e y f a m ily g^ﬁce ide - ernst & young · = amily ofﬁce ide p a th w a y to s u c c es s f...

I n collaboration w ith

E Y F a m ily fice ide

P athway to successf ul f amily and wealth management

amily office services

Cont

ents

1 amily Office ide P a th w a y to s u c c es s f u l f a m ily a nd w ea lth m a na g em ent

Cont

ents

o t s

o e o d

nt od ction

at is a family office

ection

1 y set p a family office 2 amily office services 3 e costs of r nning a family office 4 amily office governance 5 onstr cting a siness plan, staffing and strategic planning 6 Risk management 3 27 T he investment process 3 58 I T , trading tools and platforms 4 1

endi

1 T he legal setup ( excluding the U S) 4 4

2 U S regulatory and tax considerations 6 0

ont i to s

Re e ences

ontact s


Ab out our research partners

edit isseredit isse is one of t e world’s leading financial

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 bank ing, investment bank ing 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 w orth private clients w orldw ide, and also to retail clients in Sw itzerland. Credit Suisse is headq uartered in Z urich and operates in over 5 0 countries w orldw ide. T he group employs approximately 4 6 , 3 0 0 people. T he registered shares ( CSGN ) of Credit Suisse’ s parent company, Credit Suisse Group AG, are listed in Sw itzerland and, in the form of American D epositary Shares ( CS) , in N ew York . F urther information about Credit Suisse can be found at w w w . credit- suisse. com.

e ente o a i siness ni e sit o t a en

T he Center for F amily Business of the U niversity of St. Gallen ( CF B- H SG) focuses on research, teaching, and e ec tive ed cation in t e conte t of family firms and at international level.

T he CF B- H SG’ s w ork involves initiating, managing, promoting and running training and transfer programs, research projects and courses.

t t e t allen amily Office or m, representatives of erman spea ing single family offices meet twice a year

in a discrete and trustful setting. T he aim is an intensive exchange of experiences, best practice, and ideas.

w w w . cfb. unisg. ch

Ab out us o a a i siness

ente o ce enceEY is a mark et leader in advising, guiding and recognizing family businesses. W ith almost a century of experience supporting the w orld’ s most entrepreneurial and innovative family firms, we nderstand t e ni e challenges they face — and how to address them.

T hrough our EY Global F amily Business Center of Excellence, w e offer a personalized range of services aimed at t e specific needs of eac individ al family business — helping them to grow and succeed for generations.

e enter, t e first of its ind, is also a powerf l reso rce that provides access to our k now ledge, insights and experience through an unparalleled global netw ork of partners dedicated to help family businesses succeed w herever they are.

F or further information, please visit ey. com/ familybusiness.

a i fice e icesO r services for families and family offices are a re ection of our broad range of expertise and a symbol of our commitment tow ard family businesses around the w orld.

O ur comprehensive and integrated approach helps families to structure their w ealth and preserve it for future generations. O ur 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.

F or more information about the full range of our family office services, please visit ey com familyoffice


D ear Reader,

I t gives us great pleasure to bring to you our 2 0 1 6 revised edition of the EY Family Office Guide.

I n the last decade or so, w e have seen a distinct acceleration in the establishment of family offices aro nd t e world and even more so in t e emerging mar ets owever, irrespective of geography, there’ s a certain consistency to the motivations behind setting

p a family office Mitigating family con icts, preserving family wealt and ens ring its inter generational transfer, consolidating assets, dealing wit a s dden li idity in , and increasing wealt management efficiency are some of t em

not er reason for t e emergence of family offices is families’ desire to ave greater control over t eir investments and fid ciary affairs w ile red cing comple ity is need for a ig er degree of control was partly provo ed y t e financial crisis, in t e aftermat of w hich w ealthy families w anted to ease their concerns about dealing w ith a w ide range of external products and service providers.

amily offices are rat er complicated str ct res, neit er easy to nderstand nor simple to implement. T his publication w ill offer a step- by- step process that aims to demystify w hat’ s involved in setting p and r nning family offices

is revised edition of t e g ide, w ic was first p lis ed in , is certainly one of the most comprehensive and in- depth ever published. I t is designed as a learning tool to provide g idance to families considering setting p a family office ey incl de siness families w ho w ish to separate their family w ealth and assets from the operating business, and successful entrepreneurs look ing to structure the liq uidity gained from a highly profita le sale in order to f rt er grow and preserve t eir wealt t is also a sef l g ide on t e c rrent leading practices for t ose w o already ave a family office

W hile compiling this report, EY w ork ed extensively w ith Credit Suisse, the U niversity of t allen, and family offices t emselves ll t ese organi ations and individ als ave

provided inval a le insig ts into family offices and t eir concerns, and t e report wo ld not have been possible w ithout their help.

e ope t at yo will find t is report elpf l and ill minating for yo r decision ma ing as you plan the path for your family into the future.

F oreword

ete n iscGlobal L eader, EY F amily Business Center of Excellence

ete ockamily Office ervices

L eader, Germany, Sw itzerland and Austria

Ric a d o ceamily Office ervices eader, sia Pacific

Ro e t o to eamily Office ervices

L eader, Americas


Intro

duct

ion at is a a i o ficeamily offices ave t eir roots in t e si t cent ry, w en a ing’s

stew ard w as responsible for managing royal w ealth. L ater on, the aristocracy also called on this service from the stew ard, creating the concept of stew ardship that still exists today. But the modern concept of t e family office developed in t e t cent ry n

, t e family of financier and art collector P Morgan fo nded the H ouse of M organ to manage the family assets. I n 1 8 8 2 , the

oc efellers fo nded t eir own family office, w ic is still in existence and provides services to other families. 1

lt o g eac family office is ni e to some e tent and varies w ith the individual needs and objectives of the family it is devoted to ( D aniell and H amilton, 2 0 1 0 ) , it can be characterized as a family- ow ned organization that manages private w ealth and other family affairs.

Over t e years, vario s types of family offices ave emerged e most prominent ones are t e single family office O and

t e m ltifamily office M O , t t ere are also em edded family offices Os lin ed to t e family siness, w ere t ere is a low level of separation betw een the family and its assets. T he SF O s and M F O s are distinct legal entities and manage assets that are completely separated from the family or the family business.

W ith the progressive grow th of the family tree — ow ing to the birth of children and grandchildren and the addition of in- law s — and an increase in the complexity of the family’ s asset base, families usually professionalize their private w ealth management by setting up SF O s. As subseq uent generations evolve, and branches of the family become more independent of each other, investment activities w ithin the original SF O activities become separated. T his is the cornerstone for the emergence of an M F O . Sometimes these offices open p t eir services to a few non related families

ince t e individ al services of a family office are tailored to t e clients, or the family, and are correspondingly costly, the amount of family w ealth under management is generally at least U S$ 2 0 0 m. I t is more revealing, how ever, to calculate the minimum w ealth under management in the light of return expectations and targets, and t e res lting costs of t e family office is s ows t at t ere is no clear lower limit for a family office e costs of t e family office, plus the return target, must be achievable w ith the chosen asset allocation and structure.

1 . F or more information see roc efellerfinancial com


amily offices are arg a ly t e fastest growing investment vehicles in the w orld today, as families w ith substantial w ealth are increasingly seeing t e virt e of setting one p t is diffic lt to estimate ow many family offices t ere are in t e world, eca se of t e vario s definitions of w at constit tes a family office, t t ere are at least , single family offices in e istence glo ally and at least half of these w ere set up in the last 1 5 years.

T he increasing concentration of w ealth held by very w ealthy families and rising globalization are fueling their grow th. Particularly important in the years ahead w ill be the strong grow th of family offices in emerging mar ets, w ere for t e most part they have yet to tak e hold — despite the plethora of large family businesses in these economies. 2

is report attempts to define t e family office in a t oritative detail. I t look s at issues such as the reasons for setting up a family office ey staffing concerns w ic services a family office s o ld cover and w ic s o ld e o tso rced ow to optimi e investment f nctions and to ens re t ey wor for t e enefit of t e family e report also look s at regulatory and tax issues in k ey mark ets, w hich anyone considering setting p a family office needs to now t also addresses the relationship betw een the family and the external professionals w o are ro g t in to r n a family office t is cr cial for a family office to esta lis a alance etween t ese two gro ps if it is to function w ell.

amily offices are comple organi ations t at re ire deep k now ledge — not just of investment variables, but also a host of other factors. T his guide is a detailed handbook for those planning to set p a family office and also for t ose loo ing to set

enc mar s of leading practice wit in t eir e isting family office

As w ealth grow s, particularly in the emerging mark ets, there is no do t t at family offices w ill play an even bigger role in the management of substantial w ealth in the years ahead.

2 . Credit Suisse Wealth Report 2015


Sect

ion1 hy set up a amily o fice

As concerns about w ealth preservation and succession planning w ithin family businesses continue to rise, w ealthy families are increasingly eval ating t e enefits of setting p a family office

e easons ere are many reasons w y setting p a family office ma es

sense, but at the root of these is the desire to ensure smooth intergenerational transfer of w ealth and reduce intrafamily disputes. T his desire inevitably increases from one generation to the next, as the complexity of managing the family’ s w ealth grow s. W ithout being exhaustive, the follow ing points set out the reasons w hy a family office ma es sense

• ri acy an confi entiality

F or many families, the most important aspect of handling of their private w ealth is privacy and the highest possible level of confidentiality e family office often is, and s o ld e, t e only entity that k eeps all the information for all family members, covering the entire portfolio of assets and general personal information.

• Gov ernance and management structure

family office can provide governance and management structures that can deal w ith the complexities of the family’ s wealt transparently, elping t e family to avoid f t re con icts

t t e same time, confidentiality is ens red nder t e family office str ct re, as wealt management and ot er advisory services for the family members are under a single entity ow ned by the family.

• Alignment of interest

family office str ct re also ens res t at t ere is a etter alignment of interest etween financial advisors and t e family

c an alignment is estiona le in a non family office str ct re w here multiple advisors w ork w ith multiple family members.

• P otential higher returns

T hrough the centralization and professionalization of asset management activities, family offices may e more li ely to achieve higher returns, or low er risk , from their investment decisions amily offices can also elp formali e t e investment process, and maximize investment returns for all family members.


• Separation amily offices allow for separation, or at least a distinction, etween

the family business and the family’ s w ealth or surplus holdings.

• R isk management

amily offices allow for operational consolidation of ris , performance management and reporting. T his helps the advisor and principals to mak e more effective decisions to meet the family’ s investment objectives.

• C entralization of other serv ices amily offices can also coordinate ot er professional services,

including philanthropy, tax and estate planning, family governance, communications and education, to meet the family’ s mission and goals.

• F ocal point f or the f amily I n cases w here the main family business has been sold, a family

office can offer a new focal point of identification for t e family mem ers, for e ample w en t e family office manages t e philanthropic activities of the family.

i t t e e e do ts a o t settin a a i o fice

e esta lis ment of a family office is a ig nderta ing, and t ere ave een cases w en family offices ave not met t e family’s

expectations. Some of the potential doubts and concerns about setting p a family office are

• C ost

T he cost of regulatory and compliance reporting remains high, w hich means that the level of assets under management that a family office needs to nderpin m st e s fficient to offset its fi ed costs

• Mark et, legal and tax inf rastructures

amily offices f nction etter w en operating from centers w ere there are sophisticated mark ets and legal and tax structures. T he absence of these in emerging mark ets has undermined the development of family offices t ere is as often meant t at there has been little connection betw een the huge level of w ealth in some emerging mar ets and t e n m er of family offices M uch of the w ealth in emerging mark ets is still controlled by t e first generation is as also in i ited t e growt of family offices, eca se many are la nc ed d ring a wealt transition from one generation to the next.

ain t es o a i o fices

edded a i fice An EF O is usually an informal structure that exists w ithin a business ow ned by an individual, or family. T he family considers private assets as part of their family business and therefore allocates private w ealth management to trusted and loyal employees of the family business. U sually the c ief finance officer O of t e family siness and is department’s employees are entr sted wit t e family office d ties s not necessarily t e most efficient of str ct res, more and more entrepreneurial families are separating their private from their business w ealth and are considering tak ing t e family office f nctions o tside t e family siness, not least for reasons of privacy and tax compliance.

in e a i fice An SF O is a separate legal entity serving one family only.

ere are a n m er of reasons for setting p an O

• T he retirement of the business- ow ning generation

• A greater desire to diversify and w iden the asset structure eyond t e focal family firm

• A rising exposure to non- investment risk s, such as privacy concerns and legal risk s

e family owns and controls t e office t at provides dedicated and tailored services in accordance w ith the needs of the family members. T ypically, a fully functional SF O w ill engage in all, or part of, t e investments, fid ciary tr sts and estate management of a family many will also ave a concierge function.

ti a i o fice m ltifamily office will manage t e financial affairs of

multiple families, w ho are not necessarily connected to each other. As w ith an SF O , an M F O might also manage the fid ciary, tr sts and estate siness of m ltiple families as w ell as their investments. Some w ill also provide concierge services. M ost M F O s are commercial, as they sell their services to other families. A very few are private M F O s, w hereby they are exclusive to a few families, but not open to other families. O ver time, SF O s often become M F O s. T his transition is often due to the success of the SF O , prompting other families to push for access. Economies of scale are also often easier to achieve through an M F O structure, promoting some families to accept other families into t eir family office str ct re

• T he MF O of f ering

T o address the problem of the high operating costs of a family office, families often set p M Os, in w ic several families pool their w ealth together. O ften these M F O s w ill be directed by the lead family t at initiated t e office n M Os, all assets are

managed under one umbrella. But M F O s typically cater for a range of family size, w ealth and maturity levels. T his means that families can run the risk of not receiving the personalized advice t at t ey wo ld ave done in a dedicated family office set p

en considering esta lis ing a family office, some can see potential positives as negatives. T his tends to be particularly prevalent in t e following cases

• T he pref erence f or priv acy

Some families may be hesitant about consolidating their w ealth information t ro g a centrali ed family office str ct re

• T rust of external managers

etting p a family office is typically contingent on t e level of trust and comfort families have w ith external asset managers. H ow ever, trust typically stems from long- standing relationships w ith external managers.

• Expectations on returns

ltimately, family offices rely on t eir longevity t ro g ens ring wealt preservation is diffic lty of sec ring mar et returns in recent years has led to some tension in this respect.

rt ermore, d ring generational transitions, family office structures are tested, often to the point of destruction, as the next generation presses for different goals and objectives to manage the family’ s w ealth.


Sect

ion

t t e eart of any family office is investment management, t a f lly developed family office can provide a n m er of ot er services, ranging from training and education to ensuring that best practice is follow ed in family governance. T his section look s at t e f ll range of services a mat re family office co ld potentially provide see fig re ese incl de

inancia annin

I nv estment management serv icesypically, t is will e t e main reason for setting p a family office,

as it is central to ensuring w ealth preservation. T hese services will incl de

• val ation of t e overall financial sit ation

• D etermining the investment objectives and philosophy of the family

• etermining ris profiles and investment ori ons

• Asset allocation — determining mix betw een capital mark et and non- capital mark et investing

• Supporting bank ing relationships

• M anaging liq uidity for the family

• Providing due diligence on investments and external managers

P hilanthropic managementn increasingly important part of t e role of a family office

is managing its philanthropic efforts. T his w ill include the establishment and management of a foundation, and advice on donating to charitable causes. T hese services w ould typically involve

• Philanthropic planning and strategy

• Assistance w ith establishment and administration of charitable institutions

• Guidance in planning a donation strategy

• Advice on technical and operational management of charities


Sect

ion2 amily o fice ser ices

• F ormation of grant- mak ing foundations and trusts

• O rganizing charitable activities and related due diligence

L if e management and b udgetingome of t ese services are typically defined as concierge in

nature, but they are broader in scope, inasmuch as they also incl de dgeting services ervices nder t is eading will incl de

• Club ( golf, private, etc. ) memberships

• M anagement of holiday properties, private jets and yachts

• Budget services, including w ealth review s, analysis of short- and medium- term liq uidity req uirements and long- term objectives

t ate

usiness an financial a isoryeyond t e asset management advisory, family offices will also

provide advisory services on financing and siness promotion ese will incl de

• D ebt syndication

• Promoter financing

• ridge financing

• tr ct red financing

• Private eq uity

• M ergers and acq uisitions

• M anagement buyouts

• Business development

Estate and wealth transf eramily offices will e involved in siness s ccession and legacy

planning, enabling the transfer of w ealth to the next generation. ese services will incl de

• W ealth 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 w ealth transfer to succeeding generations

T raining and educationM uch of this revolves around the education of the next generation on iss es s c as wealt management and financial literacy, as well as wider economic matters ese services will incl de

• O rganizing family meetings

• Ensuring family education commitments

• Coordination of generational education w ith outside advisors

o e nance

R eporting and record k eepingT he maintenance of records and ensuring there is a strong reporting c lt re is anot er core part of a family office’s services

ey to t ese services is

• Consolidating and reporting all family assets

• Consolidating performance reporting

• Benchmark analysis

• Annual performance reporting

• M aintaining an online reporting system

• T ax preparation and reporting

Administrativ e serv icesdministrative services, or ac office services, are essential to t e

smoot r nning of a family office ese services will incl de

• Support on general legal issues

• Payment of invoices and taxes, and arranging tax compliance

• Bill payment and review of expenses for authorization

• O pening bank accounts

1 0 amily Office ide P a th w a y to s u c c es s f u l f a m ily a nd w ea lth m a na g em ent

• Bank statement reconciliation

• mployee management and enefits

• egal referrals and management of legal firms

• P lic relations referrals and management of p lic relations firms

• T echnology systems referrals and management of these vendors

• Compliance and control management

Succession planningEnsuring a smooth succession and planning for future generations is integral to t e long term via ility of t e family office and t e family it serves ese services will incl de

• Continuity planning relating to unanticipated disruptions in client leadership

• Evaluation of the strengths, w eak nesses, opportunities and threats ( SW O T analysis) of senior executives both w ithin and outside the family

• Re- evaluation of family board regarding roles of non- family directors

• Structuring of corporate social responsibility platforms and programs

• D evelopment of formal k now ledge sharing and training programs

• I mplementation of intergenerational estate transfer plans

• doption of a family c arter or constit tion, specifically aiming to

1 . F ormalize the agreed structure and mission of the family business

efine roles and responsi ilities of family and non- family members

3 . D evelop policies and procedures in line w ith family values and goals

4 . D etermine process to resolve critical business- related family disputes

d iso

T ax and legal adv isoryT ax, in particular, has become a much more important issue for family offices in recent years and as s c as ass med a more important part of t e f nctions of a family office egal matters are also important family office will typically employ a general co nsel and or a c artered or certified acco ntant, or several accountants and tax experts. T hese professionals usually provide t e following services

• Construct a tax plan that best suits the family

• D esign investment and estate planning strategies that tak e into account both investment and non- investment income sources and their tax implications

• ns re all parts of t e family office are ta compliant

C ompliance and regulatory assistanceamily offices need to ens re strict compliance wit reg lations

pertaining to investments, assets and business operations. T hese services will incl de

• Providing auditing services for internal issues

• Establishing a corporate governance mechanism

• Ensuring a high level of staff hiring

• Group performance monitoring and compliance

• O ffering recommendations on independent and board advisory formation

• Strengthening the regulatory investment process



R isk management and insurance serv icesT his is a service that has assumed a more important role in recent years because of t e financial crisis of and the subseq uent fallout. I t w ill be a crucial service for family offices in t e f t re as well ese services will incl de

• Risk analysis, measurement and reporting

• Assessment of insurance req uirements, policy acq uisition and monitoring

• Evaluation of existing policies and titling of assets

• Evaluation of security options for clients and property

• F ormulation of disaster recovery options and plans

• Protection of assets, w hich could involve the use of offshore accounts

• D evelopment of strategies to ensure hedging of concentrated investment positions

• Physical security of the family

• ata sec rity and confidentiality

• Review of social media policy and development of reputation management strategy

igure amily o fice ser ices

A dv is

o r yF ina nc ia l p la nning

Go v er na nc e S tr a

teg y

F a m ily O f fic e

S er v ic es

T ax and legal

C ompli

ance

Risk

man

agem

ent

L if e

P hilanthropic

I nv estmentadv isory

and r

eg

ulatory

and

insu

ranc

e managem

ent

management

management

assis

tance

serv

ices

and b udgeting

serv ices

k eeping

planning

serv ices

and record

SuccessionAdministrativ e

Reporting

adv isory

trans

f er

educ

atio

n

and financialand w

ealth

and

Business

Estate

T rai

ning


ete inin se icin io ities t e ake o di e a

ven t e largest family office, in terms of assets nder management, w ill need to assess w hether or not to outsource services O tso rcing certain services can e eneficial from a cost efficiency and now ow perspective, offering advantages to family offices t at incl de

• Reduced costs and overheads, and improved staff productivity

• Economies of scale, particularly for high- value professional services, thus enabling low er prices for related services

• e enefits of o ective advice from e perienced professionals w ho possess specialized sk ills

• elp wit defending t e family office’s reg latory independence w hen outsourcing investment management, by allow ing investment decisions to be made by external providers

• D ue diligence and continuous monitoring can be carried out by t e directors of t e family office to ens re performance and security against risk

O n the other hand, a number of k ey services are usually k ept in o se e advantages of t is are mostly related to confidentiality and t e independence of t e family office, and incl de

• ig er levels of confidentiality and privacy

• Assurance of independent and trusted advice

• Consolidated management of family w ealth

• evelopment of s ills specifically tailored to t e family’s needs

• Greater and more direct family control over its w ealth

• K eeping investment k now ledge w ithin the family

• Assurance of optimal goal agreement, along w ith the avoidance of con icts of interest wit e ternal 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 t e ma e or y decision are specific to t e set p c osen for t e family office, in partic lar

• T he size of the family and how many family members w ant to use t e family office

• T he net w orth and complexity of the family w ealth

• T he family’ s geographical spread

• T he variety of assets, both liq uid and illiq uid, under management

• T he existence of a family business and the link betw een this and private w ealth management

• e s ills and alifications of family mem ers

• e importance of confidentiality and privacy

• e consideration of w et er t e family office s o ld e a cost or a profit center

T his variety of factors highlights how vitally important it is for the family to clearly determine its expectations and address k ey

estions prior to creating t e siness plan for t e family office ese incl de priority setting and scope definition for t e services

to e offered from t e family office

• o s o ld e t e eneficiaries of t e family office and w at is the overall strategy of the family to secure and expand its wealt over generations

• I s the family’ s priority traditional asset management of liq uid funds, w ith or w ithout a portfolio of direct entrepreneurial investments nd w ere does p ilant ropy fit into t e mi , if at all

• o ld t e family office act as t e asset manager for all family mem ers, or s o ld it st e an advisor for some specific services to selected family mem ers

• s t e family office’s core tas t at of a financial advisor, or more that of an educational facilitator for the next generation of family mem ers

• at services s o ld t e family office offer from t e range of asset management task s, controlling and risk management, tax and legal advice to concierge services and educating the next generation

lt o g t e ma e or y decision m st e ased on t e specific set p of t e family office, some general considerations can elp to determine the optimal solution. Best practice is based on the goal of o taining t e most effective services in an efficient way and avoiding potential operational risk s.


