The path to establishing an embedded family office

Setting up an embedded family office can be a good first step toward proactively managing the many complexities that arise as wealth accumulates both inside and outside of a family business.

As a family business grows and evolves, a crucial question invariably arises: How can we best manage our expanding personal and business assets? For many families, the answer lies in the concept of an embedded family office.

Setting up an embedded family office can be a good first step toward proactively managing the many complexities that arise as wealth accumulates both inside and outside of a family business. It can help ensure more effective financial and non-financial decisions aimed at preserving the family's mission and wealth for future generations.

Still, the transition to a family office is often a difficult one. With the appropriate knowledge and planning, however, the effort can prove worthwhile. 

When to consider a family office

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Family offices connect the dots between corporate and personal resources, making the most of both by helping to ensure greater overall financial efficiency. In addition, they frequently focus on strategies that enable the business to achieve broader family goals, such as using the business as a means to create a lasting legacy for future generations.

Building a family office begins with understanding how they typically evolve. Often, they start as an embedded function within a family business to manage non-business-related activities. As business and family needs grow, they may eventually be split out into their own legal entities with their own full-time personnel. The first step, though, is to realize when a family office could be beneficial.

Two signs commonly indicate it may be time to create an embedded family office:

  1. Excess cash. When a business generates significant profits that aren't needed for growth and aren't being reinvested into it, that means the money is going outside the organization. Although the money is no longer part of the business, it still needs to be managed prudently.
  2. Altruistic intentions. When owners know they want to use their business to benefit future generations of their family and/or society, a family office can offer the expertise needed to achieve their goals.

Unfortunately, many families are hesitant to set up a family office. It can be challenging to change the roles of trusted employees, find new advisors or even break ties. Still, it's important not to allow “analysis paralysis” to set in.

Waiting too long to establish a family office can result in considerable hard and soft costs. For example:

  • Tax and investment implications. Family offices can create tax efficiencies by coordinating business and personal finances. That can have many hard dollar implications, which may increase over time. For instance, how the business is taxed could impact whether the owners should have some of their personal investments in tax-free vs. taxable bonds. Likewise, looking at levels of business income taxable on the owner's personal return to determine when to donate appreciated stocks to charity could maximize tax benefits of the donation. Gifting ownership of a successful business for the benefit of future generations can produce sizable estate tax savings. Family offices help owners understand how to combine business results with personal financial decisions to more efficiently achieve personal financial goals.
  • Family dynamics implications. Family offices often spearhead family governance efforts and advise on ways to approach delicate communications. They can act as a “bridge” between older and younger generations to preserve family harmony and allow future generations to view the business positively. They also maintain the institutional knowledge necessary to ensure future generations carry on as the owners would have liked. Should the owners die unexpectedly, for example, a family office can provide the direction the family needs to make decisions that honor the owners' wishes.

Questions to ask

The first step in setting up a family office is to determine the answers to several important questions:

  • What are the family's overall goals, needs and objectives? Before making key tactical decisions, business owners should have a clear vision of what they want the business and family office to accomplish. In other words, they should know why they want to build the family office before deciding how. This usually entails developing family mission, vision and values statements. Like corporate statements, these living documents chart a course, allowing subsequent decisions to align with the family's overarching plan.
  • What services should the family office perform? Family offices can manage a wide variety of functions. The most prevalent include personal financial planning and investing, personal taxes (including income and gift & estate taxes), family governance, personal estate planning, personal property management, personal bill payment and personal travel planning. Business owners should identify the specific functions they want the family office to do.
  • Do employees' skills match the services desired? Because family offices typically deal with finance-oriented matters, trusted CFOs or other financial employees are often asked to lead the family office. While these employees may be excellent at certain functions, it's vital that owners critically assess their talents. For instance, is the CFO truly skilled at family governance? Is someone valued for their corporate legal counsel really suited to draft personal wills and trusts for family members? Specialists should be experienced in the specific personal — not corporate — services desired. To that end, owners should avoid falling into the common trap of asking trusted employees to take responsibility for roles beyond their expertise or comfort levels. They should also be careful not to put too much responsibility on one individual. Doing so opens the risk of losing institutional knowledge if that person leaves. Instead, it's prudent to put a team with the right specialized skills in place, and to have a family office succession plan.

A safeguard for the future

Embedded family offices enable families to make smarter decisions by holistically considering business and personal assets and goals. While it's not always practical to create a fully independent family office that oversees all of a family's assets, an embedded family office can open the door to efficiencies that help safeguard the family's wealth and mission for the future.

For additional, in-depth coverage of family offices, visit our sister publication FO Pro: The Family Office Professional.

About the Author(s)

Brian Schultz

Brian Schultz, CPA, is a partner in the wealth management tax practice at Plante Moran.


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