The Future of the Family Office

Over the last 10 years, the number of family offices around the world has been significantly increased and this trend is expected to continue in the future. Family …

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Over the last 10 years, the number of family offices around the world has been significantly increased and this trend is expected to continue in the future. Family offices are private wealth management firms designed to preserve and manage the assets of the proprietary family. Family offices can also be referred as family controlled entities that serve really high-net investors. Its primary function is to consolidate the management of an important family fortune. Normally, these organizations hire individuals to manage taxes, investments, taxes, trusts, and legal matters.

As the number of affluent families grows, it is not surprising to see the spread of family offices over the last years. Wealth and asset management, new kinds of investment portfolios, multigenerational wealth preservation and global volatility are the primary reasons for having trusted wealth managers.

The idea of the “family office” actually goes back to the 19thand 20thcenturies, when super-rich families like the Rockefellers were really making their influences. They needed a way to pass down assets across many generations and establish family offices to handle all the family financial affairs. The idea was that a few trusted personalities would be in responsibility of handling the assets of the family and ensure it would be handed down to the next generation.

Family businesses and family offices are inseparably tangled together; the family office is just another commercial enterprise operated by the family. This association resulted in most family office structures to be defective in crucial ways.  One example of a defective type of family office is termed as the “upside down” model in the 19thand early 20thcenturies. This model is a defective type because the trustees are in complete control of the assets, not the family. This model clearly lefts the family in a separate second position behind the trustees. Another defective family office model is called as the “embedded” structure. The name of the model suggests that there is no separate family office structure exists. This resulted in embedded family office operations within the family operating business.

The Rise of 21stCentury Family Office Structures

A typical Single-Family Office (SFO) is a business operated by and for a single family. This type of family office comes in all forms and sizes, depending on the actual wealth and composition of a family. The business operations and enterprises began to evolve into more sophisticated structures. Beginning in the late 1980s, these enterprises began to evolve into more sophisticated structures. Concurrently, SFOs started to transform into multi-family offices (MFOs). While an SFO supports just one affluent family, an MFO supports two or more affluent families. MFOs are often structured by two large SFOs.

The Role and Function of Government

One must consider the relevant government regulation and future services to be offered when defining the applicable family office structure.  The nature and structure of some of the enterprises are determined by regulatory, asset and liability management considerations.

These structures include the family office management entity in addition to related and ancillary entities. The most common related family office entities include ancillary family offices, real estate property management companies, captive insurance companies, registered investment advisors (RIAs), broker-dealers and private trust companies (PTCs). In addition to related and ancillary entities, these structures include the family office supervision. The most common related family office entities include real estate property management companies, ancillary family offices, registered investment advisors (RIAs), private trust companies (PTCs), broker-dealers and captive insurance companies.

Ancillary Family Offices

Ancillary family offices are basically structured to manage an international family’s affairs in a country other than its main family office, consolidating the asset management of businesses, assets and family members in these jurisdictions. A comparable use of ancillary family offices is to host a portion of family office services in that enterprise, such as bill paying, reporting, accounting, tax preparation, while the main, control-entity family office offers the majority of remaining services.

Real Estate Property Management Companies

Property Management is a service which systematically covers all aspects of the building structure and its facilities. Real estate property management companies are usually structured to separate real estate management activities for the protection of businesses and their assets.

Captive Insurance Companies

A captive insurance company is an entity that provides risk-mitigation services for its parent company or for a set of related companies. Many family offices have established their own casualty insurance companies and captive property giving them the ability to better manage the risk associated with their businesses and get higher levels of risk coverage. Family offices also use captive properties in order to lower insurance costs, hold promising underwriting experience, increase cash flows and maximize the benefits of self-insured retention.

Dodd-Frank Compliance

The Dodd Frank regulations offer reform measures on financial institutions to prevent another financial crisis and protect consumers. Any investment adviser with clients fewer than fifteen was exempt from registration prior to the passage of this act. A better and more specific defined rule was imposed and replaced the old rules. Pursuant to the new rule, a family office is defined as “an entity which only gives advice to ‘family clients’,is wholly owned by family clients and controlled by family members, and does not hold itself out to the public as an ‘investment adviser’”.

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The Securities and Exchange Commission (SEC) has defined family clients as “current and former family members, key employees, and certain charities, trusts and not-for-profit organizations funded by family members or key employees”. A key employee is defined as “a person who is either an officer, director, trustee, general partner or person in a similar capacity at the family office, an affiliate of the family office, or a person employed by the family office or an affiliate for at least twelve months who participates in the investment activities of the family office in the course of the employee’s regular duties.”