T ab le 2 . 1 . Key determinants of the mak e- or- b uy decision

C ost and b udget scalating costs can pose a serio s c allenge to family offices learly, it is nreasona le to inso rce t e w ole range of potential services wit o t considering t e economic enefits ppointing an o tside provider can ens re ality, and possi ly cost savings, as t e family office wo ld enefit from economies of scale

Expertise e priority services as defined y t e family will most li ely e covered in o se in order to ens re independent e pert advice to t e family owever, t e family office will gain from o tso rcing certain selected services t at re ire specific e pertise

R egulatory restrictions family office s o ld consider all reg lations, depending on its distinct legal str ct re ile Os are significantly less reg lated, as t ey deal wit iss es wit in t e family, M Os often fall nder specific reg latory regimes n t e a sence of professional management, a family office r ns t e ris of serio s fallo t from negative p licity egal action co ld also e costly and armf l to rep tations

T echnology and inf rastructure e tec nology employed y an e ternal provider can serve t e family office effectively ying in t ese services as ecome even more of a priority as financial operations ecome more comple

C omplexity f t e family’s assets are s stantial and comple , t e family office will ave to ire more staff or o tso rce services t t e same time, t e in o se decisions on all matters ave to e final so internal staff ave to maintain t e ltimate overview and decision- mak ing process.

ata confi entiality f confidentiality is a prere isite, t en services w ere t is is a priority s o ld e ro g t in o se on critical systems and infrastructure can be outsourced.

T he traditional modelypically, financial planning services, asset allocation, ris

management, manager selection, and financial acco nting and reporting services tend to be provided in- house. Global custody, alternative investments and private eq uity, and tax and legal services are often outsourced.

H ow ever, families should be aw are that the greater the level of o tso rcing, t e less direct in ence t e family will ave over t e decision ma ing process wit in t e family office, and t e less exclusive the products and services w ill be. T able 2 . 2 provides an overview of selected family office services, w ic can e categorized as in- house or outsourced based on mark et analysis.

a le amily o fice ser ices in house or outsource

T ype of serv ice Serv ice category I n- house O utsourced

I nv estment management and asset allocation

F inancial planning asic financial planning and asset allocation decisions should be provided in- house

T he more complex, specialized and diverse assets mak e outsourcing a practical option

T ax and legal adv isory Advisory Selectively done in- house O ften outsourced to a trusted advisor to ensure state- of- the- art q uality of service

R eporting and record k eeping

Governance ecord eeping and doc mentation demand confidentiality and so this should ideally be done in- house

Basic reporting tools and softw are may be provided externally

P hilanthropic management

F inancial planning I n- house expertise should serve to assist w ith philanthropic activities

Setting up a foundation and related activities often outsourced to a consultancy


T ype of serv ice Serv ice category I n- house O utsourced

C ompliance and regulatory assistance

Advisory i e of family office mig t re ire f ll time legal and accountancy expertise

F ull- time legal staff w ill be an unnecessary and costly addition to family offices, w ic are not large eno g to req uire them, so can be outsourced w hen needed

R isk management and insurance serv ices

Advisory Some risk management sk ills 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

L if e management and b udgeting

F inancial planning o ld e done in o se if information confidentiality is a priority

O nly specialized services w ould tend to be brought in- house, less specialized services can be outsourced

T raining 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 req uired for training and development

Business adv isory Strategy Often t e general co nsel or t e finance director of t e family siness is involved in t e set p of t e family office

T he services of an external expert can offer a competitive edge

Estate and wealth transf er

Strategy n o se e pertise is re ired as data confidentiality is vital

T he family can consult external legal advisors for procedural and legal issues

Administrativ e serv ices Governance Administrative services req uire daily monitoring and so can be done in- house

O utsourcing could lead to greater costs

Succession planning Governance Clarifying level of interest of next generation members wit regard to t e siness and family office

Education, objective assessment of managerial sk ill, and definition of entry pat of ne t generation family members

enefits o in house • ig est level of confidentiality and privacy

• I ndependent and trusted advice to the family is ensured

• T otal and consolidated management of family w ealth

• amily office can develop distinct s ills, specifically tailored to t e family’ s needs

• Greater and more direct family control over its w ealth

• K eeps investment k now ledge w ithin the family

• ns res optimal goal agreement and avoids any con icts of interest w ith external providers

enefits o outsourcing • elps a family office red ce costs and over eads, elps wit staff

productivity

• H elps deliver economies of scale, particularly w hen it comes to high- value professional services, thus enabling low er prices for related services

• Offers t e enefit of o ective advice from e perienced professionals w ho possess specialized sk ills

• O tso rcing investment management may elp a family office defend its regulatory independence by allow ing investment decisions to be made by external providers

• Suggests less direct control, w hich implies due diligence and continuous monitoring can be carried out by the directors of the family office to ens re performance and sec rity against ris


hilanthropy mo ing rom gi ing to creating impactT he w orld, and the challenges it faces, are changing rapidly. Grow ing ineq uality, the forces of climate change, rapid urbanization and resource scarcity are increasingly putting pressure on the w orld’ s most vulnerable people, both at home and abroad. 1 W e need new strategies to meet these challenges — strategies that involve a fundamental rethink of the nature of philanthropy.

T raditional paradigms of philanthropy are evolving. W ith a focus on creating impact, they are becoming more accessible, s staina le and effective e ective of t e social and tec nological changes happening around the planet, this evolution reminds us that, in a globalized w orld, small groups of people can have profound impacts.

Philanthropy is one of the most rew arding, and distinctively different, activities t at can e nderta en from a family office

s wit all family office activities, p ilant ropy too deserves to be conducted w ith total professionalism and commitment. I ts challenges and rew ards should be ack now ledged.

I t has also been found that philanthropy is an integral component of many w ealthy families’ lives. F or example, America’ s 5 0 most generous donors increased their giving by 3 3 % last year. 2 T here has also been a rise in the number of technological entrepreneurs under 4 0 using their w ealth to engage in philanthropic w ork . W hile 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.

o can a amily o fice help the amily achie e its philanthropic goals One common estion facing family offices and family mem ers is how to structure philanthropic endeavors to achieve tax, economic and long- term charitable goals. M any families see philanthropy as a w ay to not only mak e a lasting impact on their communities, their countries, or the w orld, but also as a w ay to connect w ith and guide the principles that w ill impact the multiple generations that

ave eit er enefited or may enefit from t e family wealt e

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.

P hilanthropy as a way to guide f uture generations M any families view philanthropy as a long- term mission that is critical to teaching future generations responsibility and the impact w ealth can have on society. T hey believe philanthropy can teach younger family members valuable life and business sk ills, enabling t em to develop t eir passions and find f lfilment in wor ing for something they believe in. I n some of these families, the future generations w ill even get to decide w hich charities should receive

enefits, ow m c and for ow long

family office s o ld memoriali e t e family’s p ilant ropic goals in the family mission statement or the family constitution. I t should mak e sure the charities q ualify for tax- exempt status and that c arita le pledges are f lfilled in a timely manner t is t e family office t at will li ely e involved in deciding w ic assets to donate to charity. I n the U S, for example, the type of asset donated can impact the amount of the eligible deduction as w ell as the potential yearly deduction limitations.

P hilanthropy through inv estment choices W ealthy families have made substantial charitable donations in recent years. T here is also a trend for families to align their investment choices to their charitable motives. F amilies are increasingly mak ing 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 w hich companies, the family invests.

I mpact inv esting seek s to mak e a difference to communities by c oosing to invest in companies t at align profits wit c arita le intentions. F or example, a family may decide to invest in a company that w ill produce methods to purify w ater in economically challenged regions.

1 . EY Megatrends 2015

2 . “ T he 2 0 1 5 Philanthropy 5 0 ” , T he Chronicle of Philanthropy

P hilanthropy


Socially responsib le inv esting seek s 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 mak es a public statement on a position that the family does not agree w ith.

amily identification wit p ilant ropy can e a means of onoring t e family’s fo nder t can e a ve icle for finding new roles for family members — including those w ho might feel that their sk ills 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 re ests for f nds commonly received y ig profile families and a sword ena ling t e family to ave a significant positive impact on an issue of concern to it) . M ost importantly, philanthropy can provide a family w ith at least one notable commonality — acting as “ the glue that holds the family together” — especially as a family increases in size and diversity.

P ilant ropy can e pand a family office’s networ s, add s ills, generate employee satisfaction, and offer new and post- career options amily office or siness involvement in p ilant ropy can be a tangible demonstration of corporate citizenship and can en ance t e profile of t e family

efinition an change o er timeT he goal of philanthropy has alw ays remained the same, to promote the w elfare of society and to increase the business’ s public value. H ow ever, the means of achieving this goal have undergone rapid transformation.

T raditional notions of philanthropy emphasized doing good through donations or through the establishment of charitable foundations. T his approach, born of social obligation, w as free from the expectations of measurable impact, accountability, transparency and direction. I n this traditional approach, philanthropy w as also seen as exclusive — only accessible to those w ith enough money to give aw ay — or organized through religious or political institutions wit specific interests and agendas

M odern philanthropy, how ever, is decidedly different. T oday’ s p ilant ropists se innovative sol tions to solve specific pro lems, w ith approaches that are targeted and selective, and impacts and outcomes that are measurable. Philanthropy is also not seen as exclusive anymore. N ow , philanthropists come from a w ide range of ages and back grounds, ranging from individuals and businesses to

Os and not for profits, all of w om are ro g t toget er y one common goal, to help fellow human beings.

L eading practices — the b uilding b lock s of an e ecti e, amily o fice ase philanthropy

reating an effective, office ased p ilant ropic program re ires decisions to e made on matters s c as

• Should there be a mission statement for the philanthropic strategy

• Should the overall program be thematic or general and, if t ematic, w at s o ld t e priority iss es e

• at s o ld t e geograp ic reac of t e program e

• Should the program be proactive ( programs to be funded and initiated y t e office or reactive inviting applications from t e comm nity

• ill t e f nding e s ort term or long term

• W ill funding be directed at projects or general organizational s pport

• o ld t ere e a few large grants or several smaller grants

• o ld t ere e p lic g idelines and an ann al report

• at s o ld t e internal decision ma ing process e

• H ow w ill the directors be chosen and w hat succession arrangements s o ld e made

• W hat 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


• W ill collaboration w ith other funders be sought in order to gain t e enefits of collective impact

• W hat priority should be given to impact and public value assessment, and y w at means

• I s there an investment charter to direct the length, asset type and ris of t e corp s f nds

T hese are only some of the matters to be considered and only a few of these q uestions can have simple right or w rong answ ers. I t is the

nature of the philanthropic sector that much remains ambiguous and subject to different approaches. T his, how ever, mak es it all the more important that the commitment to, culture of, and processes for, re ective and systematic p ilant ropic practice e in place in a family office ort nately, t e p ilant ropic sector is ric in accessible and helpful w ritten resources, and personnel w ho are w illing to advise, collaborate and share.

o t ends

1 2 3 4

Seek ing to aligntheir estab lishedphilanthropicactiv ities withstrategy and v alues

L ook ing f orstrategic directionwith theirphilanthropicactiv ities

Ev aluate impact ofestab lishedphilanthropicportf olios

High- impactphilanthropicinv estment

Creating societalvalue and addressingcomplex challenges


T here are a number of global trends shaping the modern philanthropic landscape.

T he role of technologyT echnology has impacted every aspect of modern philanthropy. T he internet has given people access to a w ealth of information on virtually every topic imaginable. T his pow er not only enables light to be shined on otherw ise ignored topics, but also provides access to the information needed to mak e contributions. W hile 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 b usinessesPhilanthropy is increasingly seen as core to modern businesses’ operations, crucial to their social license to operate and enhanced by the entrepreneurial spirit. M odern philanthropic activities tak e many forms, including donations, charitable projects and social vent res owever, t ey can also ta e a s staina le and profita le form, such as through impact investments that are targeted toward specific program related social o ectives Many of t e largest companies in the w orld have philanthropy built into their business plans, and the trend is increasingly turning tow ard seeing financial performance as st one of t e many meas res of a business’ s success.

I mpact inv estingI mpact investments are as those that set out to achieve positive social and environmental impacts, in addition to financial ret rn, w hile measuring the achievement of both. I mpact investing dismisses t e notion t at profita le investments and giving money

to charitable w ork are separate activities, distinguishing it from other forms of philanthropy. I mpact I nvesting Australia suggests that the mark et for such investments is expected to reach U S$ 5 0 0 billion to U S$ 1 trillion globally over the next decade.

C ollectiv e impactN o single policy, program or organization can tack le the increasingly complex problems the w orld faces today. Collective impact refers to the commitment of a group of important actors from different sectors to a common agenda for solving a specific social pro lem e collective impact approac was first disc ssed y o n ania and Mar ramer in t e Stanford Social

Innovation Review ey identified five ey elements of an effective collective impact approach, including a common agenda, the consistent measurement of results, mutually reinforcing activities and the use of a back bone organization.

R esponsib le inv estment f rameworkA responsible investment framew ork helps organizations use their w ealth to mak e socially ethical investment decisions, often based on environmental, social and governance ( ESG) factors. Such framew ork s w ill commonly involve thorough monitoring practices, rigid reporting policies and a great deal of accountability and transparency. F or many organizations that are using part of their portfolio for ethical or impact investments, a responsible investment framew ork 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 Rock efeller family’ s decision to sell their investments in fossil fuels to reinvest in renew able energy.


Sect

ion3

amily offices are ni e to t e family t at sets t em p nd, to define w at an average family office s o ld loo li e is not meaningful. T heir size may vary from 1 employee to up to 5 0 or more, depending on the services provided, the number of family members to be served, and how the services are to be delivered.

espite t ere eing no standard definition of a family office, anecdotal evidence s ggests t at a f ll service family office will cost a minimum of U S$ 1 m annually to run, and in many cases it will e m c more is wo ld s ggest t at for a family office to e viable, a family should be w orth betw een U S$ 1 0 0 m and U S$ 5 0 0 m. Of co rse, a family office can e set p wit m or even less, but the service range w ill probably be limited to administration, control of assets, consolidation and risk management. A fully integrated family office will re ire a great deal more wealt T able 3 . 1 break s this dow n in more detail.

igure amily o fice types ase on assets an costs

amily o fice type Assets ( U S$ m) O v erhead cost per year ( U S$ m)

Administrativ e 5 0 to 1 0 0 0 . 1 to 0 . 5

Hyb rid 1 0 0 to 1 , 0 0 0 0 . 5 to 2 . 0

F ully integrated > 1 , 0 0 0 1 . 0 to 1 0 . 0

o rce The Global State of Family Offices, Cap Gemini, 2012.

ta costsesearc from cons ltancy amily Office c ange as fo nd t at a

significant portion of t e total costs of a family office are allocated to staff compensation and enefits 1

F igure 3 . 2 illustrates this cost break dow n in more detail.

f lly integrated family office providing most, if not all, of t e services mentioned in section three — w ould have a typical staff structure represented in F igure 3 . 3 .

Setup costs w ould also include the employment of headhunters for recruitment, compensation specialists, relocation costs, legal setup costs, and t e searc for infrastract re s c as office space and technology solutions.

amily Office Primer, Family Office Exchange, 2013.

T he costs of running aamily o fice


igure amily o fice costs

ersight o fice ith sta o an internal hie n estment ficer

igure amily o fice sta

2 . The Global Family Office Report, Campden Research/ U BS, 2 0 1 5 .

e a costsamily offices typically ave operating costs of etween asis

points and 1 2 0 basis points. A recent report by Campden Research and U BS2 states t at family office costs are on t e rise glo ally, approac ing t e mar as offices employ more staff e report concl des t at t e costs of r nning family offices as increased

as a percentage of Assets U nder M anagement ( AU M ) over recent years and t at t e costs remain on an pward trend Offices wit the low est running costs focus primarily on a limited number of w ealth management services, such as handling real estate holdings. H ow ever, there is no strong correlation betw een the size of AU M and the operating costs.

ersight o fice ith sta o three

External investment fees

External professional fees and ow ner education

Office operations

taff compensation wit c ief investment officer

3 9 %

9 %

2 7 %

2 5 %

External investment consulting fees

External investment management andcustody feesExternal professional fees and ow ner education

Office operations

Staff compensation

1 6 %

3 2 %

1 0 %

1 4 %

2 8 %

o rce The cost of complexity, understanding family office costs, amily Office c ange,

o rce A guide to the professional family office, amily Office c ange,

Chiefinancial Officer

Chiefnvestment Officer

Chief Operating Officer

Accountants

ontrollers

awyerI nvestment analysts

dministrative staff

nformation tec nology

ie ec ti e fice


Sect

ion4 amily o fice go ernance

efinin o e nance st ct esamily office governance is often ignored as a topic eca se

families s ally foc s on managing t eir financial assets and investments and overlook the importance of implementing good governance practices in t eir private family office elow is a g ide to ma or iss es regarding family office governance

Strategic planningI t is important to start the initial discussion w ith 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 w ishes and vision of the family as w ell as informing the management so they can develop a long- term strategic plan.

Board of directorss family offices s ally stem from t e desire of t e fo nders

to preserve the family w ealth and protect the future of the next generation, they often tend to depend on trusted advisors w hom they k now w ell and have been w ork ing w ith for several years. Accordingly, the concept of a board of directors managing the strategic direction of t e family office is often neglected owever, w hen the w ealth is transferred to the next generation, managing t e family office in t e same manner may e a ca se of con ict and dispute betw een family members.

ere is a need to define a proper governance str ct re t at ta es into account the req uirements of all family members. Electing a strong and active board that follow s the direction of the family and tak es into consideration the interests of all family members, not just a few , is very important. M oreover, including independent directors w ho add their experience and provide independent advice to the family is crucial in enhancing, strengthening and diversifying the family office investments and operations

I n many cases families are very reluctant to include independent directors and open their book s to outsiders because of privacy issues. T hose families may choose to appoint an interim advisory board w ith no voting pow ers to help strengthen the board and provide advice on specific topics is step elps t e family prepare and be more comfortable w ith including independent board members in the future, to create a fully functional board.


Accountab ilityo nders are often rel ctant to s are m c financial information

w ith their children, in an effort to shelter and protect them from eing acco nta le for t eir financial decisions is is not a s staina le model wit responsi ility comes acco nta ility, and the family members need to be prepared from an early age to be responsible for their actions and understand that they w ill be accountable to the rest of the family. I n order for them to be successful in the stew ardship of w ealth, they need to create the process and the opportunity for family members to grow and develop t eir s ills and talent, as well as manage t eir financial affairs responsibly.

D ev eloping a proper structuret is important for every family office to develop a proper management and legal structure to protect the operation of t e family office and t e assets of t e family eveloping proper policies and procedures, and identifying k ey talents capable of leading t e office are important factors in t e s ccessf l operation of t e family office Moreover, in order to protect t e family from any unnecessary tax implications and legal impact, it is also very important to select the right legal structure and jurisdiction for setting p t e office

ock o de and do e a enc costs cr cial point for family offices to ta e into acco nt w en

considering governance is that they are often exposed to substantial agency costs that result from managing nearly every aspect of t e office

s a res lt of t e two main f nctions family offices serve, i e , managing complex asset bases and aligning family interests, family offices enco nter family loc older as well as do le agency problems that can result in additional costs ( Z ellw eger and K ammerlander, 2 0 1 5 ) . F amily block - holder costs can emerge w hen not all family members agree on the strategy of the family office or e ample, one mem er of t e family mig t e interested in s ort term li idity to finance lifestyle am itions, w hereas other members might be more interested in holding onto investments for potentially better long- term gains. T his can lead to a misalignment of interest, w ic is a cost to t e efficient r nning of t e family office


D ouble agency costs, similarly to family block - holder costs, can emerge w en t e interests of t e family con ict wit t e interests of those non- family members hired to manage the family’ s w ealth. An example of this is w hen the family is more concerned w ith the long- term outcomes of managing their w ealth, compared w ith the often s ort term o tloo of family officers and t eir s ordinated asset managers w o loo to ma imi e t eir own financial enefits to the detriment of the family’ s w ealth. T his leads to a misalignment of interests, w ic is a cost to t e efficiency of t e family office

F amily b lock - holder costsamilies do not necessarily act in a nified way at er, family

dynamics mig t co nteract 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 ow ners opens up the possibility of negative family dynamics.

Particularly destructive effects are expected in an EF O , w hich is characterized by the absence of formal and unambiguous governance instruments, such as boards, regulations and statutes. T here are no clear responsibilities in controlling the EF O that shares part of its resources, staff and command structure w ith the operating business, w hich in turn could increase the possibility of family loc older con icts and t e related costs compared w ith an SF O .

n increase in con icts and str ggles etween family mem ers can lead to particularly severe effects on family w ealth, since con icted family loc olders mig t e tempted to engage in spendthrift lifestyles. T his could split the family w ealth and conseq uently 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 EF O employees w ho serve tw o masters could even aggravate the effects of family loc older con icts and t eir conse ent costs

D oub le agency costsCosts resulting anytime authority is vertically delegated dow n tw o tiers of hierarchies, are referred to as double agency costs. D ouble agency creates problems of control and accountability w hen tw o seq uential sets of control relationships are involved, s c as from t e family as wealt owner to t e family officer and the subordinated asset managers.

