test and
implement
Begin family office
operations
Refine budget models
to minimize capital
constraints and
surprises
Develop formal
periodic review process
for people, processes,
risks, vendors, and
technology
Measure results
against benchmarks
Review networking
opportunities for
peer-to-peer
education and best
practices
Launch and
monitor
Refine operational
models and family roles
Write job descriptions
and recruit candidates
Select technology
platforms and evaluate
data security
Initiate contracts for
outsourced services
Identify, contract, and
build-out space
Chart processes,
workflows, and
benchmarks
Develop framework for
governance
Source
and build
Education, peer networking and collaboration with advisors
Iterative analysis and modeling
Assemble a working
team of advisors
Develop a detailed
business plan
For each service
define whether
in-house, outsource,
or combination
Review resources,
technology, people,
and facilities
Estimate operating
costs and capital
requirements
Consider potential
sources of capital
funding
Evalutate legal
structures, consider
legal and tax impacts
for the office and
participating members
Structure
and design
Scope and
purpose
Establish the purpose
and long-term goals
and objectives
Understand the
family’s core assets,
current needs, and
future plans
Consider initial
thoughts on scope of
services
Understand how each
family member wants
to participate in
services
29EY Family Ofce Guide Pathway to successful family and wealth management
Figure 5.2. Family ofce strategic planning
Strategic planning
Once a family ofce is operational, strategic planning remains an
important exercise. Annual strategic planning is important for
all family ofces, but ofces that have continued for generations
often create additional 5- or 10-year strategic plans. Family ofces
respond to a wide variety of demands from many family members,
and it is easy to just be reactive. Staff must take the initiative in
their strategic planning (see gure 5.2).
The 10-year strategic plan
For family ofces that have existed for a long time and are
supporting multiple generations, recent years have seen an
increase in 5- or 10-year strategic plans. These plans are
designed to bridge the gap between the vision in the family
charter (sometimes considered a 100-year plan) and the annual
strategic plan.
Often, the process the family goes through is just as important as
the outcome. Taking time to plan what they want to accomplish in
the next 10 years causes them to think very differently than for
annual planning. Here are the major elements often considered in
these plans:
Succession planning
Preparing family for leadership takes many years, whether that
is for leading the business, governance committees or the family
ofce. Families may develop programs for an entire generation,
offering training, mentorship, and business internship programs to
give them the experience to lead the family.
Business or investment growth
Families may consider starting a new business, or perhaps a
large real estate development plan, or a shift into private equity
investing.
Direct philanthropy
Some families set philanthropic goals of changing a particular
community, providing higher education or solving health issues.
These may be long-term goals, better served through a
10-year plan.
Due to the nature of these planning efforts, families often nd it
benecial to engage an outside advisor to lead and facilitate the
process, which can help to bring new perspectives.
Family
charter
Vision of what the family
wants to be in 100 years
10-year
strategic
plan
Multi-year plan to
accomplish
milestones toward
the family vision
Annual
strategic
plan
Plan for the next year
30 EY Family Ofce Guide Pathway to successful family and wealth management
Annual strategic planning
The outcome of annual planning is an evaluation of activities in the
previous year, goals for the coming year, and a plan for achieving
those goals. Here are some important factors in the strategic plan:
Reection
How have the family and the ofce performed against the current
year plan? What are the strengths and weaknesses of the family
and the family ofce? What major changes have occurred since the
last planning exercise? Is the family successfully moving toward its
long-term vision specied in the family charter, or are there major
gaps between the stated goals and what they are actually doing?
Feedback
Actively nd out what family members think of the ofce, its staff,
and the support it provides. Quite often, the older generation
are pleased with the ofce, while younger generations are less
happy with it.
Risks
What are the major risks the family and the family ofce face, and
how might they be mitigated? This is an opportunity to consider
succession planning, risks from staff or operations, economic, legal,
or tax events, and how business risks might impact the family or
how family risks might impact the business.
Family ofce operations
Evaluate the current family ofce and its operations. Priorities often
change, and some services may be better delivered by an outside
provider. This is a good time to consider each outside advisor or
service provider. It may be that the ofce needs additional staff, or
needs to plan for coming retirements or other changes.
Technology
This is a growing concern among family ofces, and requires a lot of
time and resources. It is benecial to compare current offerings with
the rapidly changing marketplace, including how the various tools
work together to meet the family’s needs. Cybersecurity must also
be considered, as to how it could impact the family’s nances as well
as its potential effect on the family privacy and physical safety.
Family initiatives
Consider what new initiatives the family desires and how the ofce
will support them. Are there new businesses being formed, a
real estate development activity, new philanthropic initiatives, or
perhaps a major family anniversary to plan for?
Budgeting
Bringing together the above components will help determine
the budget for the coming year, including a plan for how it
will be funded. When the family agrees with the planning and
future initiatives, they will be much more likely to agree to the
required funding.
Recruiting, developing and incentivizing
family ofce staff
Stafng is crucial for the success of a family ofce and a big
challenge for them is to identify, attract and retain the best talent.
In larger institutions this process is usually overseen by the human
resources department, but family ofces cannot rely on such
infrastructure. Consequently, recruitment often becomes the
responsibility of the wealth owners and their trusted advisors —
both of whom are less trained to make these decisions.
When it comes to stafng the family ofce, one has to distinguish
between members of the owning family, working for the family
ofce and non-family professionals. While a recent study in
Switzerland and Germany found that many of the investigated
family ofces are led by a family member,
1
we decided to focus our
attention here on the process of recruiting non-family professionals.
Guidance on structuring the recruitment process, formulating
incentive packages and then maintaining strong relationships with
the new employees, is often necessary.
Despite the lack of formal recruitment structures, families can have
advantages in attracting talent — often because they are able to
offer more exibility in compensation and incentive packages for
1. Sieger, Philipp; Zellweger,Thomas:EntrepreneurialFamilies:
FromaFamilyEnterprisetoanEntrepreneurialFamily: Credit
Suisse AG, 2013.
31EY Family Ofce Guide Pathway to successful family and wealth management
senior recruits. They can also offer a working environment and
culture that can appeal to the right candidate looking for a change
from big-company culture.
Given these factors, Family Ofce Exchange believes the following
examples of best practice can help to underpin a successful
recruitment process:
• Job description. This can be exible, but must capture the key
elements and essence of the role. Family ofce executives are
often involved in multiple projects.
• Interview committee. The responsibility of hiring for roles such as
CEO and CIO should not be undertaken by one person. Sharing
the process and risk of the hire is advisable.
• Checking references. The recommendation from a trusted
advisor or family member is valuable, but more extensive checks
should be made. The process should be rigorous in order to
ensure objectivity.
Retaining talent
The key to retaining people once they have been recruited depends
heavily on compensation and the feedback process. Here is a useful
checklist:
1. Compensation
• Conversations
The feedback process must be performance-based, consistent,
and incorporate an element of long-term compensation.
• Incentives
Can include things such as phantom stock (future cash payment
based on market value of shares), co-investment opportunities,
transaction bonuses and, in some cases, partnerships. Incentive
plans often reect the standards in the industry that created the
family’s wealth, so packages vary by industry.
• Benchmarks for compensation
A CEO’s base salary in the UK ranges from US$240,000
to US$630,000, while in Switzerland CEOs managing
multijurisdictional wealth receive between US$450,000
and US$720,000 as a base.
2. Feedback
• Delivery
Many executives move from a highly structured corporate
environment and can feel uncertain about their performance,
and the family’s satisfaction with their role, due to a lack of
meaningful feedback. Family members may be unused to
having to satisfy this need for feedback, but attempts should be
made at a fair and thorough assessment of performance where
possible. It has been observed that CEOs at family ofces often
feel unimportant, largely because of a lack of feedback, rather
than concern over compensation.
• Receptiveness
A big challenge when stafng a family ofce is how family
ofce executives and family members can maintain a sense
of partnership, without the impartiality of the executive being
affected by the family. Family ofce executives must be open
to giving and receiving feedback so that an environment of
honesty and openness can ourish. This process of feedback is
in itself dependent on the long-term commitment to the family,
cultivated by appropriate incentive planning and personal
chemistry — an unquantiable element in the process!
32 EY Family Ofce Guide Pathway to successful family and wealth management
Integrating risk management
The maintenance of family wealth across generations is an
extremely complex task. There are many risks, any of which can
prevent a family from achieving their long-term legacy. Families
should develop an integrated risk management approach between
the family business assets and the private family assets, in order to
protect themselves from risks.
Categories of risk
The family ofce is the right entity to manage the different risks
facing the family. Typically, the family wealth originates from the
sale in whole or in part of the family business, or from free cash
ows that are not reinvested in the existing business. This process
of asset diversication goes hand-in-hand with the enterprise risk
management process.
Against this background, family ofces are tasked with
complementing their existing standard risk measures with
additional ones, particularly as direct investments in real assets
gain in importance. Risk management at family ofces is moving
away from a mere controlling role to a time-critical, strategic
advisory role.
This new demand for risk transparency has led to the desire to
invest more in direct investment opportunities and in real assets,
rather than complex nancial capital market products. A lower
level of complexity of investment products, the proximity to the
investment, and the possibility of having a real inuence on the
investment are more sought after now than ever before.
Long-term investments with lower volatility and a moderate
expected return are often combined with short- to mid-term
investments with a signicantly higher risk prole to achieve
outperformance. As part of this process, a further professionalization
is taking place. Families rank investment risk, family reputation and
family data and privacy among the top risks they face, according
Section
6Risk management
33EY Family Ofce Guide Pathway to successful family and wealth management
to a Campden Wealth survey on global family ofces in 2014. This
guide recommends that seven risk categories need to be evaluated
as part of a strong and coherent approach to risk management
(see gure 6.1 below).
Figure 6.1. Risk management
Risk category Summary description
Vision/legacy
Stated family vision or purpose, services provided within
the ofce, family governance, communication, education
and planning
Operations
Transaction processing and controls
Estate/regulatory
Types of entities, management and oversight of those
entities, compliance, reporting and ofce management
Business
Impact (or potential impact) on the family from the various
businesses they own and manage, this encompasses
nancial, succession and reputation impacts
Technology
Evaluate platforms used in the ofce, and review the
infrastructure of technology and security, particularly
including cybersecurity
Investment
Examine the policies and processes around investment
oversight, from investment policy statements to selecting
managers, exclusive of evaluating the risk of specic
holdings or portfolios
Disaster
Review plans and preparation for facing serious setbacks,
which includes evaluation of existing insurance coverage
Risk management systems
Risk, return and liquidity are the foremost issues to be considered
in any investment decision and asset allocation process. These
prerequisites will be the basis for the risk management system,
which in itself will cover risk mitigation and cost reduction, and may
lead to value creation as a result. These factors include:
Risk mitigation
• Identify and address key risk areas
• Effectively assess risks across the family ofce, driving
accountability and ownership
• Manage and mitigate mission-critical risks
• Establish comprehensive risk frameworks
Cost reduction
• Cost efciencies are a critical part of setting up a family ofce
• Implement an automated risk management process to materially
improve the cost structure
• Reduce cost of control spend through improved use of automated
controls
• Streamline or eliminate duplicative risk activities
• Improve process efciency through continuous monitoring
Value creation
• Achieve superior returns from risk investments
• Improve control of key processes
• Combine risk and control management to improve performance
• Use analytics to optimize the risk portfolio and improve
decision-making
Figure 6.2. Risk management system
Risk management system
Liquidity
Risk
Return
34 EY Family Ofce Guide Pathway to successful family and wealth management
Section
Figure 6.3. Risk management process
Family ofce CEOs, CFOs and CIOs increasingly perceive enterprise
risk management as adding real value to the family ofce operation.
According to the 2014EuropeanFamilyOfceSurvey by Campden
Wealth, families are well aware of the different risks, but often have
not implemented an adequate risk management process.
In an appropriate risk management process, each of the seven
categories of risk mentioned before will be assessed against
the specic situation of the individual family/family ofce. The
assessment of the inherent risks, if no controls or mitigating factors
were in place, combined with the existing control environment,
result in the residual risk after controls are taken into account
(measured, for example, on a scale from low to medium
or high risks).
Following such a diagnostic process (risk review, risk identication
and risk measurement) structured recommendations can be made
to report the risk objectively, improve the control environment
and ultimately to mitigate the risks (see gure 6.3). Such leading
practices would also include an existing disaster recovery plan
for technology and data, as well as a physical protection plan
(e.g., protecting against robbery or kidnapping) and an integrated
human resources policy for family ofce staff.
Risk review Risk measurement Risk reporting Risk mitigation
• Establish risk
appetite of family
and family office;
what level of risk is
acceptable?
• Define a common
understanding of
the risk level among
family members,
the investment
committee or other
relevant boards and
the family office
• Establish a detailed
risk identification
process
• Identify and
document
qualitative and
quantitative risks
• Define the chief
drivers of volatility
of the main asset
classes and
investments
• Measure impact of
risks on investment
decisions
• Prioritize risks
according to impact
level and likelihood
of occurance
• Include relevant
and sufficient level
of information in
regular reporting
• Establish family
governance to
deal with risk
management
• Establish measures
to mitigate at least
the top priority risks
• Opportunities need
to be identified in the
same way as risks
• Establish regular
monitoring of
the family risk
landscape
Risk identification
35EY Family Ofce Guide Pathway to successful family and wealth management
Section
7
Background
How do family ofces invest their principals’ money? There are no
xed investment regulations that apply. Family ofces tend to follow
their own individual investment policies, because, unlike banks
and other nancial service providers, they are generally subject to
the more relaxed regulations applicable to companies, trusts and
foundations. However, the degree of freedom enjoyed by family
ofces is reduced in proportion to the level of services provided by
third parties and the number of families served by the family ofce.
Family ofces can often diversify their assets very broadly, much
more than institutional investors can, thanks to the amount of
assets under management. Family ofces are also generally better
able to think and invest on a more long-term basis, and they
primarily pursue wealth preservation in order to pass on assets to
the next generations.
1
Many prefer direct investments, and where
organizations have an entrepreneurial principal, they are more
likely to get directly involved in the investment process. More than a
third of those surveyed would be glad to contribute to the planning
stage of their investments.
2
Many family ofces take an open approach to their investment
policy and try to avoid conventional investment paths. This can be
seen in the way that many invest in alternative investments, such
as yachts, horses, art, forests and farmland, or car, wine or watch
collections. This enables them to spread risks while reecting the
personal preferences and passions of family members.
The growth of family ofces is a relatively new trend, and because
of the diverse origins of many family fortunes and the different
backgrounds of CIOs, it is difcult to pinpoint a uniform family
ofce investment process. Very broadly, the process should rst set
out an investment “road ahead”, listing goals and risk tolerance,
and resolving issues relating to business shareholdings and
family member stakes. The next phase is to establish the portfolio
structure (i.e., how much in equities, real estate) to deliver the
risk and return trade-off the family requires. Implementation and
governance then follow — nding the appropriate investments to
make up the portfolio, and overseeing their performance.
The investment process
1. Credit Suisse, Family
BusinessSurvey,
September 2012.
2. Ibid.
36 EY Family Ofce Guide Pathway to successful family and wealth management
Role of the family
The crafting of an investment process is heavily dependent on
legacy issues. In what economic sector has the family made its
money, to what extent is the family still actively involved in the
business and what is the background of the CIO of the family ofce?
Each of these factors has a tendency to produce a strong behavioral
bias on how a family’s wealth is invested and on the subsequent
need to produce a diversied portfolio for the long term.
Another issue that is also important is the composition of the
family. For example, a family ofce that is set up by a rst-
generation entrepreneur would probably be very different in its
aims to one that is established by a large fourth-generation family.
As a result, the behavioral, nancial and legal issues involved in
structuring the investment process of a family ofce are complex
and fascinating.
Credit Suisse’s FamilyBusinessSurvey2012 suggests that most
family businesses, even those at the third generation and older,
do not yet have a family ofce. Cost and complexity are two
contributing factors here, though it is also clear that the rate of
growth of family ofces is accelerating, and that the need for a
transparent, independent and structured investment process is a
key reason for this.
Setting investment goals
For most investment funds, whether they are sovereign wealth
funds, endowments or family ofces, the rst step is to establish
clear investment objectives and risk proles. These different
investment structures can have varying goals and objectives, and
there is also variety in how these objectives are constructed. For
example, some institutional investors work with ination-related
return objectives, others might not.