Registered Investment Advisers

According to the Investment Advisers Act (IAA) of 1940, a registered investment advisor, or RIA, is a “person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications”. They are regulated by the United States SEC under the IAA and the guidelines implemented by the statute. The SEC registration is required if an entity meets the definition of “investment adviser” unless they are prohibited or exempted from registration. Under the IAA, a Registered Investment Adviser is a person or firm registered with the SEC that: (1) for compensation; (2) is engaged in the business of; (3) providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.


The family offices are often required by SEC to register as “broker-dealers”. A broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. In Section15 of the United States Code states

Section 15 of the United States Code (1) states that it is unlawful for a broker-dealer to use any means or instrumentalities of regional trade to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security,” unless listed with the SEC. Section 3(a)(4) of the Exchange Act defines a broker as “any person engaged in the business of effecting transactions in securities for the account of others.” Section 3(a)(5) defines a dealer as “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.” The definition of the phrase “engaged in the business” comes from case law and SEC no-action letters.

Tax and Liability Issues

Asset and liability protections, income taxes, and benefits are some of the most crucial considerations in structuring a family office. Authorities should be considered and analyzed since some geographic sectors of some countries do not enforce franchise or income taxes on certain structures. To some jurisdictions, an entity’s balance sheet was the basis for the franchise tax rather than a fixed fee. While for other jurisdictions, franchise tax was defined the other way around. If a family office is structured accordingly, the service entity can take advantage of the many tax-favored executive employee benefits, compensation, and incentives.

Tax Favored Fringe Benefits

A fringe benefit is a form of payment other than money for the services by employees.  Fringe benefit careful preparation can accomplish substantial results. The family office can cut their tax liabilities on these qualified benefits. It is also important to note that there are non-discriminant rules, compliance issues, and limitations for every particular fringe benefit so careful consideration should be done.

Wealth accumulated over many years can be threatened in a moment without proper insurance protection. Below are some of the insurance protection that a family office may consider.

Health & Accident Insurance

Accident and health insurance covers specialty policies available through an employer. It offers insurance coverage that pays benefits in case of illness, accidental injury or death. It sometimes pays for loss of income or for debt payment if it’s in connection with a loan. The family office may also deduct the cost associated with health and accident insurance.

Medical Expense Reimbursement Plan

The idea of a medical expense reimbursement plan is to provide the family office and its employees with a tax break. Under this plan, the family office reimburses an eligible employee for medical expenses that they pay out-of-pocket. These benefits are pre-tax, saving the patient considerably.

Additionally, a family office can establish a medical expense reimbursement plan as a self-funded plan whereby it opts to self-fund these benefits on tax-deductible arrangements rather than to ensure health care benefits.

Life Insurance

Premiums on life insurance are not deductible within a certain limit.  Some types of life insurance provisions such as generational split-dollar or split-dollar may be set up with some tax-deferred or limited tax-free benefits.

Disability Insurance

This is another type of policy that offers a tax-free benefit to employees. Employees who are not able to work because of accident or disability may be provided by this plan. The cost associated with this coverage can be excluded in the accumulated income of a family office.

Conditional Meals & Lodging

Meals and lodging are tax-free to the employee. The cost associated with this benefit can also be deducted by the family office.


The continued over-all uncertainty sets the scene for persistent growth of the family office sector. As requirements become more holistic and complex, we can expect to see the proliferation and evolution of family offices to continue in the 21stcentury. This development will occur around the globe and new family office structures will be better integrated with the asset preservation strategies, tax, risk management, estate, and insurances. A family office should always be driven by its ultimate goal: to make it easier for the family to manage its assets, align interests, and enhance cooperation and communication.

In order to operate, develop, and implement these sophisticated structures, a network of trusted top advisers will be needed. Increasing the globalization will drive the expansion of practices, strategies, structures, and protocols brought by huge family offices and their conglomerates.

About Blue Ocean Capital

Blue Ocean Capital is a cross-border private equity firm dedicated to actively pursuing investment opportunities in Entertainment Management, High-Tech and Blockchain, Healthcare, Family Office and Cross-border Real Estate Investment. We are committed to capital appreciation and value creation. We strive to be creative in our structuring approach to consummate transactions quickly and efficiently. We understand the need to be nimble and decisive in this competitive marketplace to capitalize on investment opportunities.


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