T he principal’ s ( i. e. , the family’ s) loss of control over its agents t e family officers and t e advisors follows from incentives for

opportunistic behavior. T he striving for more autonomy and the behavior by agents to receive a remuneration is a major problem. T he principal is increasingly exposed to biased information passed on from asset managers to t e family officer and s se ently from t e family officer to t e family

is p enomenon gains partic lar intensity in t e family office environment, w here the principal family usually lack s the sop isticated financial and investment nowledge t at family office staff have, thereby increasing the probability of agents’ empire-

ilding at t e e pense of t e principal eca se t e family office often serves as the trusted advisor of the family for much of the family’s financial affairs, and given t e limited insig ts and nowhow of the family into the complexity of these affairs, the family office is potentially well placed to act opport nistically if it is not properly monitored or incentivized.

ncentives for opport nism arise partic larly in family offices since t e family as principal may ave diffic lties in controlling t e activities of a family officer and even more diffic lties in s pervising asset managers w ho are often external experts that are not part of t e family office’s own staff Monitoring t e family officer and

is or er dealings wit t e asset managers is partic larly diffic lt in SF O s. T he formal setup and hierarchies often serve as barriers preventing t e family from closely monitoring family office staff, accessing first and information on an ongoing asis, s pervising asset allocation decisions, and controlling t e efficiency of t e family office operations

f t e family fails to provide ade ate oversig t, family office staff w ill be more prone to engage in collusive agreements w ith external asset managers and service providers or “ self- dealings, ” w ere family officer and asset managers internally agree pon opportunistic dealings to the detriment of the family’ s w ealth. Such cond ct y family officers and asset managers ndermines t e preservation of w ealth and generates potential reductions of the wealt and inefficiencies for t e family

F amily v ersus non- f amily memb ersT he extent of double agency costs certainly depends on w hether family office staff are composed of family or non family mem ers t re ects t e dilemma t at families s ally ave to deal wit


employing as family officer a non family mem er w o is well versed in financial matters, or relying on a family mem er as family officer w ho might not have that competence but is trustw orthy, thus diminishing double agency costs.

Successfully navigating concerns betw een 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 benchmark s is also important, as poorly designed benchmark s may cause fund managers and external partners to w ork against w hat families w ish to achieve. F amilies should also consider establishing formal processes to mak e investment decisions, as t is can elp family offices to set clearly defined o ndaries and goals, and avoid ad oc decisions t at are not in line w ith the broader mandate or long- term strategy.

he amily o fice ilemmaltimately, family offices face a dilemma on t e one and, t e

family as the ultimate asset ow ner w ishes to appoint the most alified people to r n t e family office ometimes, a competent

person is available w ithin the family, but this is not often the case. en, a professional non family family officer as to e appointed e enefit of doing so is t at family loc older con icts can e

mitigated t ro g t e non family mem er r nning t e family office

But a natural conseq uence of such delegation of control is the risk of losing control altogether. T his is particularly true for w ealth structures that involve trusts and foundations, but the problem is also apparent in the case of SF O s.

I n light of this dilemma betw een professionalization and loss of control, families wit a family office will ave to find ways to combine the best of both w orlds, achieving professional management w hile 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 tack le the challenge.


Sect

ion5 C onstructing a b usiness plan,

sta fing an strategic planning

annin a st ate ic a o a df a family decides t at it needs a family office, w at are t e ne t steps

t is an increasingly widely eld view t at a family office even an SF O — should not operate in the long term on a deficit asis, i. e. , purely as a cost center. M ost successful entrepreneurs w ould not start a business w ithout a w ritten business plan. O nce the business is running, these entrepreneurs generally create and update short- and long- term strategic plans for the business.

eading family offices provide t at same level of diligence for t emselves cr cial part of t e strategic plan is staffing, w ic is discussed in the section 5 . 1 , Family office staff.

siness ane first step in creating a siness plan is nderstanding t e

vision for the family ( usually described in a family charter) , and s se ently t e vision for t e family office ere are some of t e ey components of s c a plan

Summaryt is important to descri e t e vision for t e family office, e plain w hy it is being created, w hom it is designed to serve and how it is expected to evolve. I s there an intention to serve other families, t s ecoming an M O, or st to serve t e single family

F amily b usinesss t ere a siness lin ed to t e family office, or as t e siness een sold amily offices often start as an O wit in t e siness,

and become a separate entity w hen the family, its complexity and its risk s outgrow the business staff.


Structureat type of entity will o se t e office, and w o will own it at

is the plan for passing ow nership across generations ( assuming the office is intended to s pport more t an t e first generation ill t e office s pport sinesses, wit t e potential of aving some e penses ded cti le against siness income t is important to discuss the intended tax impact of the structures to ensure that the family understand their potential conseq uences. T ax and legal advisors generally ave a significant advisory role on str ct re and jurisdiction.

J urisdictionlo al families need to consider w ic co ntry t e office will e ased in, t t is decision goes m c f rt er it in specific

countries such as the U S, states have vastly different tax, legal, and dicial enefits e siness plan s o ld specify w ere t e office

and entities w ill be based.

Gov ernanceoverning oards or co ncils need to e defined, incl ding ow

they w ill w ork . T his structure often includes a family council, investment committee and even a philanthropic committee. T he plan s o ld define w at oards will e ist, ow oard mem ers will be selected, how the boards w ill change over time, how decisions w ill be made w ithin them, and w hether they w ill include non- family participants.

Serv icesere needs to e a description of t e services t e office will

deliver, and for w hich family members or generations. I n some cases, there is a list of base services available to all family members, w ith additional services available on an à la carte basis.

ta fingT his section w ill need to discuss the types and number of staff in t e office, in addition to t e organi ation or reporting str ct re Often, t e family officer reports to a family co ncil or per aps to a particular family member. I t also helps if this section discusses conditions under w hich family members may be permitted to w ork in t e office

O perationsH ow w ill the services be delivered, and w hat technology is req uired to s pport t em e team s o ld e a le to delve into t e ey types of tec nology, eit er selecting t e specific tools or narrowing them dow n to tw o or three providers. T his section also describes w hich services are intended to be outsourced and w hich should be delivered directly y family office staff

F inancialsere s o ld e pro forma dgeting for t e office, incl ding

staff, facilities, technology, and outsourced services. T his section descri es ow t e office will e f nded, w et er t ro g siness activities, billing family members, a charge on investments, or some other mechanism.


W ork planere needs to e a detailed plan of ow t e office will e implemented ervices may e rolled o t in p ases, or per aps o tso rced

initially and ro g t in o se later see fig re

igure amily o fice implementation plan

T est systems and processes andimplement

Review business continuity needsand developemergency plans

Consider disasterrisk s ( cyber attack , theft, personal security, etc. )

F ine- tune hardw are and softw are

Assess initialgovernance, and determine if additional efforts are needed

Create policy and procedure manuals

Perform final review of processes

T es t a ndim p lem ent

egin family office operations

efine dget models to minimize capital constraints and surprises

D evelop formal periodic review process for people, processes, risk s, vendors, andtechnology

M easure results against benchmark s

Review netw ork ing opportunities for peer- to- peereducation and best practices

L a u nc h a ndm o nito r

efine operational models and family roles

W rite job descriptions and recruit candidates

Select technology platforms and evaluate data security

I nitiate contracts for outsourced services

I dentify, contract, and build- out space

Chart processes, wor ows, and benchmark s

D evelop framew ork for governance

S o u r c ea nd b u ild

E d u c a tio n, p eer netw o r k ing a nd c o lla b o r a tio n w ith a d v is o r s

I terativ e analysis and modeling

Assemble a w ork ing team of advisors

D evelop a detailed business plan

F or each servicedefine w et erin- house, outsource,or combination

Review resources, technology, people, and facilities

Estimate operating costs and capital req uirements

Consider potential sources of capital funding

Evalutate legal structures, consider legal and tax impacts for t e office and participating members

S tr u c tu r ea nd d es ig n

S c o p e a ndp u r p o s e

Establish the purpose and long- term goals and objectives

U nderstand the family’ s core assets, current needs, and future plans

Consider initial thoughts on scope of services

U nderstand how each family member w ants to participate in services


igure amily o fice strategic planning

t ate ic anninOnce a family office is operational, strategic planning remains an important exercise. Annual strategic planning is important for all family offices, t offices t at ave contin ed for generations often create additional or year strategic plans amily offices respond to a w ide variety of demands from many family members, and it is easy to just be reactive. Staff must tak e the initiative in t eir strategic planning see fig re

e ea st ate ic anor family offices t at ave e isted for a long time and are

supporting multiple generations, recent years have seen an increase in 5 - or 1 0 - year strategic plans. T hese plans are designed to bridge the gap betw een the vision in the family charter ( sometimes considered a 1 0 0 - year plan) and the annual strategic plan.

O ften, the process the family goes through is just as important as the outcome. T ak ing time to plan w hat they w ant to accomplish in the next 1 0 years causes them to think very differently than for annual planning. H ere are the major elements often considered in t ese plans

Succession planning Preparing family for leadership tak es many years, w hether that is for leading the business, governance committees or the family office amilies 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 inv estment growthF amilies may consider starting a new business, or perhaps a large real estate development plan, or a shift into private eq uity investing.

D irect philanthropySome families set philanthropic goals of changing a particular community, providing higher education or solving health issues. T hese may be long- term goals, better served through a 1 0 - year plan.

e to t e nat re of t ese planning efforts, families often find it eneficial to engage an o tside advisor to lead and facilitate t e

process, w hich can help to bring new perspectives.

F a m ilyc h a r ter

V ision of what the f amilywants to b e in 1 0 0 years

1 0 - y ea rs tr a teg icp la n

Multi- year plan toaccomplishmilestones towardthe f amily v ision

A nnu a ls tr a teg icp la n

P lan f or the next year


nn a st ate ic anninT he outcome of annual planning is an evaluation of activities in the previous year, goals for the coming year, and a plan for achieving t ose goals ere are some important factors in t e strategic plan

e ectionow ave t e family and t e office performed against t e c rrent

year plan at are t e strengt s and wea nesses of t e family and t e family office at ma or c anges ave occ rred since t e last planning e ercise s t e family s ccessf lly moving toward its long term vision specified in t e family c arter, or are t ere ma or gaps etween t e stated goals and w at t ey are act ally doing

F eedb ackctively find o t w at family mem ers t in of t e office, its staff,

and the support it provides. Q uite often, the older generation are pleased wit t e office, w ile yo nger generations are less happy w ith it.

R isk sat are t e ma or ris s t e family and t e family office face, and

ow mig t t ey e mitigated is is an opport nity to consider succession planning, risk s from staff or operations, economic, legal, or tax events, and how business risk s might impact the family or how family risk s might impact the business.

amily o fice operationsval ate t e c rrent family office and its operations Priorities often

change, and some services may be better delivered by an outside provider. T his is a good time to consider each outside advisor or service provider t may e t at t e office needs additional staff, or needs to plan for coming retirements or other changes.

T echnologyis is a growing concern among family offices, and re ires a lot of

time and reso rces t is eneficial to compare c rrent offerings wit the rapidly changing mark etplace, including how the various tools w ork together to meet the family’ s needs. Cybersecurity must also

e considered, as to ow it co ld impact t e family’s finances as well as its potential effect on the family privacy and physical safety.

F amily initiativ esonsider w at new initiatives t e family desires and ow t e office

w ill support them. Are there new businesses being formed, a real estate development activity, new philanthropic initiatives, or per aps a ma or family anniversary to plan for

BudgetingBringing together the above components w ill help determine the budget for the coming year, including a plan for how it w ill be funded. W hen the family agrees w ith the planning and future initiatives, they w ill be much more lik ely to agree to the req uired funding.

Rec itin de e o in and incenti i in a i o fice stataffing is cr cial for t e s ccess of a family office and a ig

challenge for them is to identify, attract and retain the best talent. I n larger institutions this process is usually overseen by the human reso rces department, t family offices cannot rely on s c infrastructure. Conseq uently, recruitment often becomes the responsibility of the w ealth ow ners and their trusted advisors — both of w hom are less trained to mak e these decisions.

en it comes to staffing t e family office, one as to disting is betw een members of the ow ning family, w ork ing for the family office and non family professionals ile a recent st dy in Sw itzerland and Germany found that many of the investigated family offices are led y a family mem er,1 w e decided to focus our attention here on the process of recruiting non- family professionals.

Guidance on structuring the recruitment process, formulating incentive pack ages and then maintaining strong relationships w ith the new employees, is often necessary.

D espite the lack of formal recruitment structures, families can have advantages in attracting talent — often because they are able to offer more e i ility in compensation and incentive pac ages for

ieger, P ilipp Zellweger, Thomas: Entrepreneurial Families: From a Family Enterprise to an Entrepreneurial Family redit Suisse AG, 2 0 1 3 .


senior recruits. T hey can also offer a w ork ing environment and culture that can appeal to the right candidate look ing for a change from big- company culture.

iven t ese factors, amily Office c ange elieves t e following examples of best practice can help to underpin a successful recr itment process

• o description is can e e i le, t m st capt re t e ey elements and essence of t e role amily office e ec tives are often involved in multiple projects.

• I nterview committee. T he responsibility of hiring for roles such as CEO and CI O should not be undertak en by one person. Sharing the process and risk of the hire is advisable.

• Check ing references. T he recommendation from a trusted advisor or family member is valuable, but more extensive check s should be made. T he process should be rigorous in order to ensure objectivity.

Retainin ta entT he k ey to retaining people once they have been recruited depends heavily on compensation and the feedback process. H ere is a useful c ec list

1 . C ompensation• Conversations

T he feedback process must be performance- based, consistent, and incorporate an element of long- term compensation.

• I ncentives

Can include things such as phantom stock ( future cash payment based on mark et value of shares) , co- investment opportunities, transaction bonuses and, in some cases, partnerships. I ncentive plans often re ect t e standards in t e ind stry t at created t e family’ s w ealth, so pack ages vary by industry.

• Benchmark s for compensation

A CEO ’ s base salary in the U K ranges from U S$ 2 4 0 , 0 0 0 to U S$ 6 3 0 , 0 0 0 , w hile in Sw itzerland CEO s managing multijurisdictional w ealth receive betw een U S$ 4 5 0 , 0 0 0 and U S$ 7 2 0 , 0 0 0 as a base.

2 . F eedb ack• D elivery

M any executives move from a highly structured corporate environment and can feel uncertain about their performance, and the family’ s satisfaction w ith their role, due to a lack of meaningful feedback . F amily 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 w here possi le t as een o served t at Os at family offices often feel unimportant, largely because of a lack of feedback , rather than concern over compensation.

• Receptiveness ig c allenge w en staffing a family office is ow family

office e ec tives and family mem ers can maintain a sense of partnership, w ithout the impartiality of the executive being affected y t e family amily office e ec tives m st e open to giving and receiving feedback so that an environment of

onesty and openness can o ris is process of feed ac is in itself dependent on the long- term commitment to the family, cultivated by appropriate incentive planning and personal c emistry an n antifia le element in t e process


nte atin isk ana e entT he maintenance of family w ealth across generations is an extremely complex task . T here are many risk s, any of w hich can prevent a family from achieving their long- term legacy. F amilies should develop an integrated risk management approach betw een the family business assets and the private family assets, in order to protect themselves from risk s.

C ategories of riske family office is t e rig t entity to manage t e different ris s

facing the family. T ypically, the family w ealth originates from the sale in w hole or in part of the family business, or from free cash

ows t at are not reinvested in t e e isting siness is process of asset diversification goes and in and wit t e enterprise ris management process.

gainst t is ac gro nd, family offices are tas ed wit complementing their existing standard risk measures w ith additional ones, particularly as direct investments in real assets gain in importance is management at family offices is moving aw ay from a mere controlling role to a time- critical, strategic advisory role.

T his new demand for risk transparency has led to the desire to invest more in direct investment opportunities and in real assets, rat er t an comple financial capital mar et prod cts lower level of complexity of investment products, the proximity to the investment, and t e possi ility of aving a real in ence on t e investment are more sought after now than ever before.

L ongterm investments w ith low er volatility and a moderate expected return are often combined w ith short- to mid- term investments wit a significantly ig er ris profile to ac ieve outperformance. As part of this process, a further professionalization is tak ing place. F amilies rank investment risk , family reputation and family data and privacy among the top risk s they face, according Sect

ion6 R isk management


to a ampden ealt s rvey on glo al family offices in is guide recommends that seven risk categories need to be evaluated as part of a strong and coherent approach to risk management see fig re elow

F igure 6 . 1 . R isk management

R isk category Summary description

V ision/ legacy Stated family vision or purpose, services provided w ithin t e office, family governance, comm nication, ed cation and planning

O perations T ransaction processing and controls

Estate/ regulatory T ypes of entities, management and oversight of those entities, compliance, reporting and office management

Business I mpact ( or potential impact) on the family from the various businesses they ow n and manage, this encompasses financial, s ccession and rep tation impacts

T echnology val ate platforms sed in t e office, and review t e infrastructure of technology and security, particularly including cybersecurity

I nvestment Examine the policies and processes around investment oversight, from investment policy statements to selecting managers, e cl sive of eval ating t e ris of specific holdings or portfolios

D isaster Review plans and preparation for facing serious setback s, w hich includes evaluation of existing insurance coverage

Risk ana e ent s ste sRisk , return and liq uidity are the foremost issues to be considered in any investment decision and asset allocation process. T hese prereq uisites w ill be the basis for the risk management system, w hich in itself w ill cover risk mitigation and cost reduction, and may lead to val e creation as a res lt ese factors incl de

R isk mitigation• I dentify and address k ey risk areas

• ffectively assess ris s across t e family office, driving accountability and ow nership

• M anage and mitigate mission- critical risk s

• Establish comprehensive risk framew ork s

C ost reduction• ost efficiencies are a critical part of setting p a family office

• I mplement 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

• mprove process efficiency t ro g contin o s monitoring

V alue creation• Achieve superior returns from risk investments

• I mprove control of k ey processes

• Combine risk and control management to improve performance

• U se analytics to optimize the risk portfolio and improve decision- mak ing

F igure 6 . 2 . R isk management system

R isk management system

L iq uidityR iskR eturn


Sect

ionF igure 6 . 3 . R isk management process

amily office Os, Os and Os increasingly perceive enterprise ris management as adding real val e to t e family office operation According to the 2014 European Family Office Survey by Campden W ealth, families are w ell aw are of the different risk s, but often have not implemented an adeq uate risk management process.

I n an appropriate risk management process, each of the seven categories of risk mentioned before w ill be assessed against t e specific sit ation of t e individ al family family office e assessment of the inherent risk s, if no controls or mitigating factors w ere in place, combined w ith the existing control environment, result in the residual risk after controls are tak en into account

( measured, for example, on a scale from low to medium or high risk s) .

ollowing s c a diagnostic process ris review, ris identification and risk measurement) structured recommendations can be made to report the risk objectively, improve the control environment and ltimately to mitigate t e ris s see fig re c leading practices w ould also include an existing disaster recovery plan for technology and data, as w ell as a physical protection plan ( e. g. , protecting against robbery or k idnapping) and an integrated

man reso rces policy for family office staff

R is k r ev iew R is k m ea s u r em ent R is k r ep o r ting R is k m itig a tio n

• Establish risk appetite of family and family office w hat level of risk is accepta le

• efine a common understanding of the risk level among family members, the investment committee or ot er relevant boards and t e family office

• Establish a detailed ris identification process

• I dentify and doc ment q ualitative and q uantitative risk s

• efine t e c ief drivers of volatility of the main asset classes and investments

• Meas re impact of risk s on investment decisions

• Prioritize risk s according to impact level and lik elihood of occ rance

• ncl de relevant and s fficient level of information in regular reporting

• Establish family governance todeal w ith risk management

• Establish measures to mitigate at least the top priority risk s

• O pportunities need to e identified in t e same w ay as risk s

• Establish regular monitoring ofthe family risklandscape

Risk identification


Sect

ion7

ack o ndow do family offices invest t eir principals’ money ere are no

fi ed investment reg lations t at apply amily offices tend to follow their ow n individual investment policies, because, unlik e bank s and ot er financial service providers, t ey are generally s ect to the more relaxed regulations applicable to companies, trusts and foundations. H ow ever, the degree of freedom enjoyed by family offices is red ced in proportion to t e level of services provided y t ird parties and t e n m er of families served y t e family office

amily offices can often diversify t eir assets very roadly, m c more than institutional investors can, thank s to the amount of assets nder management amily offices are also generally etter able to think and invest on a more long- term basis, and they primarily pursue w ealth preservation in order to pass on assets to the next generations. 1 M any prefer direct investments, and w here organizations have an entrepreneurial principal, they are more lik ely to get directly involved in the investment process. M ore than a third of those surveyed w ould be glad to contribute to the planning stage of their investments. 2

Many family offices ta e an open approac to t eir investment policy and try to avoid conventional investment paths. T his can be seen in the w ay that many invest in alternative investments, such as yachts, horses, art, forests and farmland, or car, w ine or w atch collections is ena les t em to spread ris s w ile re ecting t e personal preferences and passions of family members.

e growt of family offices is a relatively new trend, and eca se of the diverse origins of many family fortunes and the different

ac gro nds of Os, it is diffic lt to pinpoint a niform family office investment process ery roadly, t e process s o ld first set out an investment “ road ahead” , listing goals and risk tolerance, and resolving issues relating to business shareholdings and family member stak es. T he next phase is to establish the portfolio structure ( i. e. , how much in eq uities, real estate) to deliver the risk and return trade- off the family req uires. I mplementation and governance t en follow finding t e appropriate investments to mak e up the portfolio, and overseeing their performance.

T he inv estment process

1 . Credit Suisse, Family Business Survey, September 2 0 1 2 .