An important distinction can also be made at this stage between
liquid assets, such as tradable securities, and illiquid assets, such
as direct investments, private equity and real estate — the latter
being difcult to value and often requiring some support in terms
of funding. From a conceptual point of view, many CIOs tend to
view illiquid assets in a different way, when it comes to returns and
investment horizon, to liquid asset portfolios.
Examining prior investment styles and questionnaires can help to
identify the family’s tolerance to risk. In addition, scenario testing
that illustrates and draws out important sensitivities to risk and
portfolio drawdowns can be useful. In some cases, the discussion
of the investment process is led by the CIO. In others, it can entail a
more collective discussion involving family members, and cover any
desires they have to establish charities or philanthropic initiatives
alongside the family ofce.
Once an asset allocation recommendation has been reviewed,
understood and accepted, the family should formalize their
investment plan in an investment policy statement. Such a
statement is a road map that is the focus for all parties involved in
the client relationship, including investment advisors, investment
managers and trustees. It also provides a course of action to be
followed in times of market dislocation when emotional reactions
may result in imprudent courses of action.
Once the specic investment goals and the risk prole of the family
ofce have been established, the next step is to structure an overall
portfolio and then bring to bear the necessary investment tools to
drive the investment process. In some cases, historical asset return
data is used to give a sense of what future returns might look like,
but, as recent stock market history has shown, the past is not a
great guide to the future.
Tax considerations
Selecting the most efcient combination of assets for the family
requires an adjustment to portfolio optimization that takes into
consideration the ultimate after-tax return that they would expect
to receive. For each asset class, the expected return should
be deconstructed to reect the income yield from interest and
dividends versus return from capital appreciation. Based on the
level of turnover typical for each asset class, it is possible to
estimate the percentage of asset appreciation that comes from
realized versus unrealized capital gains, and also the extent
37EY Family Ofce Guide Pathway to successful family and wealth management
to which realized capital gains would be treated as short-term
as against long-term tax liabilities. Providing asset allocation
analysis on an after-tax basis presents a realistic view of the
return the family can expect from its portfolio investments, as
well as an optimal mix of investments tailored to a family’s specic
tax situation.
Stress testing and modeling
Once an initial portfolio shape is in place, several further exercises
can be useful, such as stress testing the return prole of the
portfolio to demonstrate to family members how the portfolio
might behave during periods of volatility. In performing this type
of analysis, it is sensible to examine all the family’s wealth, not just
their investment portfolio. Modeling the core business holding of a
family as a form of private equity or direct equity holding, and then
analyzing and optimizing other components of a family’s wealth
with respect to this, is a difcult but necessary task.
In the context of family businesses, one common outcome of this
part of the process is to show that the initial investment portfolio
of the family ofce could be better diversied, since it often has a
large holding in the underlying family business or, in some cases,
legacy investments that tend to be over-concentrated in certain
asset classes (e.g., private equity). There are several different
ways to achieve a more diversied portfolio for the family ofce
(see Figure 7.1).
Figure 7.1. Projected total return and volatility of various asset classes
Equity
Fixed income
Cash and short term
Alternative investments
Projected total return (5 year average)
Projected volatility (5 year average)
0%
-2%
0%
2%
4%
6%
8%
10%
12%
5% 10% 15% 20% 25% 30% 35%
Source: The Captial Market Assumptions framework at Credit Suisse produces ve year average return and volatility forecasts for 75 asset classes, some of
which are shown in the chart.
38 EY Family Ofce Guide Pathway to successful family and wealth management
The importance of cash ow
Family ofces are different from other organizations, in that
there is often a greater and more irregular call on the investment
portfolio. Family members request funds for business-related or
private equity stakes, philanthropic and impact investments, or
ongoing expenses. In this respect, being able to model the impact
of cash ows on an overall investment portfolio is important, and
experience suggests that the focus on yield and cash ow tends to
be higher for family ofces than for other client types. Accordingly,
families should consider their overall liquidity needs carefully during
the portfolio creation process.
Implementation and governance
The implementation and governance quality is crucial. From an
investment point of view, how a portfolio is implemented must
be consistent with its objectives and structure. Having a formal
investment policy statement in place is an important step in
maintaining an appropriate governance structure. In addition to
reviewing the family’s goals and objectives, it is vital to review
asset allocation. This can be done by rerunning asset allocation
diagnostics on portfolios at least once a year, in order to make
sure that they perform as initially prescribed. Governance and
transparency are also very important, and regular meetings
and calls between principals, the family ofce staff and external
advisors will help to clarify broad macro views, turning points in
strategy, and issues relating to implementation.
In summary, while the family ofce space is growing and evolving
quickly, several building blocks can be identied as forming the key
components of a family ofce investment process. These are:
• Consideration of how legacy issues determine the starting point
of the fund
• Objective setting and creation of an investment policy statement
• Mapping risk tolerances
• Building a portfolio structure across all liquid and illiquid assets
• Implementation using strategic and tactical investment tools to
ensure that investment solutions t the goals and objectives and
meet cash ow needs
• Governance
• Rebalancing
Investment strategy overview
Once investment goals have been established, family ofces
can begin thinking through how to deploy and manage capital.
The type of investment strategy a family ofce pursues is a
function of sourcing capabilities, desired control, liquidity needs,
investing experience, and family ofce infrastructure. Family ofce
investment strategies generally fall into three broad categories: (i)
third-party managed, (ii) public direct and (iii) private direct. Often
family ofces use a mix of these strategies to diversify investment
exposure and improve risk-adjusted returns.
Third-party managed investing consists of family ofces using
asset management funds to invest their capital. Families can make
high-level decisions around how to allocate their capital between
industry sectors and asset classes at the fund selection level. Below
fund selection level, however, they have limited inuence over
investment decisions. Asset managers can focus their investments
on public or private entities and on traditional or alternative asset
classes (see gure 7.2).
Figure 7.2. Illustrative family ofce investment strategy
Third-party managed
investing
Other investors Family office
$
$
Public or private assets
Third-party asset manager
Direct investing
Family office
$
Public assets Private assets
Asset
39EY Family Ofce Guide Pathway to successful family and wealth management
Direct investing involves the family ofce making the decision
to invest capital into a specic asset or security. This requires
the family ofce to do its own research and due diligence in the
investment process. The family ofce is also responsible for
continuing to follow asset level performance and manage its
portfolio of these assets on a day-to-day basis.
• Public direct investing is centered on liquid debt, equity
securities and derivatives that trade over a public exchange.
These investments are made through the use of public
information and are subject to regulatory requirements that
both protect and constrain the investor. Unless very large
positions are accumulated, public direct investing provides very
limited inuence over the underlying asset’s management and
strategic decisions.
• Private direct investing focuses on taking a more active role
in the deal process and underlying investment. The family
ofce will often be more involved in business decisions
and strategy for the entity or asset. The investment can be
structured as debt, equity, or as a specic asset purchase
(e.g., real estate). Information can include both public and
non-public items. Regulatory requirements are much looser,
giving the investor greater access to information but more
limited protection.
Presented below is a summary of the key benets and
considerations for family ofces regarding each investment type
(see gure 7.3).
Figure 7.3. Family ofce investment strategy
Strategy Benets Considerations Examples
Third-party managed
• Lowest infrastructure requirements
• Investment access is good but
customization is limited
• Third-party expertise can be valuable
• Management fees
• Limited control over how capital is
allocated at fund level
• Transparency can be limited
• Potential conicts of interest
• Redemption features can impact liquidity
Fund investing:
• Mutual funds
• Private equity funds
• Infrastructure funds
• Hedge funds
• Fund of funds
Public direct
• Liquid asset class
• Avoids management fees
• Highly customizable portfolios
• Large investment universe
• Ability to use family ofce expertise in
investment selection
• Limited to public market opportunities
• Information must be public
• Generally has limited inuence over
underlying entity or asset
• Subject to public market volatility around
valuation
• Moderate infrastructure requirements to
manage portfolio
Traditional investing:
• Money markets
• Fixed income
• Equities
• Commodities
• Options
Private direct
• Avoids management fees
• Highest potential for “alpha”
• Structuring exibility
• Ability to use family ofce expertise in
investment selection
• Highly customizable portfolios
• Increased access to information, including
non-public
• Ability to inuence decision-making around
underlying asset
• Investment sourcing can be challenging
• Illiquid asset class
• Investment process, including due
diligence and documentation, can be
burdensome
• High infrastructure requirements
Alternative investing:
• Private equity
• Venture capital
• Mezzanine debt
• Real estate
• Infrastructure projects
• Natural resources
• Royalty streams
40 EY Family Ofce Guide Pathway to successful family and wealth management
Section
Private direct investing
Recently, a strong trend has emerged of family ofces beginning
to pursue direct investments in the private market. The primary
drivers for this trend have been: (i) a search for better investment
control, (ii) attractive risk-adjusted returns that have limited public
market correlation, and (iii) lower price volatility. This type of
investment strategy, however, requires the implementation of a
formal investment committee process to identify, vet and execute
new opportunities, as well as manage ongoing portfolio needs.
Some family ofces have chosen to team up with other family
ofces to pursue this strategy as a club. This teaming-up offers
attractive synergies around infrastructure, deal sourcing, and
idea sharing but does create governance issues with investment
selection and ongoing management. For small- to mid-sized
family ofces, the club approach also enhances their overall
competitiveness in the marketplace by increasing the capital
available to pursue new opportunities — an important criterion in
winning a competitive deal.
Along the same lines, family ofces can also decide to pursue
individual deals on a co-investment or standalone basis. The
private direct investment process can be broken into three broad
phases: (i) making, (ii) managing and (iii) monetizing. Setting up a
formal investment committee process around the implementation
of these phases and setting up the necessary infrastructure in
the family ofce for dealing with direct investments are critical.
Family ofces need to make sure that they have the right resources
available and policies and procedures in place to ensure that the
risks and opportunities around each investment are understood and
managed (see gure 7.4).
Figure 7.4. Private direct investing process
• Researching
• Sourcing
• Evaluating/due diligence
• Structuring
(e.g., M&A and tax implications)
• Financing & capital markets/
structure
• Closing
Phase
Description
Key
activities
Ongoing
support
network
Making
The process of deciding to make
the investment
Managing
The ongoing management and
monitoring of the investment
• Strategic objectives
• M&A, organic, etc.
• Operations, financial results/cash flow
• Capital markets/structure
• Refinancing
• Dividend recapitalization
• Future capital needs
• Compliance
• Governance
Monetizing
The process to return capital
to the investor (can be ongoing)
• Full sale
• Partial sale
• Capital markets/structure
• IPO
• Refinancing
• Dividend recapitalization
• Securitization
Financing, M&A, tax, legal, regulatory, process improvement,
technology, risk management, compliance, accounting/financial reporting
While family ofces often possess the foundation needed to create
a successful direct investment strategy, investment gaps can exist
at each phase of the process. Family ofces, like traditional asset
managers, often rely on outside professionals to assist with specic
services that are not carried out in-house (e.g., M&A advisory,
capital markets advisory, legal advisory, tax advisory, accounting).
This is particularly true as a family ofce platform initially begins
pursuing the private direct investing strategy. Over time, however,
as it gains experience and builds out its infrastructure, many of
these professional services can be brought in-house.
41EY Family Ofce Guide Pathway to successful family and wealth management
Section
8
Technology plays an important role in creating an efcient family
ofce. Furthermore, nding the right individuals to manage
these platforms is crucial. Technology helps a family ofce to
navigate core objectives, manage legacy changes and adhere
to industry updates. It is important that a family ofce identies
its core technology needs before choosing or creating solutions.
Automation is an excellent way to keep costs under control and
to mitigate risk. IT tools and platforms that a family ofce should
consider are:
• Custody platform (bank, brokerage or trust company)
• Consolidated reporting
• Trading and portfolio management tools
• Risk management tools
• General ledger and accounting software
• Client Relationship Management (CRM) tools
• Tax preparation software
The selection of IT should be well thought out and designed in order
to provide efcient reporting, trading, portfolio management and
accounting. The technology can range from off-the-shelf products
to highly sophisticated, customized solutions. Much of this can be
outsourced or provided at low cost from service providers, freeing
up the family ofce resources to focus on growing the wealth. The
following sections examine a selection of the various platforms in
more detail.
Custody platform
The use of multiple custodians creates the obligation to consolidate
the assets. This can be done for a fee by a third-party vendor,
in-house with the proper investment in systems, or by the use of a
global custodian.
The custody of bankable assets is the safekeeping and servicing
of assets, either with one or multiple custodians or banks (see
gure 8.1).
IT, trading tools and platforms
42 EY Family Ofce Guide Pathway to successful family and wealth management
Figure 8.1. Structure with global custody
Client
Global custodian
Securities
trading
Portfolio manager
2
External positions
• Real estate
• Yacht
• Car
• Private jet
• Business
Centralized custody and administration of all securities
• Overview on total assets, easy comparison of PM’s and simplified controlling
Global custodian
Portfolio
3
Portfolio
4
Portfolio
2
Portfolio
Global custodian
Asset
management
Asset
management
Securities
trading
Portfolio manager
3
Portfolio manager
4
Asset
management
Securities
trading
Asset
management
Securities
trading
Global custody refers to the custody and administration of assets
with one custodian, which offers many advantages such as:
• The consolidation of all bankable securities, nancial
instruments, and liquid assets, so that the time-consuming work
of consolidation resides with the global custodian and not the
family ofce
1
• The provision of a comprehensive, transparent overview of the
performance of all the assets at all times via a consolidated
investment report (providing a uniform format and standards for
all assets)
• The assets can be managed either by the custodian bank, an
external asset manager, or the client himself (i.e., the client
selects their preferred asset manager with no restrictions,
and the asset manager is free to select the brokers for
securities trading)
• The opportunity to include some non-bankable assets, such as
direct real estate investments, mortgages, third-party derivatives,
art collections and yachts
Source: GlobalCustodyPitchbook, Credit Suisse, 2013.
1. A survey by Family Ofce
Exchange in November
2012 showed that family
ofces spend one-third
of their time producing
accounting and nancial
reporting.
43EY Family Ofce Guide Pathway to successful family and wealth management
Consolidated reporting
A proper design of this process early on will allow families to
understand their investments, identify risks and strengthen their
condence in their family ofce. Consolidated reporting has been
proven to be the most valuable tool of all for a family ofce, and is
highly recommended.
Trading and portfolio management tools
Some family ofces employ an asset allocation model, which they
give to fund managers. Others make their investments in-house,
in which case portfolio management and trading systems become
more important.
Various modules can be added to the infrastructure to deal with the
increased scale and complexity. These can include:
• A portfolio management system
This provides the backbone of a fund’s operational infrastructure
and acts as the internal books and records.
• An execution management system
An electronic trading platform that provides Direct Market Access
trading connectivity as well as direct connectivity to broker
algorithms.
• Order management system
This provides the main trading platform for the rm. As with an
execution management system, it also provides Direct Market
Access trading and broker connectivity. Other key functions
include compliance (pre- and post-trade), rebalancing, order
staging and allocations, and portfolio modeling.
CRM tool
A CRM tool is vital for a family ofce to manage critical information,
such as that relating to family members, in one central location.
Information retained in a CRM database should include family
contact information, family discussions regarding services or major
family events, the structure of the family, and third-party contacts,
such as legal counsel, accountants and insurance contacts.
Human capital and technology
When choosing technology for a family ofce, it is imperative to
have the right individual(s) in place to manage and operate the
software. Such individuals, who may be in dual operational roles,
should have an understanding of performance analysis and of
accounting principles. They should be “detail oriented”, have the
ability to leverage technology for integration purposes and have
basic Excel skills. Depending on the size and technical complexity
of the IT system, some family ofces may hire a Chief Technology
Ofcer. This person would be responsible for support, updates,
communication and software training.
The implementation of IT in a new or existing family ofce may
require additional resources. These resources might involve
external consultants, who can provide advice and support with
respect to integration, implementation and the verication of input
and output data.
Implementing technology
Once the core needs have been identied and the appropriate
solutions chosen, it is vital to implement them effectively.