2 . I bid.


Ro e o t e a iT he crafting of an investment process is heavily dependent on legacy issues. I n w hat economic sector has the family made its money, to w hat extent is the family still actively involved in the

siness and w at is t e ac gro nd of t e O of t e family office Each of these factors has a tendency to produce a strong behavioral bias on how a family’ s w ealth is invested and on the subseq uent need to prod ce a diversified portfolio for t e long term

Another issue that is also important is the composition of the family or e ample, a family office t at is set p y a firstgeneration entrepreneur w ould probably be very different in its aims to one that is established by a large fourth- generation family.

s a res lt, t e e avioral, financial and legal iss es involved in str ct ring t e investment process of a family office are comple 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 ave a family office ost and comple ity are two contributing factors here, though it is also clear that the rate of growt of family offices is accelerating, and t at t e need for a transparent, independent and structured investment process is a k ey reason for this.

ettin in est ent oa sF or most investment funds, w hether they are sovereign w ealth f nds, endowments or family offices, t e first step is to esta lis clear investment o ectives and ris profiles ese different investment structures can have varying goals and objectives, and there is also variety in how these objectives are constructed. F or e ample, some instit tional investors wor wit in ation related return objectives, others might not.

An important distinction can also be made at this stage betw een liq uid assets, such as tradable securities, and illiq uid assets, such as direct investments, private eq uity and real estate — the latter

eing diffic lt to val e and often re iring some s pport in terms of funding. F rom a conceptual point of view , many CI O s tend to

view illiq uid assets in a different w ay, w hen it comes to returns and investment horizon, to liq uid asset portfolios.

Examining prior investment styles and q uestionnaires can help to identify the family’ s tolerance to risk . I n addition, scenario testing that illustrates and draw s out important sensitivities to risk and portfolio draw dow ns can be useful. I n some cases, the discussion of the investment process is led by the CI O . I n others, it can entail a more collective discussion involving family members, and cover any desires they have to establish charities or philanthropic initiatives alongside t e family office

O nce an asset allocation recommendation has been review ed, 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. I t also provides a course of action to be follow ed in times of mark et dislocation w hen emotional reactions may result in imprudent courses of action.

Once t e specific investment goals and t e ris profile of t e family office ave een esta lis ed, t e ne t step is to str ct re an overall portfolio and then bring to bear the necessary investment tools to drive the investment process. I n some cases, historical asset return data is used to give a sense of w hat future returns might look lik e, but, as recent stock mark et history has show n, the past is not a great guide to the future.

a conside ationselecting t e most efficient com ination of assets for t e family

req uires an adjustment to portfolio optimization that tak es into consideration the ultimate after- tax return that they w ould expect to receive. F or each asset class, the expected return should

e deconstr cted to re ect t e 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


to w hich realized capital gains w ould 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 mi of investments tailored to a family’s specific tax situation.

t ess testin and ode inO nce an initial portfolio shape is in place, several further exercises can e sef l, s c as stress testing t e ret rn profile of t e portfolio to demonstrate to family members how the portfolio might behave during periods of volatility. I n performing this type of analysis, it is sensible to examine all the family’ s w ealth, not just

their investment portfolio. M odeling the core business holding of a family as a form of private eq uity or direct eq uity holding, and then analyzing and optimizing other components of a family’ s w ealth wit respect to t is, is a diffic lt t necessary tas

I n the context of family businesses, one common outcome of this part of the process is to show that the initial investment portfolio of t e family office co ld e etter diversified, since it often as 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 eq uity) . T here are several different ways to ac ieve a more diversified portfolio for t e family office ( see F igure 7 . 1 ) .

F igure 7 . 1 . P roj ected total return and v olatility of v arious asset classes

Eq uityF ixed incomeCash and short termAlternative investments

Proj

ecte

d to

tal r

etur

n (5

yea

r ave

rage

)

P roj ected v olatility ( 5 year av erage)

0 %- 2 %

0 %

2 %

4 %

6 %

8 %

1 0 %

1 2 %

5 % 1 0 % 1 5 % 2 0 % 2 5 % 3 0 % 3 5 %

o rce e aptial Mar et ss mptions framewor at redit isse prod ces five year average ret rn and volatility forecasts for asset classes, some of w hich are show n in the chart.


e i o tance o cas oamily offices are different from ot er organi ations, in t at

there is often a greater and more irregular call on the investment portfolio. F amily members req uest funds for business- related or private eq uity stak es, philanthropic and impact investments, or ongoing expenses. I n this respect, being able to model the impact of cas ows on an overall investment portfolio is important, and e perience s ggests t at t e foc s on yield and cas ow tends to

e ig er for family offices t an for ot er client types ccordingly, families should consider their overall liq uidity needs carefully during the portfolio creation process.

e entation and o e nanceT he implementation and governance q uality is crucial. F rom an investment point of view , how a portfolio is implemented must be consistent w ith its objectives and structure. H aving a formal investment policy statement in place is an important step in maintaining an appropriate governance structure. I n addition to review ing the family’ s goals and objectives, it is vital to review asset allocation. T his can be done by rerunning asset allocation diagnostics on portfolios at least once a year, in order to mak e sure that they perform as initially prescribed. Governance and transparency are also very important, and regular meetings and calls etween principals, t e family office staff and e ternal advisors w ill help to clarify broad macro view s, turning points in strategy, and issues relating to implementation.

n s mmary, w ile t e family office space is growing and evolving ic ly, several ilding loc s can e identified as forming t e ey

components of a family office investment process ese are

• Consideration of how legacy issues determine the starting point of the fund

• O bjective setting and creation of an investment policy statement

• M apping risk tolerances

• Building a portfolio structure across all liq uid and illiq uid assets

• I mplementation using strategic and tactical investment tools to ens re t at investment sol tions fit t e goals and o ectives and meet cas ow needs

• Governance

• Rebalancing

n est ent st ate o e ieOnce investment goals ave een esta lis ed, family offices can begin think ing through how to deploy and manage capital.

e type of investment strategy a family office p rs es is a function of sourcing capabilities, desired control, liq uidity needs, investing e perience, and family office infrastr ct re amily office investment strategies generally fall into t ree road categories i third- party managed, ( ii) public direct and ( iii) private direct. O ften family offices se a mi of t ese strategies to diversify investment exposure and improve risk - adjusted returns.

ird party managed investing consists of family offices sing asset management funds to invest their capital. F amilies can mak e high- level decisions around how to allocate their capital betw een industry sectors and asset classes at the fund selection level. Below f nd selection level, owever, t ey ave limited in ence over investment decisions. Asset managers can focus their investments on public or private entities and on traditional or alternative asset classes see fig re

igure llustrati e amily o fice in estment strategy

T h ir d - p a r ty m a na g edinv es ting

O ther inv estors amily o fice

$

$P u b lic o r p r iv a te a s s ets

T h ir d - p a r ty a s s et m a na g er

D ir ec t inv es ting

amily o fice

$

P u b lic a s s ets P r iv a te a s s ets

A s s et


irect investing involves t e family office ma ing t e decision to invest capital into a specific asset or sec rity is re ires t e family office to do its own researc and d e diligence in t e investment process e family office is also responsi le 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 liq uid debt, eq uity securities and derivatives that trade over a public exchange. T hese investments are made through the use of public information and are subject to regulatory req uirements that both protect and constrain the investor. U nless very large positions are accumulated, public direct investing provides very limited in ence over t e nderlying asset’s management and strategic decisions.

• Private direct investing focuses on tak ing a more active role in the deal process and underlying investment. T he family office will often e more involved in siness decisions and strategy for the entity or asset. T he investment can be str ct red as de t, e ity, or as a specific asset p rc ase ( e. g. , real estate) . I nformation can include both public and non- public items. Regulatory req uirements are much looser, giving the investor greater access to information but more limited protection.

Presented elow is a s mmary of t e ey enefits and considerations for family offices regarding eac investment type see fig re

igure amily o fice in estment strategy

Strategy enefits C onsiderations Examples

T hird- party managed • L ow est infrastructure req uirements• I nvestment access is good but

customization is limited • T hird- party expertise can be valuable

• M anagement fees• L imited control over how capital is

allocated at fund level• T ransparency can be limited• Potential con icts of interest• Redemption features can impact liq uidity

nd investing• M utual funds • Private eq uity funds • I nfrastructure funds • H edge funds• F und of funds

P ub lic direct • L iq uid asset class • Avoids management fees• H ighly customizable portfolios• L arge investment universe• ility to se family office e pertise in

investment selection

• L imited to public mark et opportunities• I nformation must be public• enerally as limited in ence over

underlying entity or asset• Subject to public mark et volatility around

valuation• M oderate infrastructure req uirements to

manage portfolio

raditional investing• M oney mark ets• F ixed income• Eq uities • Commodities • O ptions

P riv ate direct • Avoids management fees• H ighest potential for “ alpha”• tr ct ring e i ility • ility to se family office e pertise in

investment selection • H ighly customizable portfolios• I ncreased access to information, including

non- public• ility to in ence decision ma ing aro nd

underlying asset

• I nvestment sourcing can be challenging• I lliq uid asset class • I nvestment process, including due

diligence and documentation, can be burdensome

• H igh infrastructure req uirements

lternative investing• Private eq uity• V enture capital • M ezzanine debt • Real estate • I nfrastructure projects• N atural resources • Royalty streams


Sect

ion

P riv ate direct inv estingecently, a strong trend as emerged of family offices eginning

to pursue direct investments in the private mark et. T he primary drivers for t is trend ave een i a searc for etter investment control, ( ii) attractive risk - adjusted returns that have limited public mark et correlation, and ( iii) low er price volatility. T his type of investment strategy, how ever, req uires the implementation of a formal investment committee process to identify, vet and execute new opportunities, as w ell as manage ongoing portfolio needs.

ome family offices ave c osen to team p wit ot er family offices to p rs e t is strategy as a cl is teaming p offers attractive synergies around infrastructure, deal sourcing, and idea sharing but does create governance issues w ith investment selection and ongoing management. F or small- to mid- sized

family offices, t e cl approac also en ances t eir overall competitiveness in the mark etplace by increasing the capital available to pursue new opportunities — an important criterion in w inning a competitive deal.

long t e same lines, family offices can also decide to p rs e individual deals on a co- investment or standalone basis. T he private direct investment process can be brok en into three broad p ases i ma ing, ii managing and iii moneti ing etting p a formal investment committee process around the implementation of these phases and setting up the necessary infrastructure in t e family office for dealing wit direct investments are critical amily offices need to ma e s re t at t ey ave t e rig t reso rces

available and policies and procedures in place to ensure that the risk s and opportunities around each investment are understood and managed see fig re

F igure 7 . 4 . P riv ate direct inv esting process

• Researching• Sourcing• Evaluating/ due diligence• Structuring ( e. g. , M & A and tax implications)• F inancing & capital mark ets/ structure• Closing

P hase

D escription

Keyactiv ities

O ngoingsupportnetwork

M a k ing

T he process of deciding to mak ethe inv estment

M a na g ing

T he ongoing management and monitoring of the inv estment

• Strategic objectives • M & A, organic, etc.• Operations, financial res lts cas ow• Capital mark ets/ structure • efinancing • D ividend recapitalization • F uture capital needs • Compliance• Governance

M o netiz ing

T he process to return capital to the inv estor ( can b e ongoing)

• F ull sale• Partial sale• Capital mark ets/ structure • I PO efinancing • D ividend recapitalization • Securitization

F inancing, M& A, tax, legal, regulatory, process improv ement,technology, risk management, compliance, accounting/financial reporting

ile family offices often possess t e fo ndation needed to create a successful direct investment strategy, investment gaps can exist at eac p ase of t e process amily offices, li e traditional asset managers, often rely on o tside professionals to assist wit specific services that are not carried out in- house ( e. g. , M & A advisory,

capital mark ets advisory, legal advisory, tax advisory, accounting) . is is partic larly tr e as a family office platform initially egins

pursuing the private direct investing strategy. O ver time, how ever, as it gains experience and builds out its infrastructure, many of these professional services can be brought in- house.


Sect

ion8

ec nology plays an important role in creating an efficient family office rt ermore, finding t e rig t individ als to manage t ese platforms is cr cial ec nology elps a family office to navigate core objectives, manage legacy changes and adhere to ind stry pdates t is important t at a family office identifies its core technology needs before choosing or creating solutions. Automation is an excellent w ay to k eep costs under control and to mitigate ris tools and platforms t at a family office s o ld consider are

• Custody platform ( bank , brok erage or trust company)

• Consolidated reporting

• T rading and portfolio management tools

• Risk management tools

• General ledger and accounting softw are

• Client Relationship M anagement ( CRM ) tools

• T ax preparation softw are

T he selection of I T should be w ell thought out and designed in order to provide efficient reporting, trading, portfolio management and accounting. T he technology can range from off- the- shelf products to highly sophisticated, customized solutions. M uch of this can be outsourced or provided at low cost from service providers, freeing

p t e family office reso rces to foc s on growing t e wealt e follow ing sections examine a selection of the various platforms in more detail.

stod at oT he use of multiple custodians creates the obligation to consolidate the assets. T his can be done for a fee by a third- party vendor, in- house w ith the proper investment in systems, or by the use of a global custodian.

T he custody of bank able assets is the safek eeping and servicing of assets, either w ith one or multiple custodians or bank s ( see fig re

I T , trading tools and platf orms


F igure 8 . 1 . Structure with glob al custody

Client

Global custodian

Securitiestrading

Portfolio manager2

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

Portfolio3

Portfolio4

Portfolio2

PortfolioGlob al custodian

Assetmanagement

Assetmanagement

Securities trading

Portfolio manager3

Portfolio manager4

Assetmanagement

Securities trading

Assetmanagement

Securities trading

Global custody refers to the custody and administration of assets wit one c stodian, w ic offers many advantages s c as

• e consolidation of all an a le sec rities, financial instruments, and liq uid assets, so that the time- consuming w ork of consolidation resides w ith the global custodian and not the family office1

• T he 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)

• T he 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 w ith no restrictions, and the asset manager is free to select the brok ers for securities trading)

• T he opportunity to include some non- bank able assets, such as direct real estate investments, mortgages, third- party derivatives, art collections and yachts

o rce Global Custody Pitchbook, Credit Suisse, 2 0 1 3 .

s rvey y amily Office Exchange in N ovember 2 0 1 2 show ed that family offices spend one t ird of their time producing acco nting and financial reporting.


onso idated e o tinA proper design of this process early on w ill allow families to understand their investments, identify risk s and strengthen their confidence in t eir family office onsolidated reporting as een proven to e t e most val a le tool of all for a family office, and is highly recommended.

adin and o t o io ana e ent too some family offices employ an asset allocation model, w ic t ey

give to fund managers. O thers mak e their investments in- house, in w hich case portfolio management and trading systems become more important.

V arious modules can be added to the infrastructure to deal w ith the increased scale and comple ity ese can incl de

• A portf olio management system T his provides the back bone of a fund’ s operational infrastructure

and acts as the internal book s and records.

• An execution management system An electronic trading platform that provides D irect M ark et Access

trading connectivity as w ell as direct connectivity to brok er algorithms.

• O rder management system is provides t e main trading platform for t e firm s wit an

execution management system, it also provides D irect M ark et Access trading and brok er connectivity. O ther k ey functions include compliance ( pre- and post- trade) , rebalancing, order staging and allocations, and portfolio modeling.

R too M tool is vital for a family office to manage critical information,

such as that relating to family members, in one central location. I nformation 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.

an ca ita and tec no oen c oosing tec nology for a family office, it is imperative to

have the right individual( s) in place to manage and operate the softw are. Such individuals, w ho may be in dual operational roles, should have an understanding of performance analysis and of accounting principles. T hey should be “ detail oriented” , have the ability to leverage technology for integration purposes and have basic Excel sk ills. D epending on the size and technical complexity of t e system, some family offices may ire a ief ec nology Officer is person wo ld e responsi le for s pport, pdates, communication and softw are training.

e implementation of in a new or e isting family office may req uire additional resources. T hese resources might involve external consultants, w ho can provide advice and support w ith respect to integration, implementation and t e verification of inp t and output data.

e entin tec no oOnce t e core needs ave een identified and t e appropriate solutions chosen, it is vital to implement them effectively.

ppropriate implementation may incl de t e following

• Conceive a detailed project plan, setting out the responsibilities of each vendor

• Agree the data import processes w ith each vendor

• Create data and functionality test scripts for each platform

• H ire an external consultant for data output testing

• H old freq uent meetings w ith each vendor on progress and on project plan milestones


Appendix

1 T he legal setup ( excluding the US)

ince a family office is a siness, t e q uestion of w hich jurisdiction provides the best environment for such activities often arises. L egal and tax structures w ill have a big impact on the structure and operational performance of t e family office and, as such, need to be given substantial consideration.

Given that the family is at the center of t e family office, c oosing a location close to the family, or at least to the central members, w ould 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. N evertheless, legal, tax and regulatory aspects relevant to the setup, as well as to t e operations of a family office, have to be check ed carefully.

Structure and j urisdictionConsidering the often global nature of families and investments today, the location and str ct re of t e family office needs to e e i le eno g to manage t e changing landscape of the family, w hile still maintaining t e enefits of a traditional, centrali ed family office e family s o ld gather the follow ing information about its glo al concerns

• L ocation of each family member — presence in multiple jurisdictions

• F uture migration and travel plans

• L ocation of substantial family w ealth

• F uture investment plans and goals in other jurisdictions

• L ocations w here family members are subject to various taxes

C riteria catalogAfter review ing various global interests of the family, the next step is to investigate the relevant jurisdictions by w eighing the

partic lar enefits and disadvantages of various structures and jurisdictions. T his analysis is uniq ue to each family. Pertinent items for consideration in each jurisdiction incl de

• L egal structures available

• T ax implications of structure

• Ease of maintaining employees

• Cost of operation versus value received

• Ability to invest and manage assets of a global family

• Risk s, reputation, and volatility — economic and political climates

• eg latory and information filing req uirements — immigration and visa req uirements for family members

• ility to coordinate efficiently wit advisors in other jurisdictions

• Q uality of communication and relationships w ith tax and regulatory authorities

• Streamlined exchange of information

• F lexibility to restructure in the future — including migration

• O pportunities for succession

W hich aspects are actually relevant in each individual case depends in particular on w et er t e family office will

• Actually ow n the family w ealth

O r

• Administer the family w ealth by acting for the family members

O r

• O nly advise family members on their joint investments, and in selected fields of activity

D epending on the framew ork provided by the jurisdiction, there are normally many aspects that must be considered in order


to optimize the individual situation w ithin the given set of legal, tax and regulatory framew ork s. T his section examines these considerations in more detail.

Ask ing the right q uestions ab out locationT he most crucial aspect of choosing a location for a family office may not e t e legal and tax environment. N evertheless, there are obviously a few jurisdictions t at stand o t as centers of family office excellence.

T he follow ing jurisdiction summaries provide you w ith information on the regulatory environment for the provision of family office services in t e most relevant jurisdictions and w ith an overview on the company law and tax issues regarding the family office itself is asic information is intended to illustrate those aspects that

ave to e considered w en defining t e scope and t e location of t e family office I t is important to establish w hich q uestions have to be ask ed — and answ ered — in the process of setting p a family office

e an

imitation regar ing financial activ itiesT he most important law regarding the reg latory environment for family offices in Germany is the German Bank ing Act ( K reditw esengesetz — K W G) . T his sets out the regulatory terms and conditions for giving investment advice and similar services. T o w hat extent regulatory restrictions have to be respected depends on t e str ct re and t e specific tas s of t e family office evert eless, t e following aspects ave to e considered

• f t e family office is str ct red as a company ( corporation or partnership) that actually ow ns the family w ealth ( w ith the family members as shareholders or partners) its investments q ualify as “ ow n account transactions” ( Eigengeschä ften) , w hich do not req uire a special permit and are not subject to further regulatory req uirements.

onse ently, t e family office’s personnel do not req uire special permits.

• f, on t e ot er and, t e family office acts as an advisor to the family or family members on how to invest t eir assets, or if t e family office performs the investments on behalf of the respective ow ner of the funds, such activities may req uire special permission from the F ederal F inancial Supervisory Authority ( Bundesanstalt fü r F inanzdienstleistungsaufsicht — BaF in) .

On ly , t e ropean Alternative I nvestment F und M anagers D irective ( AI F M D ) and the domestic law based upon this guideline ( K AGB — K apitalanlagegesetzbuch) became effective w ith a huge impact on the w hole industry. I nvestment undertak ings, such as family office ve icles w ic invest t e private w ealth of investors w ithout raising external capital, should not be considered to be AI F s in accordance w ith this D irective. Any impact on the activities of M F O s have to be closely monitored and need to be addressed individually.

US

UK

Netherlands

Germany

BelgiumSwitzerland

Austria

MexicoUAE

Qatar

Hong Kong

Singapore

Australia

NewZealand


L imitation regarding legal and tax adv iceU nder German law , legal and tax services may only be administered by law yers and y certified ta advisors respectively f

a company performs these professional services, such a company has to be registered as a law firm or a ta cons ltancy practice, w hich req uires that the company is at least partly ow ned and managed by persons w ho are personally authorized to render such services. T hus, the provision of s c professional services y a family office is only possible if the company meets the aforementioned req uirements or if it only arranges for the provision of such services through trusted advisors.

L imitation of liab ilityT he extent of possible liability for professional mistak es is dependent on the str ct re of t e family office and on t e legal nature of its services. I f the family office act ally olds t e family assets as the legal ow ner) its management is only accountable w ithin the limits of directors’ and officers’ lia ility inancial losses are losses of t e family office itself and cannot be claimed as damages by the family directly.

owever, if t e family office acts as an advisor to the family ( still ow ning the assets according to legal definition any shortcomings in the q uality of the advice res lting in financial losses may e claimed as damages. A total exclusion of liability, even for gross negligence, is not permissible under German law . F urthermore, it is advisable to cover such risk s by using financial loss ins rance

C ompany law issuesamily offices may e str ct red in vario s

w ays in Germany. N ormally, it w ould be advisable to establish an independent legal entity using a corporation ( stock corporation — AG, limited liability company — GmbH ) or a limited liability partnership ( K G) . T he use of a partnership ( w ithout built- in limitation of liability) does not seem appropriate ( but is also possible) . F rom the point of view of corporate law , corporations

( especially stock corporations) do not offer t e same degree of e i ility 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 betw een the relevant structures. German law does not have structures compara le to common law tr sts it as not ratified t e ag e onvention on the Recognition of T rusts. F or instance, a foreign trust w ith German- situated property set up by a w ill is invalid from a German civil law perspective.

L imited liab ility companyA limited liability company ( GmbH ) req uires a minimum share capital of € 2 5 , 0 0 0 . T he GmbH is represented by its managing directors ( Geschä ftsfü hrer) w ho are ( only) internally bound by shareholder decisions, but can act independently, against explicit shareholder instructions, w ith legally binding effect.

Stock corporationA stock corporation req uires a minimum share capital of € 5 0 , 0 0 0 . I t is represented by its executive directors ( V orstand) w ho can also act independently. T he executive directors are chosen by the supervisory board ( Aufsichtsrat) , w hose members are elected by the shareholders. A direct supervision of the executive directors by the shareholders is not legally possible.

L imited liab ility partnershipT he limited liability partnership is normally composed of a GmbH acting as a general partner, and one or more limited partners w hose liability can be limited to any amount ( but must be registered w ith the commercial register of the company) . T he partnership is managed by the general partner w hich is a GmbH . O ne or more limited partners may be managing directors of the GmbH ( general partner) .

F amily f oundationAccording to German civil law , a foundation is an organization that, by using its capital, promotes a special purpose set by the founder. U sually, the capital of the foundation needs to be preserved and only the income is spent for defined p rposes fo ndation has its ow n 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.

T ax issuesF rom an income tax point of view , the treatment of corporations and partnerships is different. Corporations are subject to corporate tax ( K ö rperschaftsteuer, 1 5 % ) and solidarity surcharge ( Solidaritä tszuschlag, 5 . 5 % on the corporate tax) . F urthermore, trade tax ( Gew erbesteuer, approximately 1 5 % depending on the municipality w here the business is located) is imposed on the company.

f a family office is set p 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 w hich is deemed to be nondeductible business expenses) . T his can lead to material economic enefits if t e income is accumulated at the corporate level e ta e emption is not granted for portfolio dividends ( less than 1 0 % shareholding at the beginning of the calendar year) received from 1 M arch 2 0 1 3 onw ard. T here are plans to extend this restriction to portfolio capital gains as w ell.

f, owever, t e profits of t e family office in t e 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 ta a le in ermany enerally, a at ta of 2 5 % and solidarity surcharge ( 5 . 5 % on the income tax) and church tax ( if applicable) are applied on the dividends.


I f the shareholding belongs to the private assets of the shareholder and amounts at least to 2 5 % 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 ( 6 0 % of the dividend is taxable and 4 0 % is tax- free) , w hich — in contrast to t e at ta allows t e s are older to consider negative income resulting from the shareholding.

Partnerships are not subject to taxation ( except for trade tax) . T heir income is split among the partners ( w ithout regard to w et er or not a profit distri tion is actually made) and taxed as their personal income. Such income of the partners is subject to income tax ( Eink ommensteuer, current marginal rate of 4 5 % ) , if the partner is an individual, or corporate tax, if the partner is a corporation. D ividend income and capital gains from shares held at partnership level may be partially ta e empt in t is regard, special r lings may apply ( depending partly on the shareholder structure) .

it e and

imitation regar ing financial activ ities

iven t at family offices do not normally accept deposits from the public on a professional asis, family offices do not req uire a bank ing license. Asset management is a standard activity of many family offices sset management as s c i. e. , acting in the name and for the account of the family — is currently not subject to licensing in Sw itzerland.

H ow ever, asset managers are subject to the Anti- M oney L aundering Act, and must become members of a recognized anti- money laundering self- regulatory organization or directly subordinated to the Sw iss F inancial M ark et Supervisory

t ority M f t e family office acts as an asset manager of a collective investment scheme ( either Sw iss or foreign) , a F I N M A authorization is req uired for the asset management activity. F urther, if a family office intends to distri te nits or shares of a collective investment scheme,

this is also a regulated activity and subject to a F I N M A authorization.

L imitation of liab ility family office wo ld normally e

established as a share corporation and not as a partnership. T his is to avoid, as much as possible, personal liability of the board and t e managers of t e family office f t e family office is part of t e family siness and holds the family assets ( as the legal ow ner) , the board and the management of t e family office are only acco nta le to the company, its shareholders and creditors w ithin the limits set in the Sw iss Code of O bligations for any losses or damages arising from any intentional or negligent breach of their duties.

f t e family office is separated from t e 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.

nder wiss law, t e family office wo ld e liable for any fault, w ithout any limitation w ith regard to the amount. As a matter of course, the liability is limited by contractual agreements to gross negligence and w ilful misconduct or capped at a certain amount for “ slight” negligence.

C ompany law issues e legal form of a wiss family office is

neither driven by the complexity of its functions nor the family’ s w ealth structure. Given the unlimited personal liability of at least one partner, Sw iss partnerships are not a common legal form for a family office wiss fo ndations are also seldom used, given their rigid rules in the Sw iss Civil Code. I n addition, Sw iss law does not provide for legal forms comparable to common law trusts, although Sw itzerland

as signed t e ag e onvention of ly on t e law applica le to tr sts and on

their recognition, w hich has been in force in Sw itzerland since 2 0 0 7 . F inally, limited liability companies are often avoided, given the need to register company members w ith the register of commerce. T herefore, the usual legal form w ould be a share corporation.

M ore important than the legal form is the fundamental q uestion of w hether t e family office olds t e family assets, i e , w et er t e family office is part of the family- run concern or w hether the family office is separated from t e family business. I n practice, both setups exist. A separation is more often seen in large- scale, multinational family businesses w ith fully operational entities, w hereas integration occurs w here the business is smaller or the assets only consist of financial investments

T ax issuesD ue to Sw itzerland’ s federal system, taxes are levied at three different levels, the federal, cantonal and communal level. T herefore, 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. I n general, corporate taxation for family offices in wit erland consists of t e following aspects

• Corporate income tax is levied at the federal, cantonal and communal level. W hereas the federal statutory tax rate is of t e net profit after ta , t e cantonal and communal rates vary depending on the location of the entity and the tax privileges available, if any. I n the case of ordinary taxation, the total effective maximum tax burden, consisting of federal, cantonal and communal taxes, ranges from approximately 1 2 % to 2 4 % .

• Provided that a tax privilege is applicable, the total effective maximum tax burden starts at approximately 8 % .

• Capital tax on net eq uity is also due once a year and varies, as it is levied on the cantonal and communal level only, betw een 0 . 0 0 1 % and 0 . 5 2 5 % 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 eq uity tax.

s ally, family offices provide t eir services mainly to related parties in a closed environment. I n order to avoid discussions w ith the tax authorities on the taxable profit, family offices s o ld eit er prepare


s fficient doc mentation on t eir transfer prices or reach a respective agreement w ith the authorities in an advance tax r ling c a r ling wo ld generally define t e ta a le profit ased on t e cost pl s method, w ith a mark up of betw een 5 % and 1 5 % , depending on the value- added of the operations in Sw itzerland.

A one- off capital duty of 1 % is generally levied on capital increases or contributions to Sw iss- incorporated companies. H ow ever, tax planning is available around exemptions for ( i) q ualifying mergers, reorganizations and financial restr ct rings and ii ot er contributions w ithin incorporations and capital increases of p to t e first m I n addition, a securities turnover tax on the sale or exchange of taxable securities may apply if t e family office i alifies as a securities dealer in the capacity of a brok er or dealer or ii trades on t e family office’s ow n account, provided it holds more than CH F 1 0 m of taxable securities. T he tax rate is 0 . 1 5 % for Sw iss 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 Sw iss residents or the participation exemption applicable to Sw iss corporate shareholders, provided they hold in both structures a minimum s are of in t e family office or t e participation exemption, an alternative fair mark et value of the participation of a minim m of m is s fficient

Also, it is w orth mentioning that due to t e ag e onvention of ly on the law applicable to trusts and their recognition, w hich has been in force in Sw itzerland since 2 0 0 7 , Sw iss- based family offices acting as tr stee or protector should generally not trigger negative tax implications in Sw itzerland. T his is because in neither capacity is the family office t e eneficial owner of t e tr st assets, although the trustee holds the legal title. T rust assets have to be permanently monitored, controlled and managed, w hereas less complex structured assets

may req uire less monitoring, but focus more on asset protection and preservation for future generations.

st ia

imitation regar ing financial activ itiesU nder Austrian law , legal and tax services may only be offered by law yers and y certified ta advisors f a company

performs such professional services, it as to e registered as a law firm or a ta

consultancy practice. T hus, the provision of such professional services by a family office is only possi le if t e company meets the aforementioned req uirements or if it arranges for the provision of such services through trusted advisors only.

L imitation of liab ilityT he extent of possible liability for professional mistak es depends on the structure of the legal form of the family office and on t e nat re of its services f t e family office manages a company t at actually holds the family assets ( as the legal owner , t e family office is only acco nta le wit in t e limits of its directors’ and officers’ liability. F inancial losses of the holding company itself are losses of t e family office itself and cannot be claimed as damages by the family directly.

f t e family office acts as an advisor to t e family’ s companies or the family members themselves, any shortcomings in the q uality of t e advice res lting in financial losses may be claimed as damages. N ormally the liability is ( and should be) limited by contractual agreement to gross negligence and/ or capped at a certain amount.

C ompany law issuese legal form of a family office in stria

is mainly defined y t e family’s wealt structure. Complex structures and assets have to be permanently monitored, controlled and managed, w hereas less complex structured assets may req uire less monitoring, but focus more on asset protection and preservation for future generations. D epending on the family’ s wealt str ct re, a family office’s f nctions

range from mere administration to high-level advice and management services.

M ore important than the legal form is the fundamental q uestion of w hether the family office olds t e family assets, i e , w et er t e family office is part of t e family wealt or is separated from the family or business. D epending on the family’ s asset structure, the Austrian jurisdiction offers different suitable legal forms. Since the introduction of the Austrian Private F oundation Act in t e s, many family owned fort nes w ere endow ed in private foundations. Accordingly, many organizational and administrative services are provided by the foundation’ s governing board.

T oday, the governing board not only manages and coordinates family assets,

t also needs e pertise in ot er fields 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 o ndation ct, a family office can e

installed through the foundation deed.

e family office’s mem ers, tas s, functions, rights and goals, as w ell as the governing board’ s instruction rights can be established in the foundation’ s deed. O utside the legal form of the Austrian private fo ndation, a family office can e set up as the managing board of a holding company w ith limited liability ( GmbH ) , w hich actually holds the family’ s assets, or as a service company w ith limited liability that offers advisory services to the family’ s holding companies or the family members themselves.

T ax issuesF rom a tax planning perspective, family offices can e set p in a variety of legal forms, such as corporations, partnerships or private fo ndations ic form fits the req uirement best w ill depend on the individual asset and holding structure as w ell as on the range of services provided t ro g t e family office

F rom an income tax perspective, corporations and partnerships are treated differently. Corporations are subject to


tax, w hile partnerships are “ look through” vehicles and taxed at the partner’ s level. f a family office is set p as a corporation and actually holds the family assets, t en dividends incl ding idden profit distributions) received by an Austrian company from other Austrian companies are exempt from corporate income tax ( no minimum holding is req uired) . 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 1 0 % of the share capital of a foreign corporation that is comparable w ith an Austrian corporation for more than one year. D ividends from participations that do not meet the criteria for international participations are subject to the general corporate income tax rate of 2 5 % . H ow ever, shareholdings in EU corporations, certain European Economic Area ( EEA) corporations and corporations that are resident in other countries w ith w hich Austria agreed to exchange tax information q ualify as international portfolio participations. D ividends from such international portfolio participations are exempt from tax, irrespective of the ow nership level.

D istributions from corporations are subject to a w ithholding tax of 2 5 % ( from

an ary , t e rate will increase to 2 7 . 5 % ) , if not q ualifying as repayment of capital. Partnerships themselves are not subject to taxation. T heir income is allocated to the partners ( irrespective of any distribution) and taxed as the partner’ s income. Currently, the top marginal rate for individ als is from t is will increase to 5 5 % .

A private foundation is subject to the standard corporate tax rate of 2 5 % .

ividends incl ding idden profit 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 2 5 % w hich can be set against the w ithholding tax on

grants of the private foundation to its eneficiaries rants are s ect to a

w ithholding tax of 2 5 % ( from 2 0 1 6 the rate w ill increase to 2 7 . 5 % ) .

e et e ands

imitation regar ing financial activ itiesT he most important law regarding the reg latory environment for family offices in the N etherlands is the F inancial Supervision Act ( W et F inancieel T oezicht — W ft) . T he W ft sets out the regulatory terms and conditions for giving investment advice and similar services. T his law is monitored by the Authority for the F inancial M ark ets ( AF M ) . Any company or person w ishing to provide financial services will need a permit from the AF M . T he costs of these permits range from € 2 , 0 0 0 to € 5 , 5 0 0 . N either the law nor the AF M distinguishes betw een the legal forms of a financial services company Besides a permit for the company itself, all employees providing t e act al financial services will re ire a ft certificate i e , they must have completed a professional training) .

L imitation of liab ilityT he extent of possible liability for professional mistak es is dependent on the str ct re of t e family office f t e family office olds t e family assets as t e legal ow ner) , its management is only accountable wit in t e limits of directors’ and officers’ liability.

f, on t e ot er and, t e family office acts as an advisor to the family ( still ow ning t e assets according to legal definition , any shortcomings in the q uality of the advice res lting in financial losses may e claimed as damages. N ormally, the liability is — and should be — limited by contractual agreement to gross negligence and capped at a certain amount. I t is advisable and common to cover such risk s by using financial loss ins rance


w ays in the N etherlands. N ormally, it w ould be advisable to establish an independent

legal entity using a corporation ( stock corporation — N V , limited liability company — BV ) . T he use of a partnership ( w ithout built- in limitation of liability) does not seem appropriate ( but is also possible) . F rom the point of view of corporate law , corporations ( especially the BV ) offer a large degree of

e i ility

D utch law does have structures comparable w ith common law trusts ( foundations) .

e et erlands as ratified t e ag e Convention on the Recognition of T rusts dated ly or ta p rposes,

assets ow ned by a trust- lik e entity ( separated private assets or APV ) are generally attributed to the settlor or his or her heirs.

L imited liab ility company ( Gmb H)A limited liability company ( BV ) req uires a minimum share capital of € 0 . 0 1 . T he BV is represented by a board consisting of at least one director ( bestuur) . T he members of the board are elected by the shareholders. T he board is ( only) internally bound by shareholder decisions, but can act independently, against explicit shareholder instructions, w ith legally binding effect.

Stock corporation ( NV )A stock corporation req uires a minimum share capital of € 4 5 , 0 0 0 . I t is represented by a board consisting of at least one director. T he members of the board can act independently. T he board members are chosen by the shareholders or, in the case of larger corporations, a supervisory board ( Raad V an Commissarissen) . A supervisory board is compulsory if the company either has capital exceeding € 1 6 million, more than 5 0 employees on a standalone basis or more than 1 0 0 employees on a group basis. T he supervisory board is elected by the shareholders.

D utch f oundationA 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. T he foundation is represented by a board consisting of at least one director. T he w ay


the board is appointed is not prescribed by civil law . A procedure to appoint the board can e c osen to fit t e appropriate needs of the foundation, but the choice has to be included in the articles of association.

I t is prohibited for a D utch foundation to mak e distributions to its founder( s) , director( s) or any other persons unless, in the latter case, the distribution has a social or charitable purpose.

T ax issuesF rom a tax point of view , the treatment of corporations and foundations is different.

C orporationsCorporations are subject to corporate income tax ( V ennootschapsbelasting, 2 0 % on t e first , of profit, on t e profit over t at t res old f a family office 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. T he tax exemption is not granted for portfolio dividends ( less than 5 % shareholding) or dividends received from corporations resident in tax havens. D istributions by t e family office or corporation to t e shareholders are generally liable to dividend w ithholding tax ( 1 5 % ) .

F oundationsT he D utch foundation is only liable to corporate income tax to the extent that it performs commercial activities. I f a foundation engages in commercial activities, t t e profit does not e ceed an amount of € 1 5 , 0 0 0 in a year ( or € 7 5 , 0 0 0 in t e last five years , t e e emption will also apply istri tions y t e family office or foundation are generally liable to D utch gift tax ( 1 0 % - 4 0 % ) .

e i

imitation regar ing financial activ itiesamily offices in elgi m may e s ect to

several law s and royal decrees regarding t e s pervision of t e financial sector and

of financial services is legislation sets out the regulatory terms and conditions for giving investment advice and similar services.

T his legislation is monitored by the F inancial Services and M ark ets Authority ( F SM A) . Any company or person w ishing to provide financial services will need a permit from the F SM A. T he cost of these permits depends on the k ind of services offered by t e family office e law limits financial services to certain legal forms.

Besides a permit for the company itself, employees providing t e act al financial services may re ire certain certifications, depending on the services offered.

L imitation of liab ilityT he extent of possible liability for professional mistak es is dependent on t e str ct re of t e family office f t e family office olds t e family assets ( as the legal ow ner) , the liability of its management w ill be covered by the directors’ liability as described in the Belgian Companies Code or, if the management is not a director of the family office, y t e contract etween t e family office and t e management

f, on t e ot er and, t e family office acts as an advisor to the family ( still ow ning t e assets according to legal definition , the liability for shortcomings in the q uality of t e advice res lting in financial losses w ill be a contractual liability. N ormally this liability is — and should be — limited by contractual agreement to gross negligence and capped at a certain amount. I t is advisable and common to cover such risk s y sing financial loss ins rance


w ays in Belgium. N ormally, it w ould be advisable to establish an independent legal entity using a corporation ( a public limited company — N V , or a private limited liability company — BV BA) .

P riv ate limited liab ility company ( BV BA)A private limited liability company ( BV BA) req uires a minimum share capital of € 1 8 , 5 5 0 . T he BV BA is represented by one or more directors ( zaak voerder/ gé rant) . A distinction is made betw een a statutory director ( appointed in the articles of association) and a non- statutory director ( appointed by the general meeting of shareholders) . T he board is ( only) internally bound to shareholder decisions, but can act independently, against explicit shareholder instructions, w ith legally binding effect.

P ub lic limited company ( NV )A public limited company ( N V ) req uires a minimum share capital of € 6 1 , 5 0 0 . I t is represented by a board consisting of a minimum of three directors ( bestuurders or administrateurs) . H ow ever w here the company is incorporated by tw o founders or has no more than tw o shareholders, the board of directors may be limited to tw o members. T he members of the board can act independently. T he board members are chosen by the shareholders.

T ax issuesCorporations are subject to corporate income tax ( V ennootschapsbelasting, of in principle e ig est rate for small and medium enterprises ( SM Es) is, how ever, 3 5 . 5 4 % . An SM E for the application of the so- called reduced progressive ta rates is defined as a company wit a ta a le profit not e ceeding € 3 2 2 , 5 0 0 . I ncome below € 3 2 2 , 5 0 0 is taxed at progressive rates ranging from 2 4 . 2 5 % to 3 4 . 5 0 % , to be increased w ith 3 % crisis surtax ( subject to conditions, and not applicable to holding companies) .

f a family office is set p 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 w hich are held for an uninterrupted holding period of one year are subject to a 0 . 4 1 2 % tax. T his rule is, how ever, only applicable


to large companies ( and not to SM Es) . I f the one- year holding period is not reached, the capital gain w ill be taxed at the rate of 2 5 . 7 5 % . D ividends received are taxed at the normal tax rates. H ow ever, according to the EU Parent- Subsidiary D irective, the participation exemption provides for a ded ction of of alifying dividends from the taxable basis in certain circumstances.

istri tions y t e family office or corporation to the shareholders are generally liable to a dividend w ithholding tax ( 2 5 % ) . A reduced rate applies to dividends paid by small companies on nominative shares issued as of

ly provided t ese s ares are received in exchange for a contribution of cash into the company and that an ow nership req uirement and holding period req uirement are met. T he rate amounts to 2 0 % for dividends distributed during the third year follow ing the contribution, and to 1 5 % for dividends paid as from the fourth year follow ing the contribution.

e

R egulatory env ironment family office can wor at different

levels — from being run by a small group of trusted individuals or family members to being managed by a professional service provider e laws governing a family office can vary depending on its structure. I n the U K , investment advice is given either by a financial advisor or a stoc ro er ot have to be registered w ith the F inancial Conduct Authority ( F CA) , and certain larger institutions have to be registered w ith the Prudential Regulatory Authority. T he F CA is the independent body that regulates t e financial services ind stry in t e W ith statutory pow ers invested in it by the F inancial Services Act 2 0 1 2 , the F CA has a w ide range of rule- mak ing, investigatory and enforcement pow ers.

L imitation of liab ilityamily offices can act as an nincorporated

entity and thereby there is no limitation of liability. All investments remain ow ned by

the principal, and employment law s and other public liabilities ( and other litigation) w ill attach to the individual. F or those w ho w ish to limit liability, there are three entities normally considered limited lia ility companies ( L td) , limited partnerships ( L Ps) , and limited liability partnerships ( L L Ps) . All, in general, protect t e owner from financial penalty up to the level of eq uity invested in t e family office entity

An L P is used primarily as an investment vehicle w here the aim is purely asset-holding, grow th, and income generation. An L P is normally distinguishable from an L L P because its ow ners are generally not active w ithin an L P business. T herefore, an L L P is most freq uently seen w here the entity is a trading concern or w here the ow ner is active in the business. L Ps are more freq uently used for U K - based families as a vehicle w hich can be used to transfer w ealth through the generations in a w ell- governed and ta efficient manner over time

M any international investors w ant to use U K law as the governing law of operation because of the independence and enduring stability of the U K judicial system. An often perceived disadvantage of obtaining limitation of liability is the corresponding re irement to lodge financial information w ith the U K authorities, w hich then becomes available to the public. T hose wis ing to eep t eir financial affairs private can, how ever, often tak e advantage of vario s opport nities to eep t eir profile private, w ith appropriate structuring. M any family offices are esta lis ed in t e as an advisory function but w ith ow nership of assets held abroad. T his is to tak e advantage of t e financial e pertise in L ondon, but also because certain families, w ho are not citizens of the U K ( although they may be tax residents) , can tak e advantage of the U K tax system, w hich allow s income earned outside the U K to not be taxed in the U K unless brought into the country.