Appropriate implementation may include the following:
• Conceive a detailed project plan, setting out the responsibilities of
each vendor
• Agree the data import processes with each vendor
• Create data and functionality test scripts for each platform
• Hire an external consultant for data output testing
• Hold frequent meetings with each vendor on progress and on
project plan milestones
44 EY Family Ofce Guide Pathway to successful family and wealth management
Appendix
1
The legal setup
(excluding the US)
Since a family ofce is a business, the
question of which jurisdiction provides
the best environment for such activities
often arises. Legal and tax structures will
have a big impact on the structure and
operational performance of the family ofce
and, as such, need to be given substantial
consideration.
Given that the family is at the center of
the family ofce, choosing a location close
to the family, or at least to the central
members, would appear to be much more
important than a tax-optimized choice
of location. Also the proximity to already
existing, substantial family assets can be a
decisive aspect. Nevertheless, legal, tax and
regulatory aspects relevant to the setup, as
well as to the operations of a family ofce,
have to be checked carefully.
Structure and jurisdiction
Considering the often global nature
of families and investments today, the
location and structure of the family ofce
needs to be exible enough to manage the
changing landscape of the family, while still
maintaining the benets of a traditional,
centralized family ofce. The family should
gather the following information about its
global concerns:
• Location of each family member —
presence in multiple jurisdictions
• Future migration and travel plans
• Location of substantial family wealth
• Future investment plans and goals in
other jurisdictions
• Locations where family members are
subject to various taxes
Criteria catalog
After reviewing various global interests of
the family, the next step is to investigate
the relevant jurisdictions by weighing the
particular benets and disadvantages of
various structures and jurisdictions. This
analysis is unique to each family. Pertinent
items for consideration in each jurisdiction
include:
• Legal structures available
• Tax implications of structure
• Ease of maintaining employees
• Cost of operation versus value received
• Ability to invest and manage assets of a
global family
• Risks, reputation, and volatility —
economic and political climates
• Regulatory and information ling
requirements — immigration and visa
requirements for family members
• Ability to coordinate efciently with
advisors in other jurisdictions
• Quality of communication and relationships
with tax and regulatory authorities
• Streamlined exchange of information
• Flexibility to restructure in the future —
including migration
• Opportunities for succession
Which aspects are actually relevant in each
individual case depends in particular on
whether the family ofce will:
• Actually own the family wealth
Or
• Administer the family wealth by acting for
the family members
Or
• Only advise family members on their joint
investments, and in selected elds of
activity
Depending on the framework provided by
the jurisdiction, there are normally many
aspects that must be considered in order
45EY Family Ofce Guide Pathway to successful family and wealth management
to optimize the individual situation within
the given set of legal, tax and regulatory
frameworks. This section examines these
considerations in more detail.
Asking the right questions
about location
The most crucial aspect of choosing a
location for a family ofce may not be the
legal and tax environment. Nevertheless,
there are obviously a few jurisdictions
that stand out as centers of family ofce
excellence.
The following jurisdiction summaries
provide you with information on the
regulatory environment for the provision of
family ofce services in the most relevant
jurisdictions and with an overview on the
company law and tax issues regarding the
family ofce itself. This basic information
is intended to illustrate those aspects that
have to be considered when dening the
scope and the location of the family ofce.
It is important to establish which questions
have to be asked — and answered — in the
process of setting up a family ofce.
Germany
Limitation regarding nancial
activities
The most important law regarding the
regulatory environment for family ofces
in Germany is the German Banking Act
(Kreditwesengesetz — KWG). This sets
out the regulatory terms and conditions
for giving investment advice and similar
services. To what extent regulatory
restrictions have to be respected depends
on the structure and the specic tasks
of the family ofce. Nevertheless, the
following aspects have to be considered:
• If the family ofce is structured as a
company (corporation or partnership)
that actually owns the family wealth
(with the family members as shareholders
or partners) its investments qualify
as “own account transactions”
(Eigengeschäften), which do not require
a special permit and are not subject
to further regulatory requirements.
Consequently, the family ofce’s
personnel do not require special permits.
• If, on the other hand, the family ofce
acts as an advisor to the family or
family members on how to invest
their assets, or if the family ofce
performs the investments on behalf
of the respective owner of the funds,
such activities may require special
permission from the Federal Financial
Supervisory Authority (Bundesanstalt fr
Finanzdienstleistungsaufsicht — BaFin).
On 22 July 2013, the European
Alternative Investment Fund Managers
Directive (AIFMD) and the domestic
law based upon this guideline (KAGB —
Kapitalanlagegesetzbuch) became effective
with a huge impact on the whole industry.
Investment undertakings, such as family
ofce vehicles which invest the private
wealth of investors without raising external
capital, should not be considered to be
AIFs in accordance with this Directive. Any
impact on the activities of MFOs have to be
closely monitored and need to be addressed
individually.
US
UK
Netherlands
Germany
Belgium
Switzerland
Austria
Mexico
UAE
Qatar
Hong Kong
Singapore
Australia
New
Zealand
46 EY Family Ofce Guide Pathway to successful family and wealth management
Limitation regarding legal and
tax advice
Under German law, legal and tax services
may only be administered by lawyers and
by certied tax advisors respectively. If
a company performs these professional
services, such a company has to be
registered as a law rm or a tax consultancy
practice, which requires that the company
is at least partly owned and managed by
persons who are personally authorized to
render such services. Thus, the provision of
such professional services by a family ofce
is only possible if the company meets the
aforementioned requirements or if it only
arranges for the provision of such services
through trusted advisors.
Limitation of liability
The extent of possible liability for
professional mistakes is dependent on the
structure of the family ofce and on the
legal nature of its services. If the family
ofce actually holds the family assets (as
the legal owner) its management is only
accountable within the limits of directors’
and ofcers’ liability. Financial losses
are losses of the family ofce itself and
cannot be claimed as damages by the
family directly.
However, if the family ofce acts as an
advisor to the family (still owning the
assets according to legal denition) any
shortcomings in the quality of the advice
resulting in nancial losses may be claimed
as damages. A total exclusion of liability,
even for gross negligence, is not permissible
under German law. Furthermore, it is
advisable to cover such risks by using
nancial-loss insurance.
Company law issues
Family ofces may be structured in various
ways in Germany. Normally, it would be
advisable to establish an independent
legal entity using a corporation (stock
corporation — AG, limited liability company —
GmbH) or a limited liability partnership
(KG). The use of a partnership (without
built-in limitation of liability) does not seem
appropriate (but is also possible). From the
point of view of corporate law, corporations
(especially stock corporations) do not offer
the same degree of exibility as limited
liability partnerships.
But this effect is, more or less, limited to
corporate matters, such as the notarization
of the articles of association and their
amendments and (in the case of stock
corporations) notarization of other
shareholder meetings. As far as day-to-day
business is concerned, there are no real
differences between the relevant structures.
German law does not have structures
comparable to common law trusts; it has
not ratied the Hague Convention on
the Recognition of Trusts. For instance, a
foreign trust with German-situated property
set up by a will is invalid from a German civil
law perspective.
Limited liability company
A limited liability company (GmbH) requires
a minimum share capital of €25,000. The
GmbH is represented by its managing
directors (Geschäftsfhrer) who are (only)
internally bound by shareholder decisions,
but can act independently, against explicit
shareholder instructions, with legally
binding effect.
Stock corporation
A stock corporation requires a minimum
share capital of €50,000. It is represented
by its executive directors (Vorstand)
who can also act independently. The
executive directors are chosen by the
supervisory board (Aufsichtsrat), whose
members are elected by the shareholders.
A direct supervision of the executive
directors by the shareholders is not
legally possible.
Limited liability partnership
The limited liability partnership is normally
composed of a GmbH acting as a general
partner, and one or more limited partners
whose liability can be limited to any amount
(but must be registered with the commercial
register of the company). The partnership
is managed by the general partner which
is a GmbH. One or more limited partners
may be managing directors of the GmbH
(general partner).
Family foundation
According to German civil law, a
foundation is an organization that, by
using its capital, promotes a special
purpose set by the founder. Usually, the
capital of the foundation needs to be
preserved and only the income is spent
for dened purposes. A foundation
has its own constitution regulating its
organizational structure and codifying
the purposes set by the founder.
A foundation has no members or
shareholders and can be formed as
a legal entity.
Tax issues
From an income tax point of view, the
treatment of corporations and partnerships
is different. Corporations are subject to
corporate tax (Körperschaftsteuer, 15%) and
solidarity surcharge (Solidaritätszuschlag,
5.5% on the corporate tax). Furthermore,
trade tax (Gewerbesteuer, approximately
15% depending on the municipality where
the business is located) is imposed on the
company.
If a family ofce is set up as a corporation
and actually holds the family assets,
certain parts of the income (dividends and
capital gains from the sale of shares in
corporations) are tax-exempt (except for
5% of such income which is deemed to be
nondeductible business expenses). This can
lead to material economic benets if the
income is accumulated at the corporate
level. The 95% tax exemption is not
granted for portfolio dividends (less than
10% shareholding at the beginning of the
calendar year) received from 1 March 2013
onward. There are plans to extend this
restriction to portfolio capital gains as well.
If, however, the prots of the family
ofce in the legal form of a corporation
are distributed to its shareholders
(individuals), this income (dividends) may
again be subject to German income tax
(and solidarity surcharge and church tax,
if applicable), if such shareholders are
taxable in Germany. Generally, a at tax
of 25% and solidarity surcharge (5.5%
on the income tax) and church tax (if
applicable) are applied on the dividends.
47EY Family Ofce Guide Pathway to successful family and wealth management
If the shareholding belongs to the private
assets of the shareholder and amounts at
least to 25% respective to 1% in the case
of the shareholder being employed by the
corporation, the shareholder can opt for the
taxation on the basis of the partial income
procedure (60% of the dividend is taxable
and 40% is tax-free), which — in contrast
to the at tax — allows the shareholder to
consider negative income resulting from the
shareholding.
Partnerships are not subject to taxation
(except for trade tax). Their income is
split among the partners (without regard
to whether or not a prot distribution is
actually made) and taxed as their personal
income. Such income of the partners is
subject to income tax (Einkommensteuer,
current marginal rate of 45%), if the partner
is an individual, or corporate tax, if the
partner is a corporation. Dividend income
and capital gains from shares held at
partnership level may be partially
tax-exempt; in this regard, special rulings
may apply (depending partly on the
shareholder structure).
Switzerland
Limitation regarding nancial
activities
Given that family ofces do not normally
accept deposits from the public on a
professional basis, family ofces do
not require a banking license. Asset
management is a standard activity of many
family ofces. Asset management as such —
i.e., acting in the name and for the account
of the family — is currently not subject to
licensing in Switzerland.
However, asset managers are subject
to the Anti-Money Laundering Act, and
must become members of a recognized
anti-money laundering self-regulatory
organization or directly subordinated to
the Swiss Financial Market Supervisory
Authority (FINMA). If the family ofce
acts as an asset manager of a collective
investment scheme (either Swiss or
foreign), a FINMA authorization is required
for the asset management activity. Further,
if a family ofce intends to distribute units
or shares of a collective investment scheme,
this is also a regulated activity and subject
to a FINMA authorization.
Limitation of liability
A family ofce would normally be
established as a share corporation and not
as a partnership. This is to avoid, as much
as possible, personal liability of the board
and the managers of the family ofce. If the
family ofce is part of the family business
and holds the family assets (as the legal
owner), the board and the management of
the family ofce are only accountable to
the company, its shareholders and creditors
within the limits set in the Swiss Code of
Obligations for any losses or damages
arising from any intentional or negligent
breach of their duties.
If the family ofce is separated from the
family business, and therefore acts as a
contractual advisor to the family and its
companies, the general liability rules for
obligations and agency contracts apply.
Under Swiss law, the family ofce would be
liable for any fault, without any limitation
with regard to the amount. As a matter of
course, the liability is limited by contractual
agreements to gross negligence and wilful
misconduct or capped at a certain amount
for “slight” negligence.
Company law issues
The legal form of a Swiss family ofce is
neither driven by the complexity of its
functions nor the family’s wealth structure.
Given the unlimited personal liability of
at least one partner, Swiss partnerships
are not a common legal form for a family
ofce. Swiss foundations are also seldom
used, given their rigid rules in the Swiss
Civil Code. In addition, Swiss law does
not provide for legal forms comparable to
common law trusts, although Switzerland
has signed the Hague Convention of 1 July
1985 on the law applicable to trusts and on
their recognition, which has been in force
in Switzerland since 2007. Finally, limited
liability companies are often avoided, given
the need to register company members
with the register of commerce. Therefore,
the usual legal form would be a share
corporation.
More important than the legal form is
the fundamental question of whether
the family ofce holds the family assets,
i.e., whether the family ofce is part of
the family-run concern or whether the
family ofce is separated from the family
business. In practice, both setups exist. A
separation is more often seen in large-scale,
multinational family businesses with fully
operational entities, whereas integration
occurs where the business is smaller or the
assets only consist of nancial investments.
Tax issues
Due to Switzerland’s federal system, taxes
are levied at three different levels, the
federal, cantonal and communal level.
Therefore, the taxation of similar legal
structures varies from canton to canton as
some of the applicable regulations, and in
particular tax rates, are not harmonized.
In general, corporate taxation for family
ofces in Switzerland consists of the
following aspects:
• Corporate income tax is levied at the
federal, cantonal and communal level.
Whereas the federal statutory tax rate
is 8.5% of the net prot after tax, the
cantonal and communal rates vary
depending on the location of the entity
and the tax privileges available, if any. In
the case of ordinary taxation, the total
effective maximum tax burden, consisting
of federal, cantonal and communal taxes,
ranges from approximately 12% to 24%.
• Provided that a tax privilege is applicable,
the total effective maximum tax burden
starts at approximately 8%.
• Capital tax on net equity is also due
once a year and varies, as it is levied on
the cantonal and communal level only,
between 0.001% and 0.525% depending
on the location of the entity and the tax
privileges available, if any. Approximately
half of the cantons allow corporate
income tax to be credited against the net
equity tax.
Usually, family ofces provide their services
mainly to related parties in a closed
environment. In order to avoid discussions
with the tax authorities on the taxable
prot, family ofces should either prepare
48 EY Family Ofce Guide Pathway to successful family and wealth management
sufcient documentation on their transfer
prices or reach a respective agreement
with the authorities in an advance tax
ruling. Such a ruling would generally dene
the taxable prot based on the cost-plus
method, with a markup of between 5% and
15%, depending on the value-added of the
operations in Switzerland.
A one-off capital duty of 1% is generally
levied on capital increases or contributions
to Swiss-incorporated companies. However,
tax planning is available around exemptions
for (i) qualifying mergers, reorganizations
and nancial restructurings and (ii) other
contributions within incorporations and
capital increases of up to the rst CHF1m.
In addition, a securities turnover tax on the
sale or exchange of taxable securities may
apply if the family ofce (i) qualies as a
securities dealer in the capacity of a broker
or dealer or (ii) trades on the family ofce’s
own account, provided it holds more than
CHF10m of taxable securities. The tax rate
is 0.15% for Swiss securities and 0.3% for
foreign securities.
Economic double taxation, such as
taxation of the corporation and taxation
of the shareholder, according to his or her
distribution, should also be considered. But
it may be reduced or avoided by mitigating
provisions similar to the partial taxation
of dividends distributed to Swiss residents
or the participation exemption applicable
to Swiss corporate shareholders, provided
they hold in both structures a minimum
share of 10% in the family ofce. For the
participation exemption, an alternative
fair market value of the participation of a
minimum of CHF1m is sufcient.
Also, it is worth mentioning that due to
the Hague Convention of 1 July 1985
on the law applicable to trusts and their
recognition, which has been in force in
Switzerland since 2007, Swiss-based
family ofces acting as trustee or protector
should generally not trigger negative
tax implications in Switzerland. This is
because in neither capacity is the family
ofce the benecial owner of the trust
assets, although the trustee holds the legal
title. Trust assets have to be permanently
monitored, controlled and managed,
whereas less complex structured assets
may require less monitoring, but focus
more on asset protection and preservation
for future generations.
Austria
Limitation regarding nancial
activities
Under Austrian law, legal and tax services
may only be offered by lawyers and
by certied tax advisors. If a company
performs such professional services, it
has to be registered as a law rm or a tax
consultancy practice. Thus, the provision
of such professional services by a family
ofce is only possible if the company meets
the aforementioned requirements or if it
arranges for the provision of such services
through trusted advisors only.