L egal structurest is possi le to set p a family office in t e

sing any of t e following str ct res

L imited companyA limited company is a corporate entity limited by shares. T he family may be the shareholders and possibly also act as directors, w ith or w ithout non- family professionals at t e family office company has separate legal personality.

P artnershipsA partnership is tw o or more persons carrying on a siness wit a view to profit I t is effectively transparent for tax purposes ( i. e. , the partners are taxed on their share of the income and gains of the partnership) . An L P has “ general partners” w ho manage the partnership, and “ limited partners” w ith limited liability, w ho do not. An L L P is an entity that is taxed in the same w ay as a partnership, w hile affording limited liability to its members.

A trustA trust is an arrangement w hereby assets are eld y tr stees for t e enefit of t e tr st’s eneficiaries ey are generally governed by a trust deed.

I nf ormal or contractual relationshipF amilies may employ individuals directly to provide t em wit family office services Alternatively, there may be an informal arrangement w hereby individuals w ho are employed by the family company also provide family office services to t e family

T ax structuresU K resident limited companies are legally distinct entities and are subject to corporation ta on t eir profits onU K resident companies are not subject to corporation tax unless they carry out business in the U K through a “ permanent establishment. ” I f they receive income from a U K source other than via a permanent establishment ( e. g. , from U K property or other U K investments) , they may be subject to income tax.

Partnerships ( L Ps and L L Ps) are generally transparent for tax purposes, and the


partners are taxed directly on their share of the income and gains. T he trustees of U K resident trusts are subject to income tax and capital gains tax on the income and gains of the trust. N on- U K resident trusts are subject to U K income tax on U K source income. Anti- avoidance provisions can apply to tax income and gains received by non- U K trusts, companies and other entities for U K residents connected w ith the entity.

T his is a complex issue and advice should be tak en before establishing a nonresident entity. H ow ever, offshore entities can provide tax advantages in certain situations, particularly in respect of family members w ho are non- U K resident or non- U K domiciled. W here payment is made for family office services nder a contract al or informal arrangement, the recipient may be subject to tax on the income. T he precise ta treatment will depend on t e specific circumstances of the case.

e nited a i ates

T here are limited jurisdictions in the M iddle ast w ere family offices can e set p to

successfully manage the affairs of a family. T he D ubai I nternational F inancial Center and the D ubai M ulti Commodities Center are tw o free zones w ithin the U AE that offer vario s enefits, and cater to t e family office str ct re

T he D ub ai I nternational F inancial C enter ( D I F C )T he D I F C w as established in 2 0 0 4 as a free one financial center offering a convenient

platform for leading financial instit tions and ancillary service providers. T he D I F C is a well nown and esta lis ed risdiction it aims to play a pivotal role in meeting the growing financial needs and re irements of the region, w hile strengthening link s w ith t e financial mar ets of rope, sia and the Americas.

SF O R egimeI n order to provide a platform for families to manage their ow n w ealth, the D I F C has introduced the SF O Regulation, w hich applies to families comprising one individual or a group of individuals all of w hom are the bloodline descendants of a common

ancestor or t eir spo ses f rt er defined w ithin the SF O Regulation) . O ne of the main criteria for establishing a D I F C SF O is that the family’ s w ealth exceeds the req uired minimum of U S$ 1 0 million.

M F O s are also possible in the D I F C. I f providing w ealth and asset management services to multiple families, this w ill fall

nder t e financial reg lations of t e ai F inancial Services Authority ( D F SA) , w hich reg lates all financial services cond cted in the D I F C ( purely consulting or advisory services w ould not fall under D F SA regulation) .

L egal structuresSF O s may be structured in various w ays wit in t e several ve icles are permitted, w hich include ( but are not limited to t e following

• Company limited by shares ( L T D )

• L imited liability company ( L L C)

• L imited liability partnership ( L L P)

• General partnership ( GP)

enefits o the T he D I F C offers companies a 1 0 0 % foreign ow nership structure, no exchange controls, and a U S dollar- denominated environment. T he D I F C also follow s an international legal system based on the common law of England and W ales, an independent common law judicial system consisting of t e dicial t ority t e courts) , and a regional international arbitration center launched by the D I F C and the L ondon Court of I nternational Arbitration ( L CI A) .

D ub ai Multi C ommodities C enterT he D ubai M ulti Commodities Center ( D M CC) w as originally established in 2 0 0 2 as a commodity mark et place. H ow ever, today it caters to a broad range of activities and is currently one of the largest and fastest- grow ing free zones in the U AE. T he D M CC offers 1 0 0 % foreign ow nership and recently expanded its offering to include an SF O license to manage the private w ealth of family members, w here all individuals are bloodline descendants of a common ancestor or their spouses.

O ne of the main criteria for establishing a D M CC SF O is that the family’ s w ealth has a minimum of U S$ 1 million of investible or liq uid assets.

L egal structureD M CC SF O s are permitted as free zone

str ct res wit a specific license to allow the w ealth, asset, and legal and administrative affairs management of a single family. T hese can be provided to a family member, family business, family entity ( corporate structure) , family trust or foundation. T he D M CC SF O must be w holly ow ned by the same family, or by a registered trust ow ned by the same family members.

C riteria f or setting up an SF OT he main criteria for both the D I F C and

M are

• of t e ltimate eneficial owners ip of the SF O belongs to members of a single family

• f t e ltimate eneficial owner is a tr st or similar entity, 1 0 0 % of the principal

eneficiaries controlling individ als are members of the same family

• T he SF O does not provide services to t ird parties it manages a single family’s proprietary assets only

• T he SF O has a physical presence w ithin the applicable free zone

UAE tax structureT here is currently no federal U AE taxation. Each of the individual emirates ( D ubai, Sharjah, Abu D habi, Ajman, U mm Al Q uain, Ras Al K haimah and F ujairah) has issued corporate tax decrees that, theoretically, apply to all businesses established in the U AE. H ow ever, in practice, these law s have not been enforced.

T he D I F C applies a 0 % tax rate guaranteed ntil , w ile t e M offers a specific

tax exemption for 5 0 years from the date of incorporation. T hus, families w ho decide to set up an SF O in the D I F C or D M CC can tak e advantage of a 0 % tax rate on income and profits, as well as t e freedom to repatriate capital and profits wit o t restrictions


ey may also enefit from t e wide netw ork of double taxation treaties w ith no restrictions on foreign exchange.

W hile there is currently no applicable value added tax or corporate income tax enforced in the U AE, the introduction of both are under consideration. All families and businesses considering establishment in the U AE should be mindful of the potential introduction of both direct and indirect taxes, and of future developments.

ataT he Q atar F inancial Centre ( Q F C) , w hich w as established in 2 0 0 5 , is another place in the M iddle East w here it is possible to set up a family office e stands alone from the Q atar state regime and has separate legal, regulatory and tax law s, w hich are of international standard. T he Q F C is not a free zone or an offshore center.

After the enactment of the SF O Regulations ( SF O R) in 2 0 1 2 , the Q F C Authority ( Q F CA) now aims to inform families and advisors to families to consider the Q F C as the preferred jurisdiction for SF O s and for other investment purposes.

enefits o setting up in the F amilies w ho decide to set up an SF O at the Q F C can tak e advantage of a 1 0 0 % foreign ow nership structure w ith extensive tax exemptions available, a low effective tax rate ( currently 1 0 % ) , and the freedom to repatriate capital and profits wit o t commercial and tax restrictions. T hey can also enefit from a wide networ of do le taxation treaties, a w orld- class regulatory and legal environment, and a sw ift and a streamlined licensing process.

Setup and activ ity req uirements An SF O is a corporate body, established w ithin the Q F C as an unregulated entity that manages the business, investments and w ealth of a single family w ith a minimum of U S$ 5 million in investible or liq uid assets.

F amilies interested in setting up an SF O in t e are enco raged, in t e first instance, to set up a meeting w ith the Q F CA strategic team, w ho w ill provide them w ith deep understanding of the setup process

and the documentation req uired. A single application pack should be submitted to the Q F CA w hich covers both the licensing and the registration of the SF O . T he application m st e accompanied y

etter rom an eligi le firme letter s o ld confirm t at t e rticles

of ssociation of t e O satisfies t e re irements of t e O , confirmation that the applicant family constitutes a single family and is ultimately ow ned by one or more family members of the single family/family fid ciary str ct res family entities

Statement signed b y the applicant or its designated representativ e T his should state the name of the common ancestor and s fficient information to prove t at t e applicant alifies as a single family. T his also includes, but is not limited to, a description of the sources of assets of the single family, full details of w ho controls t e single family, t e legal and eneficial ow ners, the total number of family members, the SF O ’ s activities, and details of the designated representative.

T he SF O must at all times have a registered office sit ated in t e or any ot er approved business building.

uration an ees U pon submission of the complete application pack , the establishment procedure is generally completed w ithin one month. T he SF O application and annual fee amount to U S$ 5 0 0 .

st a ia

R egulatory env ironmentStructures

e laws governing a family office will e affected by its legal structure. A family office may e set p in stralia sing any of the follow ing structures ( or any com ination of t e str ct res

P roprietary companyA proprietary company is a corporate entity that is typically limited by shares. T he family members may be the shareholders

or directors of the company, w ith or w ithout the involvement of non- family professionals. T he directors have certain common law , stat tory and fid ciary o ligations 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.

D epending on the size and status of the company, t ere will e vario s financial reporting and auditing obligations imposed on the company. T he Australian Securities & I nvestments Commission is the corporate regulator that administers corporate legislation and rules.

T rustA trust is a legal arrangement under w hich a trustee ( w hich may be a company and/or family member) holds property for the

enefit of t e tr st’s eneficiaries e terms on w hich the trustee may deal w ith t e property it olds for t e eneficiaries are generally determined by the trust deed, trust law and legislation.

pecific ta and reg latory r les apply for certain types of trusts, including in partic lar

• Superannuation funds ( i. e. , a type of pension fund)

• Private ancillary funds ( i. e. , a type of private charitable foundation)

P artnershipA partnership consists of tw o or more legal persons carrying on a business w ith a view to profit partners ip may e registered as a limited partnership, w here the liability of one or more partners ( other than the general partner) for the debts and obligations of the business is limited. Compliance w ith statutory req uirements under Partnership Acts of each state in Australia may also be req uired.

C ontractual relationshipF amilies may engage individuals directly to provide t em wit family office services I ndividuals employed by a family company ( or other entity) may also provide family office services to t e family mployment of


individuals w ill also be subject to statutory req uirements, including the payment of salary and superannuation entitlements.

R egulation of serv icesT he provision of the follow ing types of services is subject to Australian federal or state reg lation

• I nvestment advice

• L egal services

• T ax services

• Employment services

Accordingly, care should be tak en to ensure that the professional services to

e provided y a family office comply wit the relevant legislative and common law req uirements.

T hese req uirements w ill include adherence to rules and legislation that have reporting and compliance obligations w ith the

stralian a ation Office, and will vary according to the entities, size and status of t e family office

ny family office t at operates internationally should also be aw are of its obligations w ith regard to foreign investment policies in Australia. M ost notably, this w ill req uire liaising and applying for certain investments w ith the Australian F oreign I nvestments Review Board.

T ax issuese family office str ct res descri ed

above ( i. e. , a private company, trust or partnership) are all recognized as taxpayers for Australian income tax purposes. Conseq uently, they are generally req uired to register w ith the Australian T axation Office to o tain a ta file n m er and file annual income tax returns.

Australian resident taxpayers ( e. g. , a company incorporated in Australia) are subject to Australian income tax on their w orldw ide income and capital gains.

or t e year ending ne , t e Australian corporate tax rate is 3 0 % ( or 2 8 . 5 % for companies w ith an aggregated turnover under AU $ 2 m) . D ividends paid o t of profits t at ave een s ect

to Australian tax may be frank ed ( i. e. , a frank ing credit broadly provides the dividend recipient w ith a tax credit for the underlying company tax paid) .

Generally, trusts and partnerships are treated as ow t ro g entities for Australian income tax purposes. T hat is, subject to certain exceptions, the taxable net income of a trust or partnership is ta ed in t e ands of t e eneficiaries or partners, respectively, according to their interests in the trust or partnership. F or the year ending ne , t e ta rate for an stralian resident individ al eneficiary or partner w ith taxable income of more t an , is

Another important tax consideration is that capital gains on trust or partnership assets ow ned for more than 1 2 months may be eligible for the 5 0 % CGT discount ( subject to t e circ mstances of t e eneficiary or partner) .

ome e ceptions to t at ow t ro g ta treatment e ist in respect of

• Complying superannuation funds ( w hich are subject to concessional tax rates)

• Private ancillary funds ( w hich may be exempt from income tax)

• L imited partnerships ( w hich are generally taxed as companies)

e ea and

R egulatory env ironment family office can wor at different levels

depending on the family’ s needs and preferences e family office can e r n by a small group of trusted individuals and/ or family members, or be managed y a professional services firm e laws

governing t e family office depend on its structure.

F inancial advice should be obtained from an a t ori ed financial advisor registered under the F inancial Advisers Act, the Code of Professional Conduct, and other relevant financial mar et legislation toc ro ers are also req uired to be licensed w ith the F inancial M ark ets Authority ( F M A) . T he pow ers given to the F M A under the

F inancial M ark ets Conduct Act 2 0 1 3 are w ide- ranging and include monitoring, supervision, investigation and enforcement. T hey are also responsible for education, information, policy- mak ing and guidance.

U nder N ew Z ealand law , legal advice may only be offered by law yers holding a practicing certificate

L imitation of liab ilityamily offices can act as an nincorporated

entity ( e. g. , trust or partnership) and conseq uently enjoy no limitation in liability. I n these cases, all investments remain ow ned by the principal, and employment law s and public liability w ill attach to the individual.

F or those families that w ish to limit liability, t e family office can e incorporated and registered w ith the N ew Z ealand Companies Office company is a separate legal entity from both a legal perspective and a tax perspective. T his affords the ow ner protection from financial penalty p to t e level of eq uity invested in the incorporated family office entity company is re ired, 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 N ew Z ealand, or be resident in an enforcement country and be a director in that enforcement country. T he list of enforcement countries only includes Australia at present. All directors must be natural persons.

company m st file an ann al ret rn confirming t at information eld y ew

ealand ompanies Office is complete and correct on compliance wit filing may result in the company being removed from the Companies Register.

L imited partnerships also afford a level of protection from liability for the limited partner w hile the general partners are liable for all the debts and liabilities of the partnership, and are generally used purely as an asset- holding entity. L imited partnerships are registered w ith the

ompanies Office


T ax issuesF rom a tax planning perspective, family offices can e set p in a variety of legal forms, such as companies, partnerships or tr sts ic form est fits t e re ired needs depends on the individual asset and holding structure as w ell as on the range of services provided t ro g t e family office

As tax obligations are dependent on the nature and activities of the investment entity, advice should be ta en efore esta lis ing a family office investment vehicle.

I ncome taxF rom an income tax perspective, companies, partnerships and trusts are treated differently. Companies and trusts are subject to tax, w hile partnerships are transparent and taxed at the partners’ marginal tax rate.

C orporate taxCompanies are req uired to lodge an annual tax return w ith N ew Z ealand I nland Revenue. T he current company tax rate is 2 8 % and the standard tax income year ends on 3 1 M arch, unless prior approval is received from I nland Revenue.

A N ew Z ealand company is subject to tax on its w orldw ide income. Relief may be available under applicable double tax treaty agreements. Companies that are 1 0 0 % commonly ow ned have the option to consolidate for tax purposes.

Special rules apply to life insurance, nonresident insurers, ship- ow ning, petroleum and mining, and forestry companies, as w ell as group investment funds, overseas investments in controlled foreign companies and foreign investment funds.

T he dividend imputation system applies to N ew Z ealand resident companies. D ividends derived by a N ew Z ealand resident company are exempt from tax w here the companies are 1 0 0 % commonly ow ned.

F oreign tax credits can be claimed by a N ew Z ealand resident. T his credit is limited to the low er of the amount of tax paid or the N ew Z ealand tax payable on income.

ere is no capital ta regime owever, certain transactions are specifically ta a le, including property acq uired for resale, or part of business dealings. Recently, legislation w as enacted to ensure that all residential property bought and sold w ithin a tw o- year period is taxable, w ith limited exclusions.

T rustee taxT rustee income is taxed at 3 3 % and

eneficiary income is ta ed at t e eneficiary’s marginal ta rate ere is

an exception to this rule called the minor eneficiary r le, w ere y distri tions

made to eneficiaries nder years old are taxed at 3 3 % .

T he tax treatment of distributions from tr sts depends on t e classification of t e trust and the nature of the distribution.

P artnershipsPartnerships are, themselves, not taxed. T heir income is allocated to the partners in accordance w ith the partnership interest held, and is taxed at the partner’ s marginal tax rate. M arginal tax rates for individuals range from 1 0 . 5 % to 3 3 % .

on on

R egulatory env ironment family office in ong ong normally e ists

to provide comprehensive services to the high net w orth individuals ( H N W I s) and their family members — be it purely ow ning 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, w ith the support of professional service providers, namely, independent trustees and legal and tax advisors.

T he law s governing the setup and operation of a family office can vary vastly, depending on its structure and business model. A family office s ally ta es t e form of a private company, managed by trusted individuals or another company providing professional services.

I n H ong K ong, advising on securities and asset management are regulated activities governed by the Securities and F utures Ordinance f t e family office is operating as a business, it has to be a corporation licensed for “ asset management” ( type

license epending on t e e act scope of service to be provided to clients, the family office 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 F utures Commission, a statutory commission vested w ith policy- mak ing, investigatory and enforcement pow ers.

rt ermore, if t e family office is an M O and is tak ing deposits from multiple high net wort families, s c an office will e regarded as a “ restricted license bank ” or a “ deposit tak ing company” under the Bank ing O rdinance and subject to the regulations of the H ong K ong M onetary Authority. H ong K ong offers a w ell-developed common law system providing a stable legal environment for the prolonged settlement of a family office

L imitation of liab ilityT he popular types of corporate registration ve icle for setting p a family office in ong

ong are

• Private company limited by shares ( a subsidiary company)

• ranc office of a corporation incorporated outside H ong K ong

Also possible, but less common, are sole proprietorships, partnerships and limited partnerships, because they are not a separate legal entity w hereby all debts and liabilities w ould be the personal responsibility of the sole proprietor or partner, no legal firewall etween t em and the business exists. F urther, they do not have continual existence.

M any H N W I s, especially those from China, w ould w ant to use H ong K ong as an investment platform for their private investments overseas, and set up a family office in ong ong to manage t eir assets and businesses centrally. Such an arrangement tak es advantage of H ong K ong’ s close proximity to Chinese mark ets,


its ease of business formation, its sound legal and bank ing system w ithout foreign exchange controls, as w ell as its low and simple ta regime, nder w ic profits earned outside of H ong K ong, dividends and capital gains are not taxable.

C ompany law and tax issuesGiven the general limited restrictions on setting p family offices in ong ong, coupled w ith the low rate of taxation and offs ore profits ta e emption regime,

H ong K ong is felt to be a favorable place for H N W I s to consolidate and manage their ow n assets and businesses.

I n H ong K ong, there are no special legal provisions relating to the setting up of family offices and t e following str ct res are normally sed

P riv ate company limited b y shares ( a sub sidiary company)A subsidiary company is a common type of ve icle for setting p a family office in H ong K ong. T he minimum number of directors and members is one. T here is no limitation on the nationality of directors and members. Both corporates and individuals can act as members. T hat said, at least one natural person must be appointed as a director. Accordingly, overseas corporates and individuals are free to set up their ow n family office in ong ong wit few legal req uirements.

ranch o ficeI f the H N W I is uncertain about the H ong

ong mar et, or t e family office’s operation in H ong K ong is relatively small at the initial stage, they can choose to set p a ong ong ranc office of t eir foreign corporations. U nder H ong K ong law , there is no distinction betw een the foreign corporation itself and its H ong K ong branch, and the branch is only an address at w hich the corporation carries on a business.

Maintaining a ranc office can e simpler ( e. g. , a separate audit is not req uired) . Also, the business operation of a branch office can e terminated relatively easily by notifying the Companies Registry that it ceases to have a place of business in

H ong K ong, w hereas a subsidiary company can only be terminated by liq uidation or deregistration, either of w hich can be a lengthy and cumbersome process.

L imited companyA limited company is an entity incorporated under the Company O rdinance of H ong K ong limited by shares. F amily members can act as the only shareholders in an L L C, ow ning the family assets through ow ning the L L C, and appoint non- family professional individuals or corporate bodies as directors to manage the L L C as a family office

L imited partnerships partners ip is defined nder t e

Company O rdinance as tw o or more persons carrying on a business w ith a view to profit ere are two inds of partnerships, regular partnership and limited partnership. Partners in a regular partnership do not enjoy limited liability. I n a limited partnership, there are tw o k inds of partners, limited partner and general partner. W hile both types of partner are entitled to t e profit generated y the partnership, only a general partner has the right and pow er to manage the partnership. T he trade- off of such pow er is that a general partner does not enjoy limited liability. W hile limited partners cannot tak e part directly or indirectly in the management of the partnership, they enjoy limited liability. T herefore, limited partners ip can e sed as a family office vehicle to pass dow n a family’ s w ealth through the generations by having family members appointed as limited partners, w hile non- family professional individuals or corporate bodies can be appointed as general partners in charge of the partnership, being remunerated instead of aving a significant s are of t e profits generated by the partnership.