Limitation of liability
The extent of possible liability for
professional mistakes depends on the
structure of the legal form of the family
ofce and on the nature of its services. If
the family ofce manages a company that
actually holds the family assets (as the legal
owner), the family ofce is only accountable
within the limits of its directors’ and ofcers’
liability. Financial losses of the holding
company itself are losses of the family ofce
itself and cannot be claimed as damages by
the family directly.
If the family ofce acts as an advisor to the
family’s companies or the family members
themselves, any shortcomings in the quality
of the advice resulting in nancial losses
may be claimed as damages. Normally
the liability is (and should be) limited by
contractual agreement to gross negligence
and/or capped at a certain amount.
Company law issues
The legal form of a family ofce in Austria
is mainly dened by the family’s wealth
structure. Complex structures and assets
have to be permanently monitored,
controlled and managed, whereas less
complex structured assets may require
less monitoring, but focus more on asset
protection and preservation for future
generations. Depending on the family’s
wealth structure, a family ofce’s functions
range from mere administration to high-
level advice and management services.
More important than the legal form is the
fundamental question of whether the family
ofce holds the family assets, i.e., whether
the family ofce is part of the family wealth
or is separated from the family or business.
Depending on the family’s asset structure,
the Austrian jurisdiction offers different
suitable legal forms. Since the introduction
of the Austrian Private Foundation Act in
the 1990s, many family-owned fortunes
were endowed in private foundations.
Accordingly, many organizational and
administrative services are provided by the
foundation’s governing board.
Today, the governing board not only
manages and coordinates family assets,
but also needs expertise in other elds and
should guarantee independent, complete
and comprehensive advice. Although
the foundation’s governing board is not
considered the management board of the
private foundation by the Austrian Private
Foundation Act, a family ofce can be
installed through the foundation deed.
The family ofce’s members, tasks,
functions, rights and goals, as well as the
governing board’s instruction rights can
be established in the foundation’s deed.
Outside the legal form of the Austrian
private foundation, a family ofce can be
set up as the managing board of a holding
company with limited liability (GmbH),
which actually holds the family’s assets, or
as a service company with limited liability
that offers advisory services to the family’s
holding companies or the family members
themselves.
Tax issues
From a tax planning perspective, family
ofces can be set up in a variety of legal
forms, such as corporations, partnerships
or private foundations. Which form ts
the requirement best will depend on the
individual asset and holding structure as
well as on the range of services provided
through the family ofce.
From an income tax perspective,
corporations and partnerships are treated
differently. Corporations are subject to
49EY Family Ofce Guide Pathway to successful family and wealth management
tax, while partnerships are “look through”
vehicles and taxed at the partner’s level.
If a family ofce is set up as a corporation
and actually holds the family assets,
then dividends (including hidden prot
distributions) received by an Austrian
company from other Austrian companies
are exempt from corporate income tax
(no minimum holding is required). Capital
gains derived from the sale of shares in
Austrian companies are treated as ordinary
income and are subject to tax at the regular
corporate tax rate.
An Austrian company is entitled to the
international participation exemption,
if it holds at least 10% of the share
capital of a foreign corporation that is
comparable with an Austrian corporation
for more than one year. Dividends from
participations that do not meet the criteria
for international participations are subject
to the general corporate income tax rate
of 25%. However, shareholdings in EU
corporations, certain European Economic
Area (EEA) corporations and corporations
that are resident in other countries
with which Austria agreed to exchange
tax information qualify as international
portfolio participations. Dividends from
such international portfolio participations
are exempt from tax, irrespective of the
ownership level.
Distributions from corporations are
subject to a withholding tax of 25% (from
1 January 2016, the rate will increase
to 27.5%), if not qualifying as repayment
of capital. Partnerships themselves are
not subject to taxation. Their income is
allocated to the partners (irrespective of
any distribution) and taxed as the partner’s
income. Currently, the top marginal rate
for individuals is 50%; from 2016 this will
increase to 55%.
A private foundation is subject to the
standard corporate tax rate of 25%.
Dividends (including hidden prot
distributions) received by an Austrian
private foundation from Austrian and
foreign companies are exempt from
taxation. Capital gains derived from the
sale of shares are subject to a special
intermediary tax of 25% which can
be set against the withholding tax on
grants of the private foundation to its
beneciaries. Grants are subject to a
withholding tax of 25% (from 2016 the
rate will increase to 27.5%).
The Netherlands
Limitation regarding nancial
activities
The most important law regarding the
regulatory environment for family ofces in
the Netherlands is the Financial Supervision
Act (Wet Financieel Toezicht — Wft). The
Wft sets out the regulatory terms and
conditions for giving investment advice
and similar services. This law is monitored
by the Authority for the Financial Markets
(AFM). Any company or person wishing to
provide nancial services will need a permit
from the AFM. The costs of these permits
range from €2,000 to €5,500. Neither the
law nor the AFM distinguishes between the
legal forms of a nancial services company.
Besides a permit for the company itself, all
employees providing the actual nancial
services will require a Wft certicate (i.e.,
they must have completed a professional
training).
Limitation of liability
The extent of possible liability for
professional mistakes is dependent on the
structure of the family ofce. If the family
ofce holds the family assets (as the legal
owner), its management is only accountable
within the limits of directors’ and ofcers’
liability.
If, on the other hand, the family ofce acts
as an advisor to the family (still owning
the assets according to legal denition),
any shortcomings in the quality of the
advice resulting in nancial losses may be
claimed as damages. Normally, the liability
is — and should be — limited by contractual
agreement to gross negligence and capped
at a certain amount. It is advisable and
common to cover such risks by using
nancial-loss insurance.
Company law issues
Family ofces may be structured in various
ways in the Netherlands. Normally, it would
be advisable to establish an independent
legal entity using a corporation (stock
corporation — NV, limited liability company —
BV). The use of a partnership (without
built-in limitation of liability) does not seem
appropriate (but is also possible). From the
point of view of corporate law, corporations
(especially the BV) offer a large degree of
exibility.
Dutch law does have structures comparable
with common law trusts (foundations).
The Netherlands has ratied the Hague
Convention on the Recognition of Trusts
(dated 1 July 1985). For tax purposes,
assets owned by a trust-like entity
(separated private assets or APV) are
generally attributed to the settlor or his or
her heirs.
Limited liability company (GmbH)
A limited liability company (BV) requires
a minimum share capital of €0.01. The
BV is represented by a board consisting
of at least one director (bestuur). The
members of the board are elected by the
shareholders. The board is (only) internally
bound by shareholder decisions, but
can act independently, against explicit
shareholder instructions, with legally
binding effect.
Stock corporation (NV)
A stock corporation requires a minimum
share capital of €45,000. It is represented
by a board consisting of at least one
director. The members of the board can
act independently. The board members are
chosen by the shareholders or, in the case
of larger corporations, a supervisory board
(Raad Van Commissarissen). A supervisory
board is compulsory if the company either
has capital exceeding €16 million, more
than 50 employees on a stand-alone basis
or more than 100 employees on a group
basis. The supervisory board is elected by
the shareholders.
Dutch foundation
A foundation (Stichting) is a legal entity
that, by using its capital, promotes a special
purpose set by the founder. A foundation
has no members or shareholders. The
foundation is represented by a board
consisting of at least one director. The way
50 EY Family Ofce Guide Pathway to successful family and wealth management
the board is appointed is not prescribed by
civil law. A procedure to appoint the board
can be chosen to t the appropriate needs
of the foundation, but the choice has to be
included in the articles of association.
It is prohibited for a Dutch foundation
to make distributions to its founder(s),
director(s) or any other persons unless, in
the latter case, the distribution has a social
or charitable purpose.
Tax issues
From a tax point of view, the treatment of
corporations and foundations is different.
Corporations
Corporations are subject to corporate
income tax (Vennootschapsbelasting, 20%
on the rst €200,000 of prot, 25% on the
prot over that threshold). If a family ofce
is set up as a corporation and holds the
family assets, certain parts of the income
(dividends and capital gains from the sale of
shares in corporations) are tax-exempt. The
tax exemption is not granted for portfolio
dividends (less than 5% shareholding)
or dividends received from corporations
resident in tax havens. Distributions by
the family ofce or corporation to the
shareholders are generally liable to dividend
withholding tax (15%).
Foundations
The Dutch foundation is only liable to
corporate income tax to the extent
that it performs commercial activities.
If a foundation engages in commercial
activities, but the prot does not exceed an
amount of €15,000 in a year (or €75,000
in the last ve years), the exemption will
also apply. Distributions by the family ofce
or foundation are generally liable to Dutch
gift tax (10%-40%).
Belgium
Limitation regarding nancial
activities
Family ofces in Belgium may be subject to
several laws and royal decrees regarding
the supervision of the nancial sector and
of nancial services. This legislation sets
out the regulatory terms and conditions
for giving investment advice and similar
services.
This legislation is monitored by the
Financial Services and Markets Authority
(FSMA). Any company or person wishing to
provide nancial services will need a permit
from the FSMA. The cost of these permits
depends on the kind of services offered by
the family ofce. The law limits nancial
services to certain legal forms.
Besides a permit for the company itself,
employees providing the actual nancial
services may require certain certications,
depending on the services offered.
Limitation of liability
The extent of possible liability for
professional mistakes is dependent
on the structure of the family ofce.
If the family ofce holds the family
assets (as the legal owner), the liability
of its management will be covered by
the directors’ liability as described in
the Belgian Companies Code or, if the
management is not a director of the family
ofce, by the contract between the family
ofce and the management.
If, on the other hand, the family ofce acts
as an advisor to the family (still owning
the assets according to legal denition),
the liability for shortcomings in the quality
of the advice resulting in nancial losses
will be a contractual liability. Normally
this liability is — and should be — limited by
contractual agreement to gross negligence
and capped at a certain amount. It is
advisable and common to cover such risks
by using nancial-loss insurance.
Company law issues
Family ofces may be structured in various
ways in Belgium. Normally, it would be
advisable to establish an independent legal
entity using a corporation (a public limited
company — NV, or a private limited liability
company — BVBA).
Private limited liability company
(BVBA)
A private limited liability company (BVBA)
requires a minimum share capital of
€18,550. The BVBA is represented by one
or more directors (zaakvoerder/gérant).
A distinction is made between a statutory
director (appointed in the articles of
association) and a non-statutory director
(appointed by the general meeting of
shareholders). The board is (only) internally
bound to shareholder decisions, but can act
independently, against explicit shareholder
instructions, with legally binding effect.
Public limited company (NV)
A public limited company (NV) requires
a minimum share capital of €61,500. It
is represented by a board consisting of a
minimum of three directors (bestuurders
or administrateurs). However where the
company is incorporated by two founders
or has no more than two shareholders, the
board of directors may be limited to two
members. The members of the board can
act independently. The board members are
chosen by the shareholders.
Tax issues
Corporations are subject to corporate
income tax (Vennootschapsbelasting,
of in principle 33.99%). The highest
rate for small and medium enterprises
(SMEs) is, however, 35.54%. An SME for
the application of the so-called reduced
progressive tax rates is dened as a
company with a taxable prot not exceeding
€322,500. Income below €322,500 is
taxed at progressive rates ranging from
24.25% to 34.50%, to be increased with 3%
crisis surtax (subject to conditions, and not
applicable to holding companies).
If a family ofce is set up as a corporation
and holds the family assets, certain parts
of the income (dividends and capital gains
from the sale of shares in corporations) are
(partly) tax-exempt. Capital gains on shares
which are held for an uninterrupted holding
period of one year are subject to a 0.412%
tax. This rule is, however, only applicable
51EY Family Ofce Guide Pathway to successful family and wealth management
to large companies (and not to SMEs). If
the one-year holding period is not reached,
the capital gain will be taxed at the rate of
25.75%. Dividends received are taxed at
the normal tax rates. However, according
to the EU Parent-Subsidiary Directive,
the participation exemption provides
for a deduction of 95% of qualifying
dividends from the taxable basis in certain
circumstances.
Distributions by the family ofce or
corporation to the shareholders are
generally liable to a dividend withholding
tax (25%). A reduced rate applies to
dividends paid by small companies on
nominative shares issued as of
1 July 2013 provided these shares are
received in exchange for a contribution
of cash into the company and that an
ownership requirement and holding period
requirement are met. The rate amounts to
20% for dividends distributed during the
third year following the contribution, and to
15% for dividends paid as from the fourth
year following the contribution.
The UK
Regulatory environment
A family ofce can work at different
levels — from being run by a small group of
trusted individuals or family members to
being managed by a professional service
provider. The laws governing a family ofce
can vary depending on its structure. In the
UK, investment advice is given either by
a nancial advisor or a stockbroker. Both
have to be registered with the Financial
Conduct Authority (FCA), and certain larger
institutions have to be registered with the
Prudential Regulatory Authority. The FCA
is the independent body that regulates
the nancial services industry in the UK.
With statutory powers invested in it by the
Financial Services Act 2012, the FCA has
a wide range of rule-making, investigatory
and enforcement powers.
Limitation of liability
Family ofces can act as an unincorporated
entity and thereby there is no limitation of
liability. All investments remain owned by
the principal, and employment laws and
other public liabilities (and other litigation)
will attach to the individual. For those
who wish to limit liability, there are three
entities normally considered: limited liability
companies (Ltd), limited partnerships (LPs),
and limited liability partnerships (LLPs). All,
in general, protect the owner from nancial
penalty up to the level of equity invested in
the family ofce entity.
An LP is used primarily as an investment
vehicle where the aim is purely asset-
holding, growth, and income generation. An
LP is normally distinguishable from an LLP
because its owners are generally not active
within an LP business. Therefore, an LLP
is most frequently seen where the entity
is a trading concern or where the owner
is active in the business. LPs are more
frequently used for UK-based families as a
vehicle which can be used to transfer wealth
through the generations in a well-governed
and tax-efcient manner over time.
Many international investors want to use
UK law as the governing law of operation
because of the independence and enduring
stability of the UK judicial system. An
often perceived disadvantage of obtaining
limitation of liability is the corresponding
requirement to lodge nancial information
with the UK authorities, which then
becomes available to the public. Those
wishing to keep their nancial affairs
private can, however, often take advantage
of various opportunities to keep their prole
private, with appropriate structuring. Many
family ofces are established in the UK as
an advisory function but with ownership
of assets held abroad. This is to take
advantage of the nancial expertise in
London, but also because certain families,
who are not citizens of the UK (although
they may be tax residents), can take
advantage of the UK tax system, which
allows income earned outside the UK to
not be taxed in the UK unless brought into
the country.
Legal structures
It is possible to set up a family ofce in the
UK using any of the following structures:
Limited company
A limited company is a corporate entity
limited by shares. The family may be
the shareholders and possibly also act
as directors, with or without non-family
professionals at the family ofce. A
company has separate legal personality.
Partnerships
A partnership is two or more persons
carrying on a business with a view to prot.
It is effectively transparent for tax purposes
(i.e., the partners are taxed on their share
of the income and gains of the partnership).
An LP has “general partners” who manage
the partnership, and “limited partners” with
limited liability, who do not. An LLP is an
entity that is taxed in the same way as a
partnership, while affording limited liability
to its members.
A trust
A trust is an arrangement whereby assets
are held by trustees for the benet of the
trust’s beneciaries. They are generally
governed by a trust deed.
Informal or contractual
relationship
Families may employ individuals directly to
provide them with family ofce services.
Alternatively, there may be an informal
arrangement whereby individuals who
are employed by the family company also
provide family ofce services to the family.
Tax structures
UK resident limited companies are
legally distinct entities and are subject
to corporation tax on their prots. Non-
UK resident companies are not subject
to corporation tax unless they carry out
business in the UK through a “permanent
establishment.” If they receive income from
a UK source other than via a permanent
establishment (e.g., from UK property or
other UK investments), they may be subject
to income tax.
Partnerships (LPs and LLPs) are generally
transparent for tax purposes, and the
52 EY Family Ofce Guide Pathway to successful family and wealth management
partners are taxed directly on their share
of the income and gains. The trustees of
UK resident trusts are subject to income
tax and capital gains tax on the income and
gains of the trust. Non-UK resident trusts
are subject to UK income tax on UK source
income. Anti-avoidance provisions can
apply to tax income and gains received by
non-UK trusts, companies and other entities
for UK residents connected with the entity.
This is a complex issue and advice should
be taken before establishing a non-resident
entity. However, offshore entities can
provide tax advantages in certain situations,
particularly in respect of family members
who are non-UK resident or non-UK
domiciled. Where payment is made for
family ofce services under a contractual
or informal arrangement, the recipient may
be subject to tax on the income. The precise
tax treatment will depend on the specic
circumstances of the case.
The United Arab Emirates
(UAE)
There are limited jurisdictions in the Middle
East where family ofces can be set up to
successfully manage the affairs of a family.
The Dubai International Financial Center
and the Dubai Multi Commodities Center
are two free zones within the UAE that offer
various benets, and cater to the family
ofce structure.
The Dubai International Financial
Center (DIFC)
The DIFC was established in 2004 as a free
zone nancial center offering a convenient
platform for leading nancial institutions
and ancillary service providers. The DIFC is
a well-known and established jurisdiction;
it aims to play a pivotal role in meeting the
growing nancial needs and requirements
of the region, while strengthening links with
the nancial markets of Europe, Asia and
the Americas.
SFO Regime
In order to provide a platform for families
to manage their own wealth, the DIFC has
introduced the SFO Regulation, which
applies to families comprising one individual
or a group of individuals all of whom are
the bloodline descendants of a common
ancestor or their spouses (further dened
within the SFO Regulation). One of the main
criteria for establishing a DIFC SFO is that
the family’s wealth exceeds the required
minimum of US$10 million.
MFOs are also possible in the DIFC. If
providing wealth and asset management
services to multiple families, this will fall
under the nancial regulations of the Dubai
Financial Services Authority (DFSA), which
regulates all nancial services conducted
in the DIFC (purely consulting or advisory
services would not fall under DFSA
regulation).
Legal structures
SFOs may be structured in various ways
within the DIFC; several vehicles are
permitted, which include (but are not
limited to) the following:
• Company limited by shares (LTD)
• Limited liability company (LLC)
• Limited liability partnership (LLP)
• General partnership (GP)
Benets of the DIFC
The DIFC offers companies a 100% foreign
ownership structure, no exchange controls,
and a US dollar-denominated environment.
The DIFC also follows an international
legal system based on the common law
of England and Wales, an independent
common law judicial system consisting
of the DIFC Judicial Authority (the DIFC
courts), and a regional international
arbitration center launched by the DIFC
and the London Court of International
Arbitration (LCIA).
Dubai Multi Commodities Center
The Dubai Multi Commodities Center
(DMCC) was originally established in 2002
as a commodity market place. However,
today it caters to a broad range of activities
and is currently one of the largest and
fastest-growing free zones in the UAE. The
DMCC offers 100% foreign ownership and
recently expanded its offering to include an
SFO license to manage the private wealth
of family members, where all individuals
are bloodline descendants of a common
ancestor or their spouses.
One of the main criteria for establishing a
DMCC SFO is that the family’s wealth has
a minimum of US$1 million of investible or
liquid assets.
Legal structure
DMCC SFOs are permitted as free zone
LLC structures with a specic license to
allow the wealth, asset, and legal and
administrative affairs management of a
single family. These can be provided to a
family member, family business, family
entity (corporate structure), family trust
or foundation. The DMCC SFO must be
wholly owned by the same family, or by a
registered trust owned by the same family
members.
Criteria for setting up an SFO
The main criteria for both the DIFC and
DMCC are:
• 100% of the ultimate benecial ownership
of the SFO belongs to members of a
single family
• If the ultimate benecial owner is a trust
or similar entity, 100% of the principal
beneciaries/controlling individuals are
members of the same family
• The SFO does not provide services to
third parties; it manages a single family’s
proprietary assets only
• The SFO has a physical presence within
the applicable free zone
UAE tax structure
There is currently no federal UAE taxation.
Each of the individual emirates (Dubai,
Sharjah, Abu Dhabi, Ajman, Umm Al Quain,
Ras Al Khaimah and Fujairah) has issued
corporate tax decrees that, theoretically,
apply to all businesses established in the
UAE. However, in practice, these laws have
not been enforced.
The DIFC applies a 0% tax rate guaranteed
until 2054, while the DMCC offers a specic
tax exemption for 50 years from the date of
incorporation. Thus, families who decide to
set up an SFO in the DIFC or DMCC can take
advantage of a 0% tax rate on income and
prots, as well as the freedom to repatriate
capital and prots without restrictions.
53EY Family Ofce Guide Pathway to successful family and wealth management
They may also benet from the wide UAE
network of double taxation treaties with no
restrictions on foreign exchange.
While there is currently no applicable value
added tax or corporate income tax enforced
in the UAE, the introduction of both are
under consideration. All families and
businesses considering establishment in
the UAE should be mindful of the potential
introduction of both direct and indirect
taxes, and of future developments.
Qatar
The Qatar Financial Centre (QFC), which
was established in 2005, is another place in
the Middle East where it is possible to set up
a family ofce. The QFC stands alone from
the Qatar state regime and has separate
legal, regulatory and tax laws, which are
of international standard. The QFC is not a
free zone or an offshore center.
After the enactment of the SFO Regulations
(SFOR) in 2012, the QFC Authority (QFCA)
now aims to inform families and advisors
to families to consider the QFC as the
preferred jurisdiction for SFOs and for other
investment purposes.
Benets of setting up in the QFC
Families who decide to set up an SFO at
the QFC can take advantage of a 100%
foreign ownership structure with extensive
tax exemptions available, a low effective
tax rate (currently 10%), and the freedom
to repatriate capital and prots without
commercial and tax restrictions. They can
also benet from a wide network of double
taxation treaties, a world-class regulatory
and legal environment, and a swift and a
streamlined licensing process.
Setup and activity requirements
An SFO is a corporate body, established
within the QFC as an unregulated entity that
manages the business, investments and
wealth of a single family with a minimum of
US$5 million in investible or liquid assets.
Families interested in setting up an SFO
in the QFC are encouraged, in the rst
instance, to set up a meeting with the QFCA
strategic team, who will provide them with
deep understanding of the setup process
and the documentation required. A single
application pack should be submitted to the
QFCA which covers both the licensing and
the registration of the SFO. The application
must be accompanied by:
Letter from an eligible rm
The letter should conrm that the Articles
of Association of the SFO satises the
requirements of the SFOR, conrmation
that the applicant family constitutes a single
family and is ultimately owned by one or
more family members of the single family/
family duciary structures/family entities.
Statement signed by the applicant
or its designated representative
This should state the name of the common
ancestor and sufcient information to
prove that the applicant qualies as a single
family. This also includes, but is not limited
to, a description of the sources of assets of
the single family, full details of who controls
the single family, the legal and benecial
owners, the total number of family
members, the SFO’s activities, and details
of the designated representative.
The SFO must at all times have a registered
ofce situated in the QFC or any other QFC-
approved business building.
Duration and QFC fees
Upon submission of the complete
application pack, the establishment
procedure is generally completed within one
month. The SFO application and annual fee
amount to US$500.
Australia
Regulatory environment
Structures
The laws governing a family ofce will be
affected by its legal structure. A family
ofce may be set up in Australia using
any of the following structures (or any
combination of the structures):
Proprietary company
A proprietary company is a corporate entity
that is typically limited by shares. The
family members may be the shareholders
or directors of the company, with or without
the involvement of non-family professionals.
The directors have certain common law,
statutory and duciary obligations owed to
the shareholders and may be subject to civil
and criminal penalties. A company is a legal
person and has a legal identity separate to
its shareholders and directors.
Depending on the size and status of the
company, there will be various nancial
reporting and auditing obligations imposed
on the company. The Australian Securities
& Investments Commission is the corporate
regulator that administers corporate
legislation and rules.
Trust
A trust is a legal arrangement under which
a trustee (which may be a company and/
or family member) holds property for the
benet of the trust’s beneciaries. The
terms on which the trustee may deal with
the property it holds for the beneciaries
are generally determined by the trust deed,
trust law and legislation.
Specic tax and regulatory rules apply
for certain types of trusts, including in
particular:
• Superannuation funds (i.e., a type of
pension fund)
• Private ancillary funds (i.e., a type of
private charitable foundation)
Partnership
A partnership consists of two or more
legal persons carrying on a business with
a view to prot. A partnership may be
registered as a limited partnership, where
the liability of one or more partners (other
than the general partner) for the debts
and obligations of the business is limited.
Compliance with statutory requirements
under Partnership Acts of each state in
Australia may also be required.
Contractual relationship
Families may engage individuals directly to
provide them with family ofce services.
Individuals employed by a family company
(or other entity) may also provide family
ofce services to the family. Employment of
54 EY Family Ofce Guide Pathway to successful family and wealth management
individuals will also be subject to statutory
requirements, including the payment of
salary and superannuation entitlements.
Regulation of services
The provision of the following types of
services is subject to Australian federal or
state regulation:
• Investment advice
• Legal services
• Tax services
• Employment services
Accordingly, care should be taken to
ensure that the professional services to
be provided by a family ofce comply with
the relevant legislative and common law
requirements.
These requirements will include adherence
to rules and legislation that have reporting
and compliance obligations with the
Australian Taxation Ofce, and will vary
according to the entities, size and status of
the family ofce.
Any family ofce that operates
internationally should also be aware of
its obligations with regard to foreign
investment policies in Australia. Most
notably, this will require liaising and applying
for certain investments with the Australian
Foreign Investments Review Board.
Tax issues
The family ofce structures described
above (i.e., a private company, trust or
partnership) are all recognized as taxpayers
for Australian income tax purposes.
Consequently, they are generally required
to register with the Australian Taxation
Ofce to obtain a tax le number and le
annual income tax returns.
Australian resident taxpayers (e.g., a
company incorporated in Australia) are
subject to Australian income tax on their
worldwide income and capital gains.
For the year ending 30 June 2016, the
Australian corporate tax rate is 30% (or
28.5% for companies with an aggregated
turnover under AU$2m). Dividends paid
out of prots that have been subject
to Australian tax may be franked (i.e.,
a franking credit broadly provides the
dividend recipient with a tax credit for the
underlying company tax paid).
Generally, trusts and partnerships are
treated as “ow-through” entities for
Australian income tax purposes. That is,
subject to certain exceptions, the taxable
net income of a trust or partnership is
taxed in the hands of the beneciaries or
partners, respectively, according to their
interests in the trust or partnership. For the
year ending 30 June 2016, the tax rate for
an Australian resident individual beneciary
or partner with taxable income of more
than AU$180,000 is 49%.
Another important tax consideration is that
capital gains on trust or partnership assets
owned for more than 12 months may be
eligible for the 50% CGT discount (subject
to the circumstances of the beneciary or
partner).
Some exceptions to that ow-through tax
treatment exist in respect of:
• Complying superannuation funds (which
are subject to concessional tax rates)
• Private ancillary funds (which may be
exempt from income tax)
• Limited partnerships (which are generally
taxed as companies)
New Zealand
Regulatory environment
A family ofce can work at different levels
depending on the family’s needs and
preferences. The family ofce can be run
by a small group of trusted individuals
and/or family members, or be managed
by a professional services rm. The laws
governing the family ofce depend on its
structure.
Financial advice should be obtained from
an authorized nancial advisor registered
under the Financial Advisers Act, the Code
of Professional Conduct, and other relevant
nancial market legislation. Stockbrokers
are also required to be licensed with
the Financial Markets Authority (FMA).
The powers given to the FMA under the
Financial Markets Conduct Act 2013 are
wide-ranging and include monitoring,
supervision, investigation and enforcement.
They are also responsible for education,
information, policy-making and guidance.
Under New Zealand law, legal advice
may only be offered by lawyers holding a
practicing certicate.
Limitation of liability
Family ofces can act as an unincorporated
entity (e.g., trust or partnership) and
consequently enjoy no limitation in liability.
In these cases, all investments remain
owned by the principal, and employment
laws and public liability will attach to the
individual.
For those families that wish to limit liability,
the family ofce can be incorporated and
registered with the New Zealand Companies
Ofce. A company is a separate legal
entity from both a legal perspective and
a tax perspective. This affords the owner
protection from nancial penalty up to the
level of equity invested in the incorporated
family ofce entity. A company is required,
as a minimum, to have one or more shares,
one or more shareholders, and one or
more directors. At least one director must
either be resident in New Zealand, or be
resident in an enforcement country and be
a director in that enforcement country. The
list of enforcement countries only includes
Australia at present. All directors must be
natural persons.
A company must le an annual return
conrming that information held by New
Zealand Companies Ofce is complete and
correct. Non-compliance with ling may
result in the company being removed from
the Companies Register.
Limited partnerships also afford a level
of protection from liability for the limited
partner while the general partners are
liable for all the debts and liabilities of
the partnership, and are generally used
purely as an asset-holding entity. Limited
partnerships are registered with the
Companies Ofce.
55EY Family Ofce Guide Pathway to successful family and wealth management
Tax issues
From a tax planning perspective, family
ofces can be set up in a variety of legal
forms, such as companies, partnerships or
trusts. Which form best ts the required
needs depends on the individual asset and
holding structure as well as on the range of
services provided through the family ofce.
As tax obligations are dependent
on the nature and activities of the
investment entity, advice should be
taken before establishing a family ofce
investment vehicle.
Income tax
From an income tax perspective,
companies, partnerships and trusts are
treated differently. Companies and trusts
are subject to tax, while partnerships are
transparent and taxed at the partners’
marginal tax rate.
Corporate tax
Companies are required to lodge an
annual tax return with New Zealand Inland
Revenue. The current company tax rate
is 28% and the standard tax income year
ends on 31 March, unless prior approval is
received from Inland Revenue.
A New Zealand company is subject to
tax on its worldwide income. Relief may
be available under applicable double tax
treaty agreements. Companies that are
100% commonly owned have the option to
consolidate for tax purposes.
Special rules apply to life insurance,
nonresident insurers, ship-owning,
petroleum and mining, and forestry
companies, as well as group investment
funds, overseas investments in
controlled foreign companies and
foreign investment funds.
The dividend imputation system applies to
New Zealand resident companies. Dividends
derived by a New Zealand resident company
are exempt from tax where the companies
are 100% commonly owned.
Foreign tax credits can be claimed by a New
Zealand resident. This credit is limited to
the lower of the amount of tax paid or the
New Zealand tax payable on income.
There is no capital tax regime; however,
certain transactions are specically taxable,
including property acquired for resale,
or part of business dealings. Recently,
legislation was enacted to ensure that all
residential property bought and sold within
a two-year period is taxable, with limited
exclusions.
Trustee tax
Trustee income is taxed at 33% and
beneciary income is taxed at the
beneciary’s marginal tax rate. There is
an exception to this rule called the minor
beneciary rule, whereby distributions
made to beneciaries under 16 years old
are taxed at 33%.
The tax treatment of distributions from
trusts depends on the classication of the
trust and the nature of the distribution.
Partnerships
Partnerships are, themselves, not taxed.
Their income is allocated to the partners in
accordance with the partnership interest
held, and is taxed at the partner’s marginal
tax rate. Marginal tax rates for individuals
range from 10.5% to 33%.
Hong Kong
Regulatory environment
A family ofce in Hong Kong normally exists
to provide comprehensive services to the
high net worth individuals (HNWIs) and
their family members — be it purely owning
family assets and businesses, providing
administrative support or conducting
investment management activity. Such
functions or activities are normally run
by the family members or their trusted
employees, with the support of professional
service providers, namely, independent
trustees and legal and tax advisors.
The laws governing the setup and operation
of a family ofce can vary vastly, depending
on its structure and business model. A
family ofce usually takes the form of a
private company, managed by trusted
individuals or another company providing
professional services.
In Hong Kong, advising on securities and
asset management are regulated activities
governed by the Securities and Futures
Ordinance. If the family ofce is operating
as a business, it has to be a corporation
licensed for “asset management” (type
9 license). Depending on the exact scope
of service to be provided to clients, the
family ofce may need additional licenses
for “dealing in securities” (type 1 license),
“advising on securities” (type 4 license)
or other licenses issued by the Securities
and Futures Commission, a statutory
commission vested with policy-making,
investigatory and enforcement powers.