T rust Ot er t an owning t e family office in H ong K ong, directly or through their overseas corporates, H N W I s can also consider using a trust structure. A trust is an arrangement under w hich trust assets,

w hich may include businesses, are held and managed y tr stees for t e enefit of t e tr st’s eneficiaries e tr stee can be a non- family professional individual or company managing the family assets for t e eneficiaries, pres ma ly t e family members. T rustees w ill manage the trust according to a trust deed, detailing w hat can and cannot be done by the trustees, the distri tion of interest and profit, and t e purpose of the trust.

W ithout setting up a new entity or engaging a trust, families may employ individuals or a professional service provider directly to provide t em wit family office services

Hong Kong tax structureH ong K ong’ s simple tax system and low tax rates are alw ays w elcomed by the many

s w o set p t eir family offices in H ong K ong.

Regardless of w hether a subsidiary company or a ranc office is sed to operate the family business, they are subject to the same tax conseq uences in H ong K ong.

rofits ta H ong K ong adopts a territorial concept of taxation w hereby only persons that carry on a business in H ong K ong and derive

ong ong so rced profits from t at business w ould be chargeable to H ong K ong profits ta e c rrent corporate profits tax rate is 1 6 . 5 % .

person defined to incl de a limited company, a partnership or a trustee) carrying on a trade, profession or business in ong ong is s ect to profits ta on profits arising in or derived from H ong K ong. Gains of a capital nature are specifically e empt from profits ta

Partnerships in H ong K ong are not treated as transparent for tax purposes. Except in certain circ mstances, profits derived y a partnership are generally subject to tax in the name of the partnership. W hile the definition of a person does not incl de a tr st, in practice, esides its own profits, a trustee is also subject to tax on behalf of t e tr st in respect of t e latter’s profits


D ividends and distributions paid by companies, partnerships and trusts from after ta profits in ong ong are not subject to any further tax in H ong K ong, either by w ay of w ithholding or otherw ise.

F urther to the above, under the “ source of profits r le, an entity will not e s ect to ong ong profits ta even if it carries on a business in H ong K ong but derives profits t at are arising or derived o tside of H ong K ong.

T hat said, the q uestion of locality or source of profits is a ard, practical matter of fact. Case law indicates that, as a broad guiding principle, “ one look s to see w hat t e ta payer as done to earn t e profits in q uestion and w here he has done it. ” I t is necessary to appreciate the reality of each case, focusing on effective courses for earning t e profits wit o t eing distracted by antecedent or incidental matters.

Pursuant to the D epartmental I nterpretation and Practice N otes ( D I PN ) N o. 2 1 ( revised) , the H ong K ong tax authorities’ view on certain major types of income that family business could generate is as follows

• rading profits t e place w ere t e contracts of purchase and sale are effected”

• ervice income t e place w ere t e services are rendered

• Profits from listed s ares location of the stock exchange w here the shares or securities in q uestion are traded

• Profits from nlisted s ares t e place w here the contracts of purchase and sale are effected

or eac ind of profit, if t e aforementioned activities are performed o tside ong ong, t e profits derived therefrom w ill be offshore sourced and not s ect to ong ong profits ta O n the contrary, if any of such activities are cond cted in ong ong, t e profits derived therefrom w ill be onshore sourced and s ect to ong ong profits ta Also note that apportionment of onshore and offs ore profits is possi le for service income derived from activities carried out partially in and outside of H ong K ong.

O ther merits of the H ong K ong tax system include the follow ing, H ong K ong does not tax on capital gains earned by companies and individuals, and does not impose w ithholding tax on dividends and interest received by a foreign entity from a H ong K ong taxpayer.

astly, ong ong profits ta compliance procedures are relatively simple and straightforw ard, an entity is only req uired to file its profits ta ret rn once a year toget er wit t e a dited financial statements.

I ndirect tax T here is no goods and services tax or value-added tax in H ong K ong.

Estate duty and gif t taxT here is no estate duty and gift tax in H ong K ong.

T axation on trustT he H ong K ong tax law does not contain a code, or a set of provisions that deal w ith the taxation of trusts. I n other w ords, a trust w ould in practice be taxed in the same manner as a subsidiary company or branch office w ere y it wo ld e c argea le to

ong ong profits ta if it carries on a business in H ong K ong and derives H ong

ong so rced profits e general practice is that if a trust is chargeable to tax in H ong K ong, it w ould be charged in the name of the trustee.

in a o e

imitation regar ing financial activ itiesActivities pertaining to securities, futures and funds management are governed under t e ec rities and t res ct, apter ( SF A) . T he SF A puts in place the rules and regulations concerning mark ets, mark et operators, clearing facilities, intermediaries and representatives. Regulated activities include dealing in securities, advising on corporate finance, f nd management, and sec rities financing, among ot ers o w at extent the regulatory req uirements and restrictions apply depends on the structure and t e specific tas s of t e family office

f t e family office is str ct red as a company that holds the family’ s w ealth ( w ith the family members as shareholders and directors and t e family office enters into investments on its ow n account, such a company could be view ed as an investment-holding company and therefore w ill not be regulated under the SF A. Such a company w ill be subject to Singapore’ s normal tax rules, and an applicable income tax rate of 1 7 % applies on income that it derives.

On t e ot er and, if t e family office acts as an investment advisor or manager to the family’ s asset- ow ning vehicle( s) , such investment management activities may be regulated under the SF A. U nder the SF A, among ot er re irements, t e family office w ill have to register as a Registered F und M anagement Company ( RF M C) or apply for a Capital M ark ets Services ( CM S) license for fund management w ith the M onetary Authority of Singapore if there are third-party assets under management ( AU M ) . I f the AU M belongs solely to the family, there may be an exemption from registering as an RF M C or holding a CM S license for fund management. W here the asset- ow ning vehicle( s) are managed by such a family office i e , e empt, registered as an M or licensed under the SF A) , the asset-ow ning vehicle( s) may be able to enjoy tax exemption on prescribed q ualifying income.

L imitations regarding legal and tax adv iceU nder Singapore law , legal advice may only be offered by law yers. I f a company performs such professional services, it

as to e registered as a law firm, wit Singapore registered practicing law yers.

T here are currently no regulations specifying that tax advice can only

e rendered y certified ta advisors in Singapore. H ow ever, there is a tax accreditation body in Singapore — the Singapore I nstitute of Accredited T ax Professionals ( SI AT P) — to w hich tax professionals can apply to become accredited tax advisors or practitioners.

T hus, the provision of such professional services y a family office is possi le if the company meets the aforementioned req uirements, hires personnel w ith the


relevant tax expertise and accreditation, or arranges for the provision of such services through trusted advisors only.

L imitation of liab ilityT he extent of possible liability for professional mistak es depends on the structure of the legal form of the family office and on t e nat re of its services

f t e family office act ally olds t e family w ealth ( as the legal ow ner) , it is only accountable w ithin the limits of its directors’ and officers’ lia ility inancial losses are losses of t e family office itself and cannot be claimed as damages by the family directly.

f t e family office acts as an investment advisor or manager to the family’ s companies or the family members themselves, any shortcomings in the q uality of the advice t at res lts in financial losses may e claimed as damages. N ormally, the liability is limited by contractual agreement to gross negligence and capped at a certain amount.

L egal structuresamily offices in ingapore are typically

structured as a limited company. T he use of partnerships is not commonly seen ( although it is possible) in view of the unlimited personal liability of at least one partner. T here are also structures involving the use of a trust.

L imited companyA limited company is a corporate entity limited by shares. T he family may be the shareholders and possibly also act as directors, w ith or w ithout non- family professionals in t e family office company is a separate legal entity distinct from the directors and shareholders.

P artnershipsA partnership is tw o or more persons carrying on a siness wit a view to profit I t 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 w ho has unlimited liability and one limited partner w ho enjoys limited liability. An L L P is taxed in the

same w ay as a partnership, w hile affording limited liability to its members in view of its separate legal status.

T rustsA trust is an arrangement w hereby assets are eld y tr stees for t e enefit of t e tr st’s eneficiaries e tr st is generally governed by a trust deed.

T ax structuresSingapore has adopted a territorial and remittance- based tax system. T ax is only imposed on income accruing in or derived from Singapore, or received in Singapore from outside, unless otherw ise exempt.

Companies are subject to corporate income ta on t eir profits at a prevailing rate of 1 7 % ) , w ith certain partial tax exemptions on chargeable income.

f a family office is set p as a company in Singapore and holds the family assets, certain parts of t e family office’s income ( e. g. , Singapore one- tier exempt dividends and capital gains from the sale of shares in corporations or other capital assets) w ill be tax- exempt.

f t e family office is a ingapore ta resident company, certain foreign-sourced income earned ( e. g. , foreign dividends) may q ualify for tax exemption, subject to conditions being met. T he tax resident family office wo ld also ave access to Singapore’ s netw ork of over 7 0 comprehensive double taxation agreements w ith other countries, w hich may offer certain double taxation reliefs and reduced w ithholding tax rates.

e profits of t e family office in t e legal form of a Singapore tax resident company) , w hen distributed to its shareholders as one-tier exempt dividend income, w ill be tax-exempt in the hands of the shareholders. W ithholding tax is not applicable on dividends made y t e family office

Partnerships, limited partnerships and L L Ps 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 2 0 % or up to 2 2 % for the basis period from 2 0 1 6 onw ard) if the partner is an

individual, or corporate tax rate if the partner is a company.

T he taxable income of a trust may be assessed to tax on the trustee ( in general, a limited company or t e eneficiaries or both) depending on the circumstances.

ere ta is assessed on t e eneficiaries, this is commonly referred to as the “ tax transparency treatment. ”

W here the taxable income of a trust ( or part thereof) is to be assessed to tax on the trustee, such income w ill be subject to tax at the prevailing corporate income tax rate ( currently 1 7 % ) . T he tax at the trustee level will e a final ta

I f tax transparency treatment is accorded, no tax w ill be imposed at the trustee level on t at eneficiary’s s are of ta a le income and t at eneficiary will e s ect to tax on the income distributions received at his or her ow n individual tax rates. T hat

eneficiary will also e entitled to t e same concessions, exemptions and foreign tax credits as if he or she had received the income directly.

e ico

L egal setup and regulatory env ironmentamily offices are not specifically reg lated

by law in M exico. H ow ever, it is not uncommon for w ealthy families to set up a family office to manage t eir estates ome families have an SF O to ensure the value of their assets, w hile others rely on the services of an M F O or choose to outsource the services needed through a virtual family office

amily offices offer a wide range of services, primarily classified into t ree categories i legal and oo eeping ii ta

compliance and iii investment advice L egal services vary, depending on the specific asset and family str ct re, t typically involve legal advice w ith respect to contracted obligations and succession planning, as w ell as book k eeping and the maintenance of legal documentation. T ax services are also determined y t e specific needs of the family, but normally consist of t e preparation and filing of ta ret rns and notices, and the compliance of other tax


obligations arising from the transactions carried out by the family members directly or through their investment structures. I n general terms, legal and tax services do not have restrictions under M exican law .

H ow ever, some relevant regulations for investment advice services w ere introduced recently through the M exican Stock Exchange L aw ( L ey del M ercado de V alores — L M V ) and the new ly enacted M exican Anti- M oney L aundering L aw ( L ey ederal para la Prevenci n e dentificaci n

de O peraciones con Recursos de Procedencia I lí cita — L F PI O RPI ) .

I n terms of the L M V , individuals and entities that provide services for stock portfolio management or personal investment advice, w ill be considered investment advisors and w ill be subject to the supervision of the N ational Bank ing and Securities Commission ( Comisió n N acional Bancaria y de V alores — CN BV ) . T heir obligations include registering w ith the

, and periodically filing information w ith the CN BV about their clients and operations.

I n order to be registered by the CN BV , individual investment advisors must, among ot er re irements, e properly certified, and have a sound reputation and credit history. Entities operating as investment advisors also ave to e properly certified and ave a good financial rep tation and credit history, among other things. T hey s o ld also ave a p ysical office w ere t e services will e provided, file information about their shareholders, and provide a manual that sets out standards and policies to resolve con icts of interest

I t is important to consider that investment advisors may not be req uired registration before the CN BV if, among others, ( i) services are provided exclusively for t e enefit of a family gro p i e , O and the services are not promoted in Me ico ii t e investment advisor is nonresident in M exico, the services are not promoted in M exico, there is no physical office availa le in Me ico, and t ere are no agents, commissioners, or any other type of representatives of the investment advisor in M exico.

n terms of t e P O P , family offices q ualifying as investment advisor also have obligations relating to anti- money laundering, including the proper identification of t eir clients t ro g now 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 CN BV .

L imitation of liab ilityI n general terms, investment advisors w ill be liable for damages from their clients if they do not comply w ith the restrictions established by the L M V in rendering their services. T he L M V does not allow them to accept any k ind of remuneration for the promotion of certain securities or intermediaries accept f nds or sec rities from their clients ( unless as a remuneration for t eir services offer g aranteed yields or act against t eir client’s interest or act as co- ow ner of their client’ s securities intermediary contracts, among other restrictions.

I nvestment advisors are also bound by the terms of the service contract w ith the client.

e a st ct est is possi le to set p a family office in M exico using any of the follow ing str ct res

L egal v ehicles T he tw o main types of commercial entities are the limited liability company ( SRL ) and t e stoc corporation civil entities may be used, principally the civil law corporation ( SC) .

A limited liability company is established by partners w ho are only obligated to pay their contributions. T here must alw ays be a minimum of tw o partners and a maximum of 5 0 partners. T he administration of limited liability companies w ill be held by one or more managers w ho may be partners or third parties to the company, appointed temporarily or indefinitely

A stock corporation is established by shareholders w ho are liable only for a payment of the value of their subscribed shares. T here must be a minimum of tw o shareholders and each one must s scri e to at least one s are t ere is no maximum number of shareholders. T he social contract must set up the minimum amount of capital stock , w hich must be fully subscribed. T he administration w ill 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. T he partners are only liable for the payment of their contributions. T here must be a minimum of two partners t ere is no ma im m n m er of partners. T he social contract must set up the minimum amount of capital and the share of each partner. T he administration of the partnership may be held by one or more partners.

T ax issuesCorporations ( either commercial or civil) that are resident in M exico for taxable purposes w ill be taxable on their w orldw ide income. Corporations are considered to be resident in M exico if they have established their principal place of management, or their effective management center, in M exico.

Corporations are subject to federal corporate income tax at a rate of 3 0 % on t eir ta a le profit en a corporation mak es a distribution of dividends to its shareholders, it w ill be subject to an additional 1 0 % w ithholding tax. H ow ever, in some cases, w hen a civil law corporation mak es a distribution of yields to its partners there w ill be no additional w ithholding tax.


Appendix

2 US regulatory and tax considerations

T he comments in this section are intended as a general overview of t e financial and tax regulatory environment applicable to family offices operating in t e ny tax advice contained herein is not intended or w ritten to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the I nternal Revenue Code, applicable state or local tax law provisions. EY does not offer advice regarding non- tax related legal matters in the U S. D ue to the complexity of U S federal and state financial laws and reg lations, legal counsel should be sought regarding the establishment or operation of a family office in t e

R egulatory env ironmentamily offices in t e generally provide

a broad range of services to the families they serve. Some services provided may be regulated or subject to governmental oversight. O ne important exception is legal services ile family offices 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 betw een law yers and non- law yers w here the practice of law is involved.

s a siness, a family office may e subject to general business regulations, including, for example, the Eq ual Employment O pportunity Commission, the Americans w ith D isabilities Act, and the Patient Protection and Affordable Care Act.

I t is important to remember that each of the 5 0 states, as w ell as the D istrict of Columbia and individual U S territories,

has its ow n law s and regulations that may apply to family offices ese incl de r les concerning business licenses, franchise taxes, and registration req uirements for businesses conducted in certain forms.

regulation o amily o ficesPursuant to the I nvestment Advisers Act of dvisers ct , t e ec rities Exchange Commission ( SEC) generally has regulatory authority over all professionals and businesses that offer investment advice for a fee, nless specifically e empt

s noted elow, family offices may e subject to registration, SEC oversight and information reporting under the Advisers Act, unless they q ualify for an exemption.

I nv estment adv isor registration, 2 0 1 1 and thereaf terI n 2 0 1 0 , Congress passed the D odd-F rank W all Street Reform and Consumer Protection Act ( D odd- F rank ) . D odd- F rank removed the private advisor exemption, effective from ly owever, D odd- F rank also instituted several new exemptions from registration and directed t e to write a specific family office exclusion ( the exclusion) .

U nder this direction, the SEC issued Rule 2 0 2 ( a) ( 1 1 ) ( G) 1 ( Rule 2 0 2 ) . U nder Rule

, a family office is e cl ded from t e definition of investment advisor for t e purposes of D odd- F rank if it meets the following re irements

• I t only serves clients that are considered “ family clients” .

• I t does not hold itself out to the public as an investment advisor.


T o understand how the exclusion may e applica le, it is important, first of

all, to nderstand t e definitions of t e terms “ family clients, ” “ family members” and family entities o confirm t ese definitions nder le , eac family office m st first of all designate a common ancestor t at defines t e family nit served. T he common ancestor may be living or deceased, but may not be more than 1 0 generations removed from the youngest generation served y t e family office

e family office may redefine t e role of common ancestor in the future.

amily mem ers are t en defined as the lineal descendants of this common ancestor, as w ell as the spouses and spousal eq uivalents ( and former spouses and spousal eq uivalents) of such descendants. T o 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 w hom a lineal descendant became legal guardian w hile the child w as still a minor.

amily clients incl de

• Current and former family members

• ertain ey employees of t e family office and, under certain circumstances, former employees

• Charities funded exclusively by family clients

• T he estate of a current or former family member or k ey employee

• T rusts existing for the sole current enefit of family clients, nless f nded

by a family client and also for the enefit of c arita le and not for profit

organizations

• Revocable trusts funded solely by family clients

• Certain k ey employee trusts

• Companies w holly ow ned by, and operated for, t e sole enefit of family clients

Recently, the SEC has granted exemptive orders for advisors seek ing to include in-laws and in laws’ relatives in t e definition

of “ family member. ” T he term “ in- law s” does not refer to a spouse of a family member ( w hich is considered a family mem er , t is more acc rately re ected by an individual w ho is a member of the extended family, such as the sister of a family member’ s spouse.

On an ary , t e granted an e emptive order for a family office that advised a former sister- in- law ( sister of family member’ s spouse) for 2 6 years

nder t e prior family office r les e accepted the assertion that the former sister- in- law w as an important part of the family, her assets had been managed by the family office for more t an years, and the familial, non- commercial relationship s o ld allow t e family office to contin e to advise er w ile relying on t e family office exemption. Similar relief has been granted to ot er family offices owever, it s o ld e noted that the req uests granted have been s mitted y advisors t at filed applications w ith the SEC after the rules relating to in-law s changed in 2 0 1 1 .

e term ey employees incl des

• n e ec tive officer, director, tr stee, general partner, or person serving in a similar capacity at t e family office

• ny ot er employee of t e family office w ho, in connection w ith 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 1 2 months in a family office setting, nless t e employee performs solely clerical, secretarial or administrative functions

I n their commentary on Rule 2 0 2 , the specifically pro i its ey employees,

their trusts and their personally controlled entities from mak ing additional investments t ro g t e family office after t eir employment ends. T hey may, how ever, continue to hold their existing investments t ro g t e family office wit o t jeopardizing the exclusion.

T he rule does ack now ledge that involuntary transfers to non- family clients may accidentally occur and should not cause

t e family office to fail t e e cl sion An example referenced in Rule 2 0 2 is a beq uest from the estate of a family client to a non- family client. Rule 2 0 2 therefore provides a transition period of up to one year to transfer those client investments to another investment advisor, or to otherw ise restructure to comply w ith D odd- F rank .

I t is important to note that the SEC specifically e cl des certain ot er parties from t e definition of family clients Providing services under the Advisers Act to these individuals w ould violate the exclusion.

ese e cl sions incl de

• Spouses or other immediate family members of k ey employees, except w ith respect to spousal joint property w ith the k ey employee

• K ey employees of family entities w ho are not also employees of t e family office, such as employees of related family-ow ned operating companies

• Certain k ey employees w ho do not meet the 1 2 - month experience req uirement, and other long- term employees of the family w ho do not meet the “ k now ledgeable employee standard”

• T rusts formed by k ey employees for t e enefit of ot er non spo sal family members of that employee

• I rrevocable trusts w ho provide for a c rrent eneficiary t at is not a family client, as w ell as trusts w here a contingent eneficiary t at is not a family client ecomes a c rrent eneficiary, unless the involuntary transfer rules are follow ed

• arita le or not for profit organi ations that have accepted any funding from non- family clients, including the general public, unless restructured appropriately by 3 1 D ecember 2 0 1 3

ese distinctions concerning w ic specific employees may receive investment services are very complicated and may prompt the family office to implement detailed policies preventing unintended conseq uences.

e noted t at in narrowly defining the term “ k ey employees, ” they sought to


allow participation only by those individuals w o co ld e pres med to ave s fficient financial sop istication, e perience, and k now ledge to evaluate investment risk s and to tak e steps to protect themselves. ”

As regards ow nership and control of the family office, le ma es clear t at in order to q ualify for the exclusion, ow nership must reside w holly in the hands of family clients, but control must remain either directly or indirectly in the hands of family members and family entities. T he result is that control is a more exclusive test than ow nership. Special care must be tak en w en eval ating a family office’s oard of directors, to the extent that the board could exercise control and includes non- family members.

e confirmed t eir position t at 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 2 0 M arch 2 0 1 2 , family offices were re ired to register w ith the SEC under D odd- F rank , meet the terms of the exclusion, or receive a formal exemption order.

T he SEC decided against rescinding previously issued exemption order, such t at family offices in receipt of e isting exemption order w ould continue to be exempt from registering as an investment advisor even if they did not meet the terms of t e e cl sion amily offices alifying for the exclusion are not req uired to notify the SEC of their status. Advisors subject to D odd- F rank must register w ith the SEC and file ann al data forms and operating reports.