Furthermore, if the family ofce is an MFO
and is taking deposits from multiple high
net worth families, such an ofce will be
regarded as a “restricted license bank”
or a “deposit taking company” under the
Banking Ordinance and subject to the
regulations of the Hong Kong Monetary
Authority. Hong Kong offers a well-
developed common law system providing a
stable legal environment for the prolonged
settlement of a family ofce.
Limitation of liability
The popular types of corporate registration
vehicle for setting up a family ofce in Hong
Kong are:
• Private company limited by shares
(a subsidiary company)
• A branch ofce of a corporation
incorporated outside Hong Kong
Also possible, but less common, are
sole proprietorships, partnerships and
limited partnerships, because they are
not a separate legal entity whereby all
debts and liabilities would be the personal
responsibility of the sole proprietor or
partner, no legal rewall between them and
the business exists. Further, they do not
have continual existence.
Many HNWIs, especially those from
China, would want to use Hong Kong as
an investment platform for their private
investments overseas, and set up a family
ofce in Hong Kong to manage their
assets and businesses centrally. Such an
arrangement takes advantage of Hong
Kong’s close proximity to Chinese markets,
56 EY Family Ofce Guide Pathway to successful family and wealth management
its ease of business formation, its sound
legal and banking system without foreign
exchange controls, as well as its low and
simple tax regime, under which prots
earned outside of Hong Kong, dividends
and capital gains are not taxable.
Company law and tax issues
Given the general limited restrictions on
setting up family ofces in Hong Kong,
coupled with the low rate of taxation and
“offshore prots tax exemption regime,”
Hong Kong is felt to be a favorable place for
HNWIs to consolidate and manage their own
assets and businesses.
In Hong Kong, there are no special legal
provisions relating to the setting up of
family ofces and the following structures
are normally used:
Private company limited by shares
(a subsidiary company)
A subsidiary company is a common type
of vehicle for setting up a family ofce
in Hong Kong. The minimum number of
directors and members is one. There is no
limitation on the nationality of directors and
members. Both corporates and individuals
can act as members. That said, at least
one natural person must be appointed as a
director. Accordingly, overseas corporates
and individuals are free to set up their own
family ofce in Hong Kong with few legal
requirements.
A branch ofce
If the HNWI is uncertain about the Hong
Kong market, or the family ofce’s
operation in Hong Kong is relatively small
at the initial stage, they can choose to
set up a Hong Kong branch ofce of their
foreign corporations. Under Hong Kong law,
there is no distinction between the foreign
corporation itself and its Hong Kong branch,
and the branch is only an address at which
the corporation carries on a business.
Maintaining a branch ofce can be simpler
(e.g., a separate audit is not required).
Also, the business operation of a branch
ofce can be terminated relatively easily
by notifying the Companies Registry that
it ceases to have a place of business in
Hong Kong, whereas a subsidiary company
can only be terminated by liquidation or
deregistration, either of which can be a
lengthy and cumbersome process.
Limited company
A limited company is an entity incorporated
under the Company Ordinance of Hong
Kong limited by shares. Family members
can act as the only shareholders in an
LLC, owning the family assets through
owning the LLC, and appoint non-family
professional individuals or corporate
bodies as directors to manage the LLC as
a family ofce.
Limited partnerships
A partnership is dened under the
Company Ordinance as two or more
persons carrying on a business with a
view to prot. There are two kinds of
partnerships, regular partnership and
limited partnership. Partners in a regular
partnership do not enjoy limited liability. In
a limited partnership, there are two kinds
of partners, limited partner and general
partner. While both types of partner
are entitled to the prot generated by
the partnership, only a general partner
has the right and power to manage the
partnership. The trade-off of such power
is that a general partner does not enjoy
limited liability. While limited partners
cannot take part directly or indirectly in
the management of the partnership, they
enjoy limited liability. Therefore, limited
partnership can be used as a family ofce
vehicle to pass down a family’s wealth
through the generations by having family
members appointed as limited partners,
while non-family professional individuals
or corporate bodies can be appointed
as general partners in charge of the
partnership, being remunerated instead
of having a signicant share of the prots
generated by the partnership.
Trust
Other than owning the family ofce in
Hong Kong, directly or through their
overseas corporates, HNWIs can also
consider using a trust structure. A trust is
an arrangement under which trust assets,
which may include businesses, are held
and managed by trustees for the benet
of the trust’s beneciaries. The trustee can
be a non-family professional individual or
company managing the family assets for
the beneciaries, presumably the family
members. Trustees will manage the trust
according to a trust deed, detailing what
can and cannot be done by the trustees, the
distribution of interest and prot, and the
purpose of the trust.
Without setting up a new entity or engaging
a trust, families may employ individuals or
a professional service provider directly to
provide them with family ofce services.
Hong Kong tax structure
Hong Kong’s simple tax system and low tax
rates are always welcomed by the many
HNWIs who set up their family ofces in
Hong Kong.
Regardless of whether a subsidiary
company or a branch ofce is used to
operate the family business, they are
subject to the same tax consequences in
Hong Kong.
Prots tax
Hong Kong adopts a territorial concept of
taxation whereby only persons that carry
on a business in Hong Kong and derive
Hong Kong sourced prots from that
business would be chargeable to Hong Kong
prots tax. The current corporate prots
tax rate is 16.5%.
A person (dened to include a limited
company, a partnership or a trustee)
carrying on a trade, profession or business
in Hong Kong is subject to prots tax
on prots arising in or derived from
Hong Kong. Gains of a capital nature are
specically exempt from prots tax.
Partnerships in Hong Kong are not treated
as transparent for tax purposes. Except in
certain circumstances, prots derived by
a partnership are generally subject to tax
in the name of the partnership. While the
denition of a person does not include a
trust, in practice, besides its own prots, a
trustee is also subject to tax on behalf of
the trust in respect of the latter’s prots.
57EY Family Ofce Guide Pathway to successful family and wealth management
Dividends and distributions paid by
companies, partnerships and trusts from
after-tax prots in Hong Kong are not
subject to any further tax in Hong Kong,
either by way of withholding or otherwise.
Further to the above, under the “source of
prots” rule, an entity will not be subject
to Hong Kong prots tax even if it carries
on a business in Hong Kong but derives
prots that are arising or derived outside of
Hong Kong.
That said, the question of locality or source
of prots is a hard, practical matter of
fact. Case law indicates that, as a broad
guiding principle, “one looks to see what
the taxpayer has done to earn the prots
in question and where he has done it.” It
is necessary to appreciate the reality of
each case, focusing on effective courses for
earning the prots without being distracted
by antecedent or incidental matters.
Pursuant to the Departmental
Interpretation and Practice Notes (DIPN)
No. 21 (revised), the Hong Kong tax
authorities’ view on certain major types of
income that family business could generate
is as follows:
• Trading prots: the place where “the
contracts of purchase and sale are
effected”
• Service income: the place where the
services are rendered
• Prots from listed shares: location of
the stock exchange where the shares or
securities in question are traded
• Prots from unlisted shares: the place
where the contracts of purchase and sale
are effected
For each kind of prot, if the
aforementioned activities are performed
outside Hong Kong, the prots derived
therefrom will be offshore sourced and
not subject to Hong Kong prots tax.
On the contrary, if any of such activities
are conducted in Hong Kong, the prots
derived therefrom will be onshore sourced
and subject to Hong Kong prots tax.
Also note that apportionment of onshore
and offshore prots is possible for service
income derived from activities carried out
partially in and outside of Hong Kong.
Other merits of the Hong Kong tax system
include the following, Hong Kong does not
tax on capital gains earned by companies
and individuals, and does not impose
withholding tax on dividends and interest
received by a foreign entity from a Hong
Kong taxpayer.
Lastly, Hong Kong prots tax compliance
procedures are relatively simple and
straightforward, an entity is only required
to le its prots tax return once a year
together with the audited nancial
statements.
Indirect tax
There is no goods and services tax or value-
added tax in Hong Kong.
Estate duty and gift tax
There is no estate duty and gift tax in
Hong Kong.
Taxation on trust
The Hong Kong tax law does not contain a
code, or a set of provisions that deal with
the taxation of trusts. In other words, a
trust would in practice be taxed in the same
manner as a subsidiary company or branch
ofce whereby it would be chargeable to
Hong Kong prots tax if it carries on a
business in Hong Kong and derives Hong
Kong sourced prots. The general practice
is that if a trust is chargeable to tax in Hong
Kong, it would be charged in the name of
the trustee.
Singapore
Limitation regarding nancial
activities
Activities pertaining to securities, futures
and funds management are governed under
the Securities and Futures Act, Chapter 289
(SFA). The SFA puts in place the rules and
regulations concerning markets, market
operators, clearing facilities, intermediaries
and representatives. Regulated activities
include dealing in securities, advising on
corporate nance, fund management, and
securities nancing, among others. To what
extent the regulatory requirements and
restrictions apply depends on the structure
and the specic tasks of the family ofce.
If the family ofce is structured as a
company that holds the family’s wealth
(with the family members as shareholders
and directors) and the family ofce enters
into investments on its own account, such a
company could be viewed as an investment-
holding company and therefore will not be
regulated under the SFA. Such a company
will be subject to Singapore’s normal tax
rules, and an applicable income tax rate of
17% applies on income that it derives.
On the other hand, if the family ofce acts
as an investment advisor or manager to
the family’s asset-owning vehicle(s), such
investment management activities may be
regulated under the SFA. Under the SFA,
among other requirements, the family ofce
will have to register as a Registered Fund
Management Company (RFMC) or apply for
a Capital Markets Services (CMS) license
for fund management with the Monetary
Authority of Singapore if there are third-
party assets under management (AUM). If
the AUM belongs solely to the family, there
may be an exemption from registering as
an RFMC or holding a CMS license for fund
management. Where the asset-owning
vehicle(s) are managed by such a family
ofce (i.e., exempt, registered as an RFMC
or licensed under the SFA), the asset-
owning vehicle(s) may be able to enjoy tax
exemption on prescribed qualifying income.
Limitations regarding legal and
tax advice
Under Singapore law, legal advice may
only be offered by lawyers. If a company
performs such professional services, it
has to be registered as a law rm, with
Singapore registered practicing lawyers.
There are currently no regulations
specifying that tax advice can only
be rendered by certied tax advisors
in Singapore. However, there is a tax
accreditation body in Singapore — the
Singapore Institute of Accredited Tax
Professionals (SIATP) — to which tax
professionals can apply to become
accredited tax advisors or practitioners.
Thus, the provision of such professional
services by a family ofce is possible if
the company meets the aforementioned
requirements, hires personnel with the
58 EY Family Ofce Guide Pathway to successful family and wealth management
relevant tax expertise and accreditation, or
arranges for the provision of such services
through trusted advisors only.
Limitation of liability
The extent of possible liability for
professional mistakes depends on the
structure of the legal form of the family
ofce and on the nature of its services.
If the family ofce actually holds the family
wealth (as the legal owner), it is only
accountable within the limits of its directors’
and ofcers’ liability. Financial losses are
losses of the family ofce itself and cannot
be claimed as damages by the family
directly.
If the family ofce acts as an investment
advisor or manager to the family’s companies
or the family members themselves, any
shortcomings in the quality of the advice
that results in nancial losses may be
claimed as damages. Normally, the liability
is limited by contractual agreement to gross
negligence and capped at a certain amount.
Legal structures
Family ofces in Singapore are typically
structured as a limited company. The use
of partnerships is not commonly seen
(although it is possible) in view of the
unlimited personal liability of at least one
partner. There are also structures involving
the use of a trust.
Limited company
A limited company is a corporate entity
limited by shares. The family may be
the shareholders and possibly also act
as directors, with or without non-family
professionals in the family ofce. A
company is a separate legal entity distinct
from the directors and shareholders.
Partnerships
A partnership is two or more persons
carrying on a business with a view to prot.
It is effectively transparent for tax purposes
(i.e., the partners are taxed on their share
of the income and gains of the partnership).
A limited partnership must consist of at
least one general partner who has unlimited
liability and one limited partner who enjoys
limited liability. An LLP is taxed in the
same way as a partnership, while affording
limited liability to its members in view of its
separate legal status.
Trusts
A trust is an arrangement whereby assets
are held by trustees for the benet of the
trust’s beneciaries. The trust is generally
governed by a trust deed.
Tax structures
Singapore has adopted a territorial and
remittance-based tax system. Tax is only
imposed on income accruing in or derived
from Singapore, or received in Singapore
from outside, unless otherwise exempt.
Companies are subject to corporate income
tax on their prots (at a prevailing rate of
17%), with certain partial tax exemptions on
chargeable income.
If a family ofce is set up as a company
in Singapore and holds the family assets,
certain parts of the family ofce’s income
(e.g., Singapore one-tier exempt dividends
and capital gains from the sale of shares in
corporations or other capital assets) will be
tax-exempt.
If the family ofce is a Singapore tax
resident company, certain foreign-
sourced income earned (e.g., foreign
dividends) may qualify for tax exemption,
subject to conditions being met. The tax
resident family ofce would also have
access to Singapore’s network of over 70
comprehensive double taxation agreements
with other countries, which may offer
certain double taxation reliefs and reduced
withholding tax rates.
The prots of the family ofce (in the legal
form of a Singapore tax resident company),
when distributed to its shareholders as one-
tier exempt dividend income, will be tax-
exempt in the hands of the shareholders.
Withholding tax is not applicable on
dividends made by the family ofce.
Partnerships, limited partnerships and LLPs
are generally transparent for tax purposes,
and the partners are taxed directly on their
share of the income and gains — at the
prevailing progressive tax rates (currently
up to 20% or up to 22% for the basis period
from 2016 onward) if the partner is an
individual, or corporate tax rate if the
partner is a company.
The taxable income of a trust may be
assessed to tax on the trustee (in general,
a limited company) or the beneciaries (or
both) depending on the circumstances.
Where tax is assessed on the beneciaries,
this is commonly referred to as the “tax
transparency treatment.”
Where the taxable income of a trust (or
part thereof) is to be assessed to tax on the
trustee, such income will be subject to tax
at the prevailing corporate income tax rate
(currently 17%). The tax at the trustee level
will be a nal tax.
If tax transparency treatment is accorded,
no tax will be imposed at the trustee level
on that beneciary’s share of taxable
income and that beneciary will be subject
to tax on the income distributions received
at his or her own individual tax rates. That
beneciary will also be entitled to the same
concessions, exemptions and foreign tax
credits as if he or she had received the
income directly.
Mexico
Legal setup and regulatory
environment
Family ofces are not specically regulated
by law in Mexico. However, it is not
uncommon for wealthy families to set up a
family ofce to manage their estates. Some
families have an SFO to ensure the value
of their assets, while others rely on the
services of an MFO or choose to outsource
the services needed through a virtual
family ofce.
Family ofces offer a wide range of services,
primarily classied into three categories:
(i) legal and bookkeeping; (ii) tax
compliance; and (iii) investment advice.
Legal services vary, depending on the
specic asset and family structure, but
typically involve legal advice with respect
to contracted obligations and succession
planning, as well as bookkeeping and the
maintenance of legal documentation. Tax
services are also determined by the specic
needs of the family, but normally consist of
the preparation and ling of tax returns and
notices, and the compliance of other tax
59EY Family Ofce Guide Pathway to successful family and wealth management
obligations arising from the transactions
carried out by the family members directly
or through their investment structures. In
general terms, legal and tax services do not
have restrictions under Mexican law.
However, some relevant regulations
for investment advice services were
introduced recently through the Mexican
Stock Exchange Law (Ley del Mercado de
Valores — LMV) and the newly enacted
Mexican Anti-Money Laundering Law (Ley
Federal para la Prevención e Identicación
de Operaciones con Recursos de
Procedencia Ilícita — LFPIORPI).
In terms of the LMV, individuals and entities
that provide services for stock portfolio
management or personal investment
advice, will be considered investment
advisors and will be subject to the
supervision of the National Banking and
Securities Commission (Comisión Nacional
Bancaria y de Valores — CNBV). Their
obligations include registering with the
CNBV, and periodically ling information
with the CNBV about their clients and
operations.
In order to be registered by the CNBV,
individual investment advisors must, among
other requirements, be properly certied,
and have a sound reputation and credit
history. Entities operating as investment
advisors also have to be properly certied
and have a good nancial reputation and
credit history, among other things. They
should also have a physical ofce where the
services will be provided, le information
about their shareholders, and provide a
manual that sets out standards and policies
to resolve conicts of interest.
It is important to consider that investment
advisors may not be required registration
before the CNBV if, among others,
(i) services are provided exclusively for
the benet of a family group (i.e., SFO)
and the services are not promoted in
Mexico; (ii) the investment advisor is non-
resident in Mexico, the services are not
promoted in Mexico, there is no physical
ofce available in Mexico, and there are no
agents, commissioners, or any other type of
representatives of the investment advisor
in Mexico.
In terms of the LFPIORPI, family ofces
qualifying as investment advisor also
have obligations relating to anti-money
laundering, including the proper
identication of their clients through “know
your customer” procedures, maintenance
of documentation related to the operations
carried out on behalf of their clients,
and the appointment of a compliance
representative before the CNBV.
Limitation of liability
In general terms, investment advisors will
be liable for damages from their clients if
they do not comply with the restrictions
established by the LMV in rendering their
services. The LMV does not allow them
to accept any kind of remuneration for
the promotion of certain securities or
intermediaries; accept funds or securities
from their clients (unless as a remuneration
for their services); offer guaranteed yields
or act against their client’s interest; or
act as co-owner of their client’s securities
intermediary contracts, among other
restrictions.
Investment advisors are also bound by
the terms of the service contract with
the client.
Legal structures
It is possible to set up a family ofce
in Mexico using any of the following
structures:
Legal vehicles
The two main types of commercial entities
are the limited liability company (SRL) and
the stock corporation (SA); civil entities
may be used, principally the civil law
corporation (SC).
A limited liability company is established
by partners who are only obligated to pay
their contributions. There must always be a
minimum of two partners and a maximum
of 50 partners. The administration of
limited liability companies will be held
by one or more managers who may be
partners or third parties to the company,
appointed temporarily or indenitely.
A stock corporation is established by
shareholders who are liable only for a
payment of the value of their subscribed
shares. There must be a minimum of
two shareholders and each one must
subscribe to at least one share; there is no
maximum number of shareholders. The
social contract must set up the minimum
amount of capital stock, which must be fully
subscribed. The administration will be held
by one or several directors.
A civil law company is established by the
partners for a common purpose that is
primarily economic, but must not constitute
commercial speculation. The partners
are only liable for the payment of their
contributions. There must be a minimum of
two partners; there is no maximum number
of partners. The social contract must set
up the minimum amount of capital and the
share of each partner. The administration of
the partnership may be held by one or more
partners.
Tax issues
Corporations (either commercial or civil)
that are resident in Mexico for taxable
purposes will be taxable on their worldwide
income. Corporations are considered to be
resident in Mexico if they have established
their principal place of management,
or their effective management center,
in Mexico.
Corporations are subject to federal
corporate income tax at a rate of 30% on
their taxable prot. When a corporation
makes a distribution of dividends to its
shareholders, it will be subject to an
additional 10% withholding tax. However,
in some cases, when a civil law corporation
makes a distribution of yields to its partners
there will be no additional withholding tax.
60 EY Family Ofce Guide Pathway to successful family and wealth management
Appendix
2
US regulatory and tax
considerations
The comments in this section are intended
as a general overview of the nancial and
tax regulatory environment applicable to
family ofces operating in the US. Any US
tax advice contained herein is not intended
or written to be used, and cannot be used,
for the purpose of avoiding penalties
that may be imposed under the Internal
Revenue Code, applicable state or local tax
law provisions. EY does not offer advice
regarding non-tax related legal matters in
the US. Due to the complexity of US federal
and state nancial laws and regulations, US
legal counsel should be sought regarding
the establishment or operation of a family
ofce in the US.
Regulatory environment
Family ofces in the US generally provide
a broad range of services to the families
they serve. Some services provided may
be regulated or subject to governmental
oversight. One important exception is
legal services. While family ofces may
provide consulting services, they are
generally unable to practice law due to
statutes that prohibit the practice of law by
non-licensed attorneys and rules limiting
certain associations between lawyers and
non-lawyers where the practice of law is
involved.
As a business, a family ofce may be
subject to general business regulations,
including, for example, the Equal
Employment Opportunity Commission, the
Americans with Disabilities Act, and the
Patient Protection and Affordable Care Act.
It is important to remember that each of
the 50 states, as well as the District of
Columbia and individual US territories,
has its own laws and regulations that may
apply to family ofces. These include rules
concerning business licenses, franchise
taxes, and registration requirements for
businesses conducted in certain forms.
SEC regulation of family ofces
Pursuant to the Investment Advisers Act
of 1940 (Advisers Act), the Securities
Exchange Commission (SEC) generally has
regulatory authority over all professionals
and businesses that offer investment
advice for a fee, unless specically exempt.
As noted below, family ofces may be
subject to registration, SEC oversight and
information reporting under the Advisers
Act, unless they qualify for an exemption.
Investment advisor registration, 2011
and thereafter
In 2010, Congress passed the Dodd-
Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank). Dodd-Frank
removed the private advisor exemption,
effective from 21 July 2011. However,
Dodd-Frank also instituted several new
exemptions from registration and directed
the SEC to write a specic family ofce
exclusion (the exclusion).
Under this direction, the SEC issued Rule
202(a)(11)(G)1 (Rule 202). Under Rule
202, a family ofce is excluded from the
denition of “investment advisor” for the
purposes of Dodd-Frank if it meets the
following requirements:
• It only serves clients that are considered
“family clients”.
• It does not hold itself out to the public as
an investment advisor.
61EY Family Ofce Guide Pathway to successful family and wealth management
To understand how the exclusion may
be applicable, it is important, rst of
all, to understand the denitions of the
terms “family clients,” “family members”
and “family entities.” To conrm these
denitions under Rule 202, each family
ofce must rst of all designate a “common
ancestor” that denes the family unit
served. The common ancestor may be living
or deceased, but may not be more than 10
generations removed from the youngest
generation served by the family ofce.
The family ofce may redene the role of
common ancestor in the future.
Family members are then dened as
the lineal descendants of this common
ancestor, as well as the spouses and spousal
equivalents (and former spouses and
spousal equivalents) of such descendants.
To account for the realities of modern
families, the phrase “lineal descendants” is
expanded to include stepchildren, adopted
children, foster children, and certain other
children for whom a lineal descendant
became legal guardian while the child was
still a minor.
Family clients include:
• Current and former family members
• Certain key employees of the family ofce
and, under certain circumstances, former
employees
• Charities funded exclusively by family
clients
• The estate of a current or former family
member or key employee
• Trusts existing for the sole current
benet of family clients, unless funded
by a family client and also for the
benet of charitable and not-for-prot
organizations
• Revocable trusts funded solely by family
clients
• Certain key employee trusts
• Companies wholly owned by, and
operated for, the sole benet of
family clients
Recently, the SEC has granted exemptive
orders for advisors seeking to include in-
laws and in-laws’ relatives in the denition
of “family member.” The term “in-laws”
does not refer to a spouse of a family
member (which is considered a family
member), but is more accurately reected
by an individual who is a member of the
extended family, such as the sister of a
family member’s spouse.
On 20 January 2015, the SEC granted
an exemptive order for a family ofce
that advised a former sister-in-law (sister
of family member’s spouse) for 26 years
under the prior family ofce rules. The SEC
accepted the assertion that the former
sister-in-law was an important part of the
family, her assets had been managed by the
family ofce for more than 20 years, and
the familial, non-commercial relationship
should allow the family ofce to continue to
advise her while relying on the family ofce
exemption. Similar relief has been granted
to other family ofces; however, it should be
noted that the requests granted have been
submitted by advisors that led applications
with the SEC after the rules relating to in-
laws changed in 2011.
The term “key employees” includes:
• An executive ofcer, director, trustee,
general partner, or person serving in a
similar capacity at the family ofce
• Any other employee of the family ofce
who, in connection with his or her
regular functions or duties, participates
in investment activities, provided such
an employee has been performing
such services or substantially similar
functions for at least 12 months in a
family ofce setting, unless the employee
performs solely clerical, secretarial or
administrative functions
In their commentary on Rule 202, the
SEC specically prohibits key employees,
their trusts and their personally controlled
entities from making additional investments
through the family ofce after their
employment ends. They may, however,
continue to hold their existing investments
through the family ofce without
jeopardizing the exclusion.
The rule does acknowledge that involuntary
transfers to non-family clients may
accidentally occur and should not cause
the family ofce to fail the exclusion.
An example referenced in Rule 202 is a
bequest from the estate of a family client
to a non-family client. Rule 202 therefore
provides a transition period of up to one
year to transfer those client investments to
another investment advisor, or to otherwise
restructure to comply with Dodd-Frank.
It is important to note that the SEC
specically excludes certain other parties
from the denition of family clients.
Providing services under the Advisers
Act to these individuals would violate the
exclusion.
These exclusions include:
• Spouses or other immediate family
members of key employees, except with
respect to spousal joint property with the
key employee
• Key employees of family entities who are
not also employees of the family ofce,
such as employees of related family-
owned operating companies
• Certain key employees who do not meet
the 12-month experience requirement,
and other long-term employees
of the family who do not meet the
“knowledgeable employee standard”
• Trusts formed by key employees for
the benet of other non-spousal family
members of that employee
• Irrevocable trusts who provide for
a current beneciary that is not a
family client, as well as trusts where a
contingent beneciary that is not a family
client becomes a current beneciary,
unless the involuntary transfer rules are
followed
• Charitable or not-for-prot organizations
that have accepted any funding from
non-family clients, including the general
public, unless restructured appropriately
by 31 December 2013
These distinctions concerning which specic
employees may receive investment services
are very complicated and may prompt the
family ofce to implement detailed policies
preventing unintended consequences.
The SEC noted that in narrowly dening
the term “key employees,” they sought to
62 EY Family Ofce Guide Pathway to successful family and wealth management
allow participation only by those individuals
who “could be presumed to have sufcient
nancial sophistication, experience, and
knowledge to evaluate investment risks and
to take steps to protect themselves.”
As regards ownership and control of the
family ofce, Rule 202 makes clear that in
order to qualify for the exclusion, ownership
must reside wholly in the hands of family
clients, but control must remain either
directly or indirectly in the hands of family
members and family entities. The result is
that control is a more exclusive test than
ownership. Special care must be taken
when evaluating a family ofce’s board of
directors, to the extent that the board could
exercise control and includes non-family
members.
The SEC conrmed their position that family
members retaining the right to appoint,
terminate, or replace the directors does not
cure this issue if the board is controlled by
non-family members. By 20 March 2012,
family ofces were required to register
with the SEC under Dodd-Frank, meet the
terms of the exclusion, or receive a formal
exemption order.
The SEC decided against rescinding
previously issued exemption order, such
that family ofces in receipt of existing
exemption order would continue to be
exempt from registering as an investment
advisor even if they did not meet the terms
of the exclusion. Family ofces qualifying
for the exclusion are not required to notify
the SEC of their status. Advisors subject
to Dodd-Frank must register with the SEC
and le annual data forms and operating
reports.
Rule 202 and the exclusion have provided
greater clarity on the registration
requirements for family ofces. But
uncertainty still exists on certain key
issues, especially when the family ofce is
a division of an operating business entity
rather than a separate legal entity. Such
a structure makes distinctions between
ownership, control, employees, and clients
even more challenging to apply. Some
published reports indicate that certain
family ofces have transferred their
investment advisor function to a non-
employee, “outsourced chief investment
ofcer” model to avoid registration.
Such family ofces appear to be taking
the position that residual family ofce
investment services (cash ow modeling,
etc.) either do not constitute “investment
advice” under the Advisers Act or are
“solely incidental” to their general
obligations.
Forming a private trust company may
similarly render the investment services as
solely incidental to the trustee function. If
this is the case, the family ofce may not
be subject to Dodd-Frank. However, these
approaches are not specically sanctioned,
and the only certain way for a new family
ofce to avoid registration at this time is to
either meet the terms of the exclusion or
apply for an exemption order.
Internal Revenue Service (IRS)
oversight
The IRS has no direct oversight of
family ofces. However, the US Treasury
Department publishes Circular 230, which
presents the regulations applicable to
those professionals who practice before
the IRS. Circular 230 also contains
rules of professional conduct and lists
requirements for providing tax advice.
Tax advisors who violate Circular 230
may be sanctioned, ned, or suspended
from practicing before the IRS. Therefore,
while the family ofce itself might not be
subject to oversight by the IRS, employees
involved in the tax function may be subject
to Circular 230.
Generally, the ability to practice before the
IRS has been limited to specic classes of
professionals, including certied public
accountants, attorneys, and enrolled
agents. Prior to 2011, however, the IRS
did not attempt to regulate preparers of
tax returns. In that year, the IRS began
a program to regulate all tax return
preparers who are compensated for their
services, requiring annual registration
and payment of an annual fee, as well as
ongoing continuing education and testing
requirements. The IRS registration process
resulted in registered preparers being
assigned a Preparer Tax Identication
Number (PTIN), to be reported on all
returns signed by the preparer.
The concept of “paid preparers” is also
important in the family ofce when
considering the potential for IRS penalties
that may be applicable to tax return
positions that are not ultimately sustained.
IRC Section 7701(a)(36) denes a return
preparer as any person who prepares a
tax return for compensation, with limited
exceptions. IRC Section 6694 outlines
the monetary penalties that may apply to
return preparers who prepare tax returns
containing unsustained positions.
The rules are complex and beyond the
scope of this report, but generally a paid
preparer may be subject to signicant
monetary penalties for an unsustained tax
return position, unless the position: (1)
meets at least the “reasonable basis” test
and is disclosed appropriately on the tax
return; or (2) has “substantial authority.”
However, a tax shelter or reportable
transaction must at least meet a “more
likely than not” standard and may also be
subject to other disclosure requirements.
These terms are dened in Treasury
Regulations to the Internal Revenue Code.
It is important to note that these rules apply
not only to the person who signs the tax
return as preparer, but also to any other
person who prepares a substantial portion
of the return and any person who provides
advice on a substantial portion of a return
entry. A tax return may have multiple
preparers for these purposes, and the
penalty standards are applied on a position-
by-position basis.
One of the limited exceptions to Section
7701(a) (36) is a person who “prepares a
return or claim for refund of the employer
(or of an ofcer or employee of the
employer) by whom he is regularly and
continuously employed.” It is uncertain
whether this exception is sufcient to
except family ofce employees from
paid preparer status with respect to all
tax returns that they might prepare. It is
also unclear whether the requirement of
compensation applies in situations where
family ofces that prepare tax returns may
not bill their family clients directly for such
services. Therefore, it is unknown how these
preparer penalty rules will be interpreted
by the IRS in a family ofce setting where
63EY Family Ofce Guide Pathway to successful family and wealth management
employees sign returns, prepare portions of
returns signed by others, or provide advice
on tax return positions.
Any person engaged in the business of
preparing US tax returns, or providing
services in connection with the preparation
of US tax returns, is subject to nancial and
criminal penalties if that person knowingly,
or recklessly, discloses any information
furnished to him or her in the tax return
preparation process to another person or
uses such information for any purposes
other than preparing or assisting in the
preparation of such a return.
US legal structures
In general, a key consideration for most
family ofce organizers is selecting an
entity structure that provides some
degree of liability protection to the
owners. This includes forming the legal
entity as a corporation, a general or
limited partnership, or a limited liability
company (LLC).
While partnerships and LLCs are often taxed
identically, the fact that all the members
of an LLC can benet from the protection
of limited liability has generally decreased
the use of general partnerships or limited
partnerships in entity selection. This is
because, in either partnership structure,
the general partners retain joint and several
liability for the debts of the entity. As with
LLCs, corporations provide limited liability
to their owners.
The creation and operation of these
structures are governed by US state law. US
state law will also determine the limitations
on liability and legal life of these structures.
When creating a family ofce, the legal
entity is not required to be formed in the
state of the family’s general residence.
Tax considerations play a signicant role in
the determination of the appropriate legal
entity status for the family ofce. Because
of the numerous differences between the
taxation of corporations and partners in a
partnership, it is difcult to compare the
net tax effect of both structures without
a thorough understanding, among other
factors, of:
• The nature of the family ofce operations
• The capital funding structure and expense
funding mechanism
• The specic underlying investments and
operating businesses
• The use of partnership structures for
underlying investment pooling
• The designs for succession and future
ownership
The points below highlight some of the
key tax considerations that need to be
taken into account when selecting the legal
structure.
Cost allocations and treatment of
expenses
Regardless of the type of entity selected
for structuring a family ofce, the entity
may incur expenses related to a number
of different activities, including managing
and accounting for family-owned business
entities, portfolio investments, real estate,
and personal activities of family members.
The costs of operating the family ofce
must be allocated to the family’s business
ventures, investment activities, and
philanthropic affairs, as well as the personal
services provided, based on a reasonable
allocation methodology.
Some items may be specically allocated
if they represent the direct costs of a
particular area of operation; others may be
allocated based on usage of family ofce
resources on a time and materials basis. A
family ofce must take care in classifying
and reporting its expenditures due to the
differing tax treatment afforded to each.
Making matters more complicated, the
extent of the deductibility of these items will
differ based on the entity classication of
the family ofce.
Expenses related to a trade or business
and real estate rental activity are generally
treated more favorably under US tax law —
they are currently deductible or deferred
and deductible in later years — than are
expenses related to the management of
investment assets, for which deductions
are limited. Personal expenses of the family
members incurred by the family ofce
are generally not deductible under any
entity classication, though costs that are
partially personal and partially related to a
trade, business investment management
may be allocated appropriately.
The active management of a family
investment portfolio, and the management
of family enterprises conducted through
the corporate format, may not be viewed
as a trade or business, despite the time
and expense typically incurred in such
an operation — unless the family ofce
charges for its services and operates as
more than a mere cost center for the
family members. Thus, as noted below,
the deductibility of these expenses may
be substantially limited.
Many family ofces assist in coordinating
philanthropic activities for family members.
IRS rules on “self-dealing” prohibit certain
relationships between charities and their
related parties, though exceptions may
apply for certain expense reimbursements
for professional services rendered. The
self-dealing rules are highly complicated
and warrant specic attention from family
ofces that handle charitable affairs for
their family members.
US taxation of individuals
and trusts
The taxable income of US citizens, tax
residents and domestic trusts is subject
to a graduated rate schedule. The top
marginal tax rate on the ordinary income
of individuals and trusts is 39.6%. Long-
term capital gains and qualied dividends
are taxed at a top income tax rate of 20%.
An additional 3.8% tax generally applies
to net investment income recognized by
an individual or trust with overall income
above certain thresholds. This additional
tax applies to net income from interest,
dividends, rents, royalties and passive
business income, and non-business
capital gains received or recognized by an
individual or trust.
In some cases, the Alternative Minimum
Tax (AMT) may apply. The AMT has a top
marginal rate of 28% and applies when
it exceeds the regular income tax of an
individual or trust. Many tax benets (e.g.,
accelerated depreciation) and certain
deductions (e.g., state and local income
taxes and investment expenses) that are
allowed under the regular tax do not apply
64 EY Family Ofce Guide Pathway to successful family and wealth management
for AMT purposes. For that reason the AMT,
with its 28% rate, may exceed the regular
income tax, even at its top rate of 39.6%.
US tax law applies numerous limits to
the deductibility of expenses that are
not related to the conduct of a trade or
business, such as investment expenses,
interest, charitable contributions, medical
expenses and certain types of taxes. Net
losses from business activities reported by
an individual or trust in which the individual
or trust is not a material participant in the
management of the enterprise on a regular,
continuous and substantial basis (commonly
referred to as “passive activities”) are
generally deductible only against income
from other passive business activities.
The practical effect of the limitation on
the deductibility of “passive losses” is that
these losses are only allowed when the
individual (or trust) has positive net income
from other passive business activities or the
passive activity is completely disposed of in
a taxable transaction. Note that portfolio-
type income (interest, dividends and gains
from the sale of investments) is not income
from a passive business activity for these
purposes. A detailed discussion of the limits
on the deductibility of losses and expenses
is beyond the scope of this guide.
Deductions incurred in the course of a trade
or business are generally deductible to
individuals and trusts without limit, unless
from a passive activity. However, expenses
incurred in the production of portfolio
income are subject to substantial limitations
on their deductibility. Investment expenses
are generally only deductible to the extent
that they exceed 2% of an individual or
trust’s adjusted gross income, and are
not deductible for purposes of computing
AMT. As noted below, these limitations on
investment expenses generally do not apply
to activities engaged in by corporations.
US taxation of partnerships
Partnerships are not subject to federal
taxation at the entity level. Instead, the
partnership allocates its items of income,
deduction and credit to its partners.
Allocations of items of taxable income
and deduction may be in accordance with
capital ownership percentages but need
not be so; partnership taxation generally
offers exibility in allocations so long as the
allocations are specied in the operating
agreement and reect the partners’
economic interests in the partnership.
LLCs with more than one member are
generally treated as partnerships for
income tax purposes, unless the organizers
le an election to treat the LLC as a
corporation. LLCs with only one member,
or single member LLCs, are generally
disregarded for income tax purposes
(i.e., they are scally transparent for US
tax purposes and the owner of the LLC is
treated as the owner of the LLC’s assets).
For the purpose of the discussion below,
the term “partnership” refers to any entity
taxed as a partnership under US tax law,
and the term “partner” includes any owner
of such an entity.
A partnership must le an annual tax return
with the IRS to report its total income,
deductions and credits. Additionally, the
partnership must provide its owners with
Schedule K-1, partner’s share of income,
deductions, credits, etc., which reports
each partner’s share of these items. These
items are then reported on the partners’
own income tax returns to compute
their income tax accordingly. This may
allow partners to offset income from the
partnership with items of deduction or loss
from other sources. Such specic treatment
may differ, depending on whether the
partner is an individual, trust, or other
type of taxpayer and the character of the
partner’s income and deductions.
Individuals and trusts pay a top federal
income tax rate of 39.6% on ordinary
income, including the income from
family ofce operations. Income from
a partnership retains its “character” as
it is reported to the owners. Therefore,
preferential tax rates on qualied dividends
or long-term capital gains apply to such
items allocated to a partner from a
partnership. Consequently, items of income
or loss owing through from a family ofce
taxed as a partnership will retain their
character when allocated to the partners.
Deductions incurred in the course of a
trade or business are reported separately
from deductions incurred in the production
of portfolio income. It is important to
recall that limitations may exist on the
ability of individuals and trusts to deduct
their investment expenses and that
these limitations on investment expenses
generally do not apply to corporations.
The distribution of cash (or property) from
a partnership to the partners typically does
not result in the recognition of income
(although there are many exceptions to this
general rule), so long as the partner has
sufcient “basis” in the investment. The
basis rules are complex, but usually seek to
ensure that previously taxed income can be
distributed without incurring an additional
layer of tax.
US taxation of corporations
Corporations, other than S corporations
(described on following page), are generally
subject to US income tax at the entity
level on their worldwide income, with a
credit allowable for certain taxes paid to
foreign jurisdictions. The maximum federal
corporate tax rate is currently 35%. There
are no preferential rates for long-term
capital gains recognized by a corporation
as there are for individuals. Additionally,
the 3.8% net investment income tax does
not apply to corporations. Corporations
may deduct a portion of their dividends
received, and the corporate AMT is more
punitive in its treatment of municipal bond
income than for individuals.
Dividends of cash or property paid by the
domestic US corporation (and certain
non-US corporations) to the shareholders
are generally taxed to the shareholder at a
maximum individual income tax rate of 20%,
though additional complexities may apply
on distributions of appreciated property. At
higher income levels, individuals and trusts
are also subject to the 3.8% net investment
income tax applicable to dividends.
The corporation receives no deduction
for its dividend distributions. For this
reason, shareholders in US corporations
are often said to be subject to “two levels
of taxation” — earnings are taxed annually
at the entity level and accumulated prots
are taxable to the shareholders when
distributed. However, at lower income levels
the overall rate of corporate income may
65EY Family Ofce Guide Pathway to successful family and wealth management
be less, depending on the mix of income
received and tax paid by the corporation,
compared to such income in the hands of a
partner in a partnership.
When analyzing the deductibility of
expenses, corporations are generally
not subject to the same restrictions
as individuals on expenses related
to producing portfolio income (i.e.,
investment expenses). If the family
ofce itself represents a prot-making
activity, then expenses will generally
be fully deductible to the corporation
unless they represent personal expenses
of the shareholders. Thus, the lack of
preferential tax rates for certain income
at the corporate level may be offset by
more favorable treatment of deductions,
especially when considering AMT.
Additional complications may apply if the
corporation is treated as a personal holding
company (a corporation whose gross
income consists principally of portfolio
income or rents and royalties) or a personal
service corporation. Proper consideration
should be given at formation to addressing
these issues.
S corporations
Certain corporations may elect to be
taxed under subchapter S of the Internal
Revenue Code as a hybrid entity, called an
S corporation, or “S corp”, which allows
for many (but not all) of the benets of the
ow-through nature of partnerships. This
may allow an entity to be a corporation
in legal entity form, but avoid the double
taxation of corporations.
However, the eligibility requirements are
very restrictive, especially if the entity
is owned by trusts. The complicated
rules concerning trust ownership must
be analyzed before formation in a family
ofce structure, due to the high likelihood
that a trust will ultimately be an owner
of the family ofce. Furthermore, the
eligibility requirements prohibit any foreign
ownership of the corporate stock, which
may limit the applicability of S corp status in
a global family ofce context.
With the exception of certain distributions
of appreciated property, S corporations are
generally not subject to federal tax at the
entity level, unless the legal entity existed
as a non-electing S corporation prior to
electing S corp status. S corporations may
also be subject to entity-level tax on the
disposition of certain appreciated property
that was held by the entity upon conversion
from traditional corporation status.
Like a partnership, an S corporation
passes through all items of income and
deduction to its owners, and such items
retain their character when reported
by the shareholder. Distributions of
previously taxed income are generally
not taxed as income to the shareholder
if the shareholder has basis in their
stock. However, if an S corporation was
previously a traditional corporation and had
undistributed accumulated earnings and
prots at the election date, the distributions
could be taxable. Because the income and
deductions of an S corporation retain their
character, the treatment of investment
expenses is similar to that of a partnership,
and thus less advantageous than the
treatment of a traditional corporation.
Unlike partnerships, S corporations do
not allow for exibility in allocations
among shareholders. All income and
deductions must be allocated pro rata to
the shareholders on a per-share, per-day
basis. S corporations may only have one
class of stock, unless the only difference is
with respect to voting rights. This prohibits
S corporations from allowing any action
that could be viewed as creating a second
class of stock, including disproportionate
distributions.
Family ofces housed within
private operating companies
Many family ofces begin their life cycle
within the structure of a private operating
business, providing services to the family
business owners. These family ofces
are not segregated into a separate legal
entity, but rather exist as a division of
the operating company itself. Operating
a family ofce within a private operating
company presents numerous additional
tax issues for consideration. Also, from
a non-tax standpoint, housing a family
ofce within a private company can
create additional privacy and governance
concerns, especially if signicant
management operations are handled by
non-family members, or if family members
have varying degrees of involvement in the
operating company.
A family ofce that is not adequately
compensated for its services by the family
members it serves may be thought to have
made a distribution to its shareholders,
to the extent that the value of services
rendered is deemed to exceed the value
paid for such services. This consideration
may not be material in a stand-alone family
ofce structure (especially those taxed as
partnerships) but may be very material
within a private operating company. The
issue is heightened for S corporations,
where a deemed distribution could
terminate the entity’s S election if not
proportionate to all shareholders.
Also, as noted earlier, the SEC registration
requirements for family ofces may be
more difcult to navigate and manage
within the connes of a private company
structure, especially if the company has
any degree of employee or non-family
ownership. For these and other reasons,
many families have chosen to relocate
their family ofce from within their
private operating company to a separate
legal entity.
Private trust companies
Family ofces often consider whether
they should provide professional duciary
(trustee) services to the family members
they serve, or whether such services are
best purchased from external sources.
Those ofces wanting to provide duciary
services may consider setting themselves
up as private trust companies in order to
bundle duciary services with traditional
family ofce services. The number of
private trust companies remains a small
percentage of the overall number of US
family ofces.
66 EY Family Ofce Guide Pathway to successful family and wealth management
Contri
EY
Peter Brock Executive Director, Family Ofce Services Leader, Germany
Jörgchristian Klette Executive Director, Private Client Services, Germany
Dr. Christian Reiter Senior Manager, Private Client Services, Germany
Astrid Wimmer Partner, Family Business Leader, Austria
Johannes Volpini Partner, International and Private Tax Services, Austria
Roland Suter Executive Director, International Tax and Private Client Services,
Switzerland
Christian Wasser-Petrnousek Executive Director, International Tax and Private Client Services,
Switzerland
Jvo Grundler Managing Partner, Legal Services, Switzerland
Dirk van Beelen Executive Director, Private Client Services, Netherlands
Wouter Coppens Partner, Private Client Services, Belgium
John Cooney Partner, Family Business Leader, UK
David Kilshaw Partner, Private Client Services, UK
Adib Rashid Director, MENA Family Business Leader, UAE
Stijn Janssen Partner, International Tax Services, UAE
Robert (Bobby) A. Stover, Jr. Partner, Americas Family Ofce Services Leader, US
Charlie J. Carr Executive Director, Private Client Services, Family Ofce Advisory, US
Joseph T. Carroll Executive Director, Private Client Services, Family Ofce Advisory, US
Justin Ransome Partner, Private Client Services, US
Jeff Brodsky Principal, Private Client Services, US
Melinda R. Rochelle Executive Director, Private Client Services, US
Charlie L. Ratner Executive Director, Private Client Services, US
Marianne R. Kayan Senior Manager, Private Client Services, US
Brian Schad Senior Manager, Private Client Services, US
Gary Mills Senior Manager, Financial Services, US
Bo Powell Senior Managing Director, Ernst and Young Capital Advisers,
LLC, US
Elias Adam Bitar Partner, International Tax Services, Mexico
Daniela Penalva Tron Senior Manager, International Tax Services, Mexico
Jacob Dabdoub Hernandez Senior, International Tax Services, Mexico
Richard Boyce Partner, Family Ofce Services Leader Oceania, Australia
Paul Ho Partner, Financial Services Tax, Asia-Pacic, Hong Kong
Simon Wang Partner, Greater China Private Client Services, Hong Kong
Siow Hui Goh Partner, Tax Services, Singapore
67EY Family Ofce Guide Pathway to successful family and wealth management
butors
Credit Suisse
Béatrice Fischer Head Philanthropy Service and Responsible Investment
Cédric Daetwyler Senior Philanthropy Advisor
Yvonne Suter Head Competence Center Philanthropy Services and Responsible
Investment
Daniela Düblin Competence Center Philanthropy Services and Responsible
Investment
Michael O’Sullivan Regional Chief Investment Ofcer, Private Banking UK & EMEA
Markus Stierli Head of Fundamental Micro Themes, Private Banking and Wealth
Management, Investment Strategy and Research
Antonios Koutsoukis Fundamental Micro Themes, Private Banking and Wealth
Management, Investment Strategy and Research
Pascal Rohner Senior Family Ofce Advisor, Private Banking EMEA and
Western Europe
Franco Dorizzi Head Single Family Ofce Team Zrich and Eastern Switzerland,
Premium Clients Switzerland and Global External Asset Managers
Bernard Fung Head of Family Ofce Services and Philanthropy Advisory
Asia-Pacic
Gerold Reiser Head of Segment and Sales Management, Private Banking EMEA
Janina von Grünigen Segment and Sales Management, Private Banking EMEA
Lucia Moreno Business Development, Private Banking Americas
CFB-HSG — University of St. Gallen
Michael Gaska, M. Sc. Research Assistant and PhD student
Thomas Zellweger, Prof. Dr. Chair of Family Business
68 EY Family Ofce Guide Pathway to successful family and wealth management
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69EY Family Ofce Guide Pathway to successful family and wealth management
Contact
us
Global and EMEIA
Germany, Switzerland and Austria
US, Canada, Central and South America
Asia-Pacic
Marnix Van Rij
Global Leader
EY Family Business
marnix.van.rij@nl.ey.com
Robert (Bobby) A. Stover
Family Ofce Services Leader
bobby.stover@ey.com
Richard Boyce
Family Ofce Services Leader
richard.boyc[email protected]y.com
Peter Brock
Family Ofce Services Leader
peter.brock@de.ey.com
Visit us at
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