Rule 2 0 2 and the exclusion have provided greater clarity on the registration re irements for family offices t uncertainty still exists on certain k ey iss es, especially w en t e family office is a division of an operating business entity rather than a separate legal entity. Such a structure mak es distinctions betw een ow nership, control, employees, and clients even more challenging to apply. Some published reports indicate that certain family offices ave transferred t eir investment advisor function to a non-employee, “ outsourced chief investment

officer model to avoid registration c family offices appear to e ta ing

t e position t at resid al family office investment services cas ow modeling, etc. ) either do not constitute “ investment advice” under the Advisers Act or are “ solely incidental” to their general obligations.

F orming a private trust company may similarly render the investment services as solely incidental to the trustee function. I f t is is t e case, t e family office may not be subject to D odd- F rank . H ow ever, these approac es are not specifically sanctioned, and the only certain w ay for a new family office to avoid registration at t is time is to either meet the terms of the exclusion or apply for an exemption order.

I nternal R ev enue Serv ice ( I R S) ov ersightT he I RS has no direct oversight of family offices owever, t e reas ry D epartment publishes Circular 2 3 0 , w hich presents the regulations applicable to those professionals w ho practice before the I RS. Circular 2 3 0 also contains rules of professional conduct and lists req uirements for providing tax advice. T ax advisors w ho violate Circular 2 3 0 may e sanctioned, fined, or s spended from practicing before the I RS. T herefore, w ile t e family office itself mig t not e subject to oversight by the I RS, employees involved in the tax function may be subject to Circular 2 3 0 .

Generally, the ability to practice before the as een limited to specific classes of

professionals, incl ding certified p lic accountants, attorneys, and enrolled agents. Prior to 2 0 1 1 , how ever, the I RS did not attempt to regulate preparers of tax returns. I n that year, the I RS began a program to regulate all tax return preparers w ho are compensated for their services, req uiring annual registration and payment of an annual fee, as w ell as ongoing continuing education and testing req uirements. T he I RS registration process resulted in registered preparers being assigned a Preparer a dentification N umber ( PT I N ) , to be reported on all returns signed by the preparer.

T he concept of “ paid preparers” is also important in t e family office w en considering the potential for I RS penalties that may be applicable to tax return positions that are not ultimately sustained.

ection a defines a ret rn preparer as any person w ho prepares a tax return for compensation, w ith limited e ceptions ection o tlines the monetary penalties that may apply to return preparers w ho prepare tax returns containing unsustained positions.

T he rules are complex and beyond the scope of this report, but generally a paid preparer may e s ect to significant monetary penalties for an unsustained tax ret rn position, nless t e position meets at least the “ reasonable basis” test and is disclosed appropriately on the tax ret rn or as s stantial a t ority H ow ever, a tax shelter or reportable transaction must at least meet a “ more lik ely than not” standard and may also be subject to other disclosure req uirements.

ese terms are defined in reas ry Regulations to the I nternal Revenue Code.

I t is important to note that these rules apply not only to the person w ho signs the tax return as preparer, but also to any other person w ho prepares a substantial portion of the return and any person w ho 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.

O ne of the limited exceptions to Section 7 7 0 1 ( a) ( 3 6 ) is a person w ho “ prepares a return or claim for refund of the employer or of an officer or employee of t e

employer) by w hom he is regularly and continuously employed. ” I t is uncertain w et er t is e ception is s fficient to e cept family office employees from paid preparer status w ith respect to all tax returns that they might prepare. I t is also unclear w hether the req uirement of compensation applies in situations w here family offices t at prepare ta ret rns may not bill their family clients directly for such services. T herefore, it is unk now n how these preparer penalty rules w ill be interpreted y t e in a family office setting w ere


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 U S tax returns, or providing services in connection w ith the preparation of ta ret rns, is s ect to financial and criminal penalties if that person k now ingly, or reck lessly, 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 structuresI n general, a k ey consideration for most family office organi ers is selecting an entity structure that provides some degree of liability protection to the ow ners. T his includes forming the legal entity as a corporation, a general or limited partnership, or a limited liability company ( L L C) .

W hile partnerships and L L Cs are often taxed identically, the fact that all the members of an can enefit from t e protection of limited liability has generally decreased the use of general partnerships or limited partnerships in entity selection. T his is because, in either partnership structure, the general partners retain joint and several liability for the debts of the entity. As w ith L L Cs, corporations provide limited liability to their ow ners.

T he creation and operation of these structures are governed by U S state law . U S state law w ill also determine the limitations on liability and legal life of these structures.

en creating a family office, t e legal entity is not req uired to be formed in the state of the family’ s general residence.

a considerations play a significant role in the determination of the appropriate legal entity stat s for t e family office eca se of the numerous differences betw een the taxation of corporations and partners in a partners ip, it is diffic lt to compare t e net tax effect of both structures w ithout a thorough understanding, among other factors, of

• e nat re of t e family office operations

• T he capital funding structure and expense funding mechanism

• e specific nderlying investments and operating businesses

• T he use of partnership structures for underlying investment pooling

• T he designs for succession and future ow nership

T he points below highlight some of the k ey tax considerations that need to be tak en into account w hen selecting the legal structure.

C ost allocations and treatment of expensesRegardless of the type of entity selected for str ct ring a family office, t e entity may incur expenses related to a number of different activities, including managing and accounting for family- ow ned business entities, portfolio investments, real estate, and personal activities of family members.

e costs of operating t e family office must be allocated to the family’ s business ventures, investment activities, and philanthropic affairs, as w ell as the personal services provided, based on a reasonable allocation methodology.

ome items may e specifically allocated if they represent the direct costs of a partic lar area of operation ot ers may e allocated ased on sage of family office resources on a time and materials basis. A family office m st ta e care in classifying and reporting its expenditures due to the differing tax treatment afforded to each. M ak ing matters more complicated, the extent of the deductibility of these items w ill differ ased on t e entity classification of t e family office

Expenses related to a trade or business and real estate rental activity are generally treated more favorably under U S tax law — they are currently deductible or deferred and deductible in later years — than are expenses related to the management of investment assets, for w hich deductions are limited. Personal expenses of the family mem ers inc rred y t e family office are generally not deductible under any entity classification, t o g costs t at are partially personal and partially related to a

trade, business investment management may be allocated appropriately.

T he active management of a family investment portfolio, and the management of family enterprises conducted through the corporate format, may not be view ed as a trade or business, despite the time and expense typically incurred in such an operation nless t e family office charges for its services and operates as more than a mere cost center for the family members. T hus, as noted below , the deductibility of these expenses may be substantially limited.

Many family offices assist in coordinating philanthropic activities for family members. I RS rules on “ self- dealing” prohibit certain relationships betw een charities and their related parties, though exceptions may apply for certain expense reimbursements for professional services rendered. T he self- dealing rules are highly complicated and warrant specific attention from family offices t at andle c arita le affairs for their family members.

US taxation of indiv iduals and trustsT he taxable income of U S citizens, tax residents and domestic trusts is subject to a graduated rate schedule. T he top marginal tax rate on the ordinary income of individ als and tr sts is ongterm capital gains and alified dividends are taxed at a top income tax rate of 2 0 % . An additional 3 . 8 % tax generally applies to net investment income recognized by an individual or trust w ith overall income above certain thresholds. T his 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.

I n some cases, the Alternative M inimum T ax ( AM T ) may apply. T he AM T has a top marginal rate of 2 8 % and applies w hen it exceeds the regular income tax of an individ al or tr st Many ta enefits e g , accelerated depreciation) and certain deductions ( e. g. , state and local income taxes and investment expenses) that are allow ed under the regular tax do not apply


for AM T purposes. F or that reason the AM T , w ith its 2 8 % rate, may exceed the regular income ta , even at its top rate of

U S 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. N et losses from business activities reported by an individual or trust in w hich 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.

T he practical effect of the limitation on the deductibility of “ passive losses” is that these losses are only allow ed w hen 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. N ote 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.

D eductions incurred in the course of a trade or business are generally deductible to individuals and trusts w ithout limit, unless from a passive activity. H ow ever, expenses incurred in the production of portfolio income are subject to substantial limitations on their deductibility. I nvestment 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 AM T . 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. I nstead, 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 w ith capital ow nership percentages but need

not e so partners ip ta ation generally offers e i ility in allocations so long as t e allocations are specified in t e operating agreement and re ect t e partners’ economic interests in the partnership.

L L Cs w ith more than one member are generally treated as partnerships for income tax purposes, unless the organizers file an election to treat t e as a corporation. L L Cs w ith only one member, or single member L L Cs, are generally disregarded for income tax purposes i e , t ey are fiscally transparent for

tax purposes and the ow ner of the L L C is treated as the ow ner of the L L C’ s assets) . F or the purpose of the discussion below , the term “ partnership” refers to any entity taxed as a partnership under U S tax law , and the term “ partner” includes any ow ner of such an entity.

partners ip m st file an ann al ta ret rn w ith the I RS to report its total income, deductions and credits. Additionally, the partnership must provide its ow ners w ith Schedule K - 1 , partner’ s share of income, deductions, credits, etc. , w hich reports each partner’ s share of these items. T hese items are then reported on the partners’ ow n income tax returns to compute their income tax accordingly. T his may allow partners to offset income from the partnership w ith items of deduction or loss from ot er so rces c specific treatment may differ, depending on w hether the partner is an individual, trust, or other type of taxpayer and the character of the partner’ s income and deductions.

I ndividuals and trusts pay a top federal income ta rate of on ordinary income, including the income from family office operations ncome from a partnership retains its “ character” as it is reported to the ow ners. T herefore, preferential ta rates on alified dividends or long- term capital gains apply to such items allocated to a partner from a partnership. Conseq uently, items of income or loss owing t ro g from a family office taxed as a partnership w ill retain their character w hen allocated to the partners.

D eductions incurred in the course of a trade or business are reported separately from deductions incurred in the production

of portfolio income. I t 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.

T he 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 s fficient asis in t e investment e basis rules are complex, but usually seek to ensure that previously taxed income can be distributed w ithout incurring an additional layer of tax.

US taxation of corporations Corporations, other than S corporations ( described on follow ing page) , are generally subject to U S income tax at the entity level on their w orldw ide income, w ith a credit allow able for certain taxes paid to foreign jurisdictions. T he maximum federal corporate tax rate is currently 3 5 % . T here 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 AM T is more punitive in its treatment of municipal bond income than for individuals.

D ividends of cash or property paid by the domestic U S corporation ( and certain non- U S corporations) to the shareholders are generally taxed to the shareholder at a maximum individual income tax rate of 2 0 % , 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.

T he corporation receives no deduction for its dividend distributions. F or this reason, shareholders in U S corporations are often said to be subject to “ tw o levels of taxation” — earnings are taxed annually at t e entity level and acc m lated profits are taxable to the shareholders w hen distributed. H ow ever, at low er income levels the overall rate of corporate income may


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.

W hen 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) . I f the family office itself represents a profit ma ing activity, then expenses w ill generally be fully deductible to the corporation unless they represent personal expenses of the shareholders. T hus, the lack of preferential tax rates for certain income at the corporate level may be offset by more favorable treatment of deductions, especially w hen considering AM T .

Additional complications may apply if the corporation is treated as a personal holding company ( a corporation w hose 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 corporationsCertain corporations may elect to be taxed under subchapter S of the I nternal Revenue Code as a hybrid entity, called an S corporation, or “ S corp” , w hich allow s for many t not all of t e enefits of t e

ow t ro g nat re of partners ips is may allow an entity to be a corporation in legal entity form, but avoid the double taxation of corporations.

H ow ever, the eligibility req uirements are very restrictive, especially if the entity is ow ned by trusts. T he complicated rules concerning trust ow nership must be analyzed before formation in a family office str ct re, d e to t e ig li eli ood that a trust w ill ultimately be an ow ner of t e family office rt ermore, t e eligibility req uirements prohibit any foreign ow nership of the corporate stock , w hich may limit the applicability of S corp status in a glo al family office conte t

W ith 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 w as held by the entity upon conversion from traditional corporation status.

L ik e a partnership, an S corporation passes through all items of income and deduction to its ow ners, and such items retain their character w hen reported by the shareholder. D istributions of previously taxed income are generally not taxed as income to the shareholder if the shareholder has basis in their stock . H ow ever, if an S corporation w as previously a traditional corporation and had undistributed accumulated earnings and profits at t e election date, t e distri tions 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.

U nlik e partnerships, S corporations do not allow for e i ility 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 w ith respect to voting rights. T his prohibits S corporations from allow ing any action that could be view ed as creating a second class of stock , including disproportionate distributions.

amily o fices house ithin priv ate operating companies Many family offices egin t eir life cycle w ithin the structure of a private operating business, providing services to the family

siness owners ese family offices are not segregated into a separate legal entity, but rather exist as a division of the operating company itself. O perating a family office wit in a private operating

company presents numerous additional tax issues for consideration. Also, from a non- tax standpoint, housing a family office wit in a private company can create additional privacy and governance concerns, especially if significant management operations are handled by non- family members, or if family members have varying degrees of involvement in the operating company.

family office t at is not ade ately 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. T his consideration may not be material in a standalone family office str ct re especially t ose ta ed as partnerships) but may be very material w ithin a private operating company. T he issue is heightened for S corporations, w here a deemed distribution could terminate the entity’ s S election if not proportionate to all shareholders.

Also, as noted earlier, the SEC registration re irements for family offices may e more diffic lt to navigate and manage wit in t e confines of a private company structure, especially if the company has any degree of employee or non- family ow nership. F or these and other reasons, many families have chosen to relocate t eir family office from wit in t eir private operating company to a separate legal entity.

P riv ate trust companiesamily offices often consider w et er

t ey s o ld provide professional fid ciary ( trustee) services to the family members they serve, or w hether such services are best purchased from external sources.

ose offices wanting to provide fid ciary services may consider setting themselves up as private trust companies in order to

ndle fid ciary services wit traditional family office services e n m er of private trust companies remains a small percentage of the overall number of U S family offices


Contri E Y P eter Brock ec tive irector, amily Office ervices eader, ermany P eter Englisch Partner, Global F amily Business L eader, Germany J ö rgchristian Klette Executive D irector, Private Client Services, Germany D r. C hristian R eiter Senior M anager, Private Client Services, Germany Astrid W immer Partner, F amily Business L eader, Austria J ohannes V olpini Partner, I nternational and Private T ax Services, Austria R oland Suter Executive D irector, I nternational T ax and Private Client Services,

Sw itzerland C hristian W asser- P etrnousek Executive D irector, I nternational T ax and Private Client Services,

Sw itzerland J v o Grundler M anaging Partner, L egal Services, Sw itzerland D irk v an Beelen Executive D irector, Private Client Services, N etherlands W outer C oppens Partner, Private Client Services, Belgium J ohn C ooney Partner, F amily Business L eader, U K D av id Kilshaw Partner, Private Client Services, U K Adib R ashid D irector, M EN A F amily Business L eader, U AE Stij n J anssen Partner, I nternational T ax Services, U AE R ob ert ( Bob b y) A. Stov er, J r. Partner, mericas amily Office ervices eader, C harlie J . C arr ec tive irector, Private lient ervices, amily Office dvisory, J oseph T . C arroll ec tive irector, Private lient ervices, amily Office dvisory, J ustin R ansome Partner, Private Client Services, U S J ef f Brodsk y Principal, Private Client Services, U S Melinda R . R ochelle Executive D irector, Private Client Services, U S C harlie L . R atner Executive D irector, Private Client Services, U S Marianne R . Kayan Senior M anager, Private Client Services, U S Brian Schad Senior M anager, Private Client Services, U S Gary Mills Senior M anager, F inancial Services, U S Bo P owell Senior M anaging D irector, Ernst and Young Capital Advisers,

L L C, U S Elias Adam Bitar Partner, I nternational T ax Services, M exico D aniela P enalv a T ron Senior M anager, I nternational T ax Services, M exico J acob D ab doub Hernandez Senior, I nternational T ax Services, M exico R ichard Boyce Partner, amily Office ervices eader Oceania, stralia P aul Ho Partner, inancial ervices a , sia Pacific, ong ong Simon W ang Partner, Greater China Private Client Services, H ong K ong Siow Hui Goh Partner, T ax Services, Singapore


butors edit isse Bé atrice F ischer H ead Philanthropy Service and Responsible I nvestment

C é dric D aetwyler Senior Philanthropy Advisor

Y v onne Suter H ead Competence Center Philanthropy Services and Responsible I nvestment

D aniela D ü b lin Competence Center Philanthropy Services and Responsible I nvestment

Michael O ’ Sulliv an egional ief nvestment Officer, Private an ing M

Mark us Stierli H ead of F undamental M icro T hemes, Private Bank ing and W ealth M anagement, I nvestment Strategy and Research

Antonios Koutsouk is F undamental M icro T hemes, Private Bank ing and W ealth M anagement, I nvestment Strategy and Research

P ascal R ohner enior amily Office dvisor, Private an ing M and W estern Europe

F ranco D orizzi ead ingle amily Office eam ric and astern wit erland, Premium Clients Sw itzerland and Global External Asset M anagers

Bernard F ung ead of amily Office ervices and P ilant ropy dvisory sia Pacific

Gerold R eiser H ead of Segment and Sales M anagement, Private Bank ing EM EA

J anina v on Grü nigen Segment and Sales M anagement, Private Bank ing EM EA

L ucia Moreno Business D evelopment, Private Bank ing Americas

ni e sit o t a en Michael Gask a, M. Sc. Research Assistant and PhD student

T homas Zellweger, P rof . D r. Chair of F amily Business


Refe

renc

es

and s

ourc

esAng, Andrew , N ational Bureau of Economic Research, Asset owners and delegated managers, 2 0 1 2

r c ner, Prof r vonne in cooperation wit an , amily Office der nft, Krisenfolgen: Opportunitäten und Herausforderungen, Executive Summary, amily Office Panel,

en, osep , ong, arrison and i , osep , Outsourcing mutual fund management, 2 0 1 0Credit Suisse and T hunderbird School of Global M anagement, Family Governance White Paper: How Leading Families Manage the Challenges of Wealth, 2 0 1 2Credit Suisse and U niversity of St. Gallen, Entrepreneurial Families White Paper, 2 0 1 2Credit Suisse Research I nstitute, Family Business Survey, Credit Suisse, 2 0 1 2D aniell, M . H . , and H amilton, S. S. , Family legacy and leadership: Preserving true family wealth in challenging times ingapore o n iley ons sia Pte td , D egen, D r. Beate, EY, and Ruhw edel, Prof. D r. Peter, Der Aufsichtsrat und das Risikomanagmenent, D er Aufsichtsrat, 2 0 1 1EY, Turning risk into results, 2 0 1 2amily Office c ange, Managing Family Capital generated by the Family Business, 2 0 1 4amily Office c ange, A Look Inside the Small Family Office, 2 0 1 0amily Office c ange, Building a Family Enterprise Plan to Deal with Future Uncertainty, 2 0 1 2amily Office c ange, Protecting the Future: Managing Family Wealth Separately From the Family

Business, 2 0 0 8amily Office c ange, Recasting the Central Role of the Family Office as Risk Manager: The New

Imperative as Family Risk Manager, 2 0 0 6amily Office c ange, Rethinking Investment Management, Anticipated Changes to Investment Risk

Management Practices in a New Era of Due Diligence, amily Office c ange, Securing the Future: Managing Threats and Opportunities

Through Effective Risk Planning, amily Offices ro p, ic ard ilson apital Partners , The Family Office Reportoster orsc ngsinstit t f r amily Offices, M nvestments, Qualitative Analyse des

Risk Management in Family Offices und bei großen Unternehmervermögen, 2 0 1 1F razzini, Andrea and Pedersen, L asse H eje, Betting against beta, N YU Stern School of Business, 2 0 1 0reytag, tefan and von inc , il elm, e tsc e amily Office , Institutionelles

Vermögensmanagement fur große Privatvermögen, Absolut Report, Ausgabe 6 / 2 0 1 1H aupt, F elix and H ilger, T homas, Das Family Office: Integrierter Dienstleister oder strategischer Berater?, I N T ES I nstitut fü r F amilienunternehmen, F orschungspapier N r. 5 , W H U F orschungspapier N r. 1 1 3 , W H U O tto Beisheim School of M anagement, 2 0 0 6K night F rank , The Wealth Report, 2 0 1 5

en pring amily Offices, Sustaining the Family Enterprise, 2 0 1 2ele , enoit and c wass, oac im, M , Family offices and risk investments, 2 0 0 6

Professional W ealth M anagement, Growing the family business, M arch 2 0 1 2o les, ngelo , o nder O, amily Office ssociation, Creating an SFO for Wealth Creation and

Family Legacy Sustainability, amily Office ssociation, osploc , , e complete family office and oo A guide for affluent families and the advisers who

serve them, o n iley ons, Sieger, P. and Z ellw eger, T . , Entrepreneurial families: From a family enterprise to an entrepreneurial family, Credit Suisse AG, 2 0 1 3SL Advisers, In pursuit of value, 2 0 1 1 U BS, Campden W ealth, Growing Toward Maturity: Family Offices in Asia-Pacific Come of Age, U BS and

ampden ealt sian amily Office rvey U BS, Campden W ealth, Back to business — Family Offices adapt to the new normal, U BS and Campden

ealt ropean amily Office rvey U BS, Campden W ealth, The Global Family Office Report 2014V P Group, U niversity of St. Gallen, Family Offices in Asia — The Evolution of the Asian Family OfficeMarket, 2 0 0 8W erk mü ller, D r. M aximilian A. , L L M , Family Office Management, F inanz Colloq uium H eidelberg, 2 0 1 0W harton Global F amily Alliance, Single family offices: private wealth management in the family context, 2 0 0 7W harton Global F amily Alliance, Benchmarking the SFO, W orld Economic F orum, Future of long-term investing, 2 0 1 1W orld Economic F orum, Impact Investing: A Primer for Family Offices, 2 0 1 4Z ellw eger, T . , and K ammerlander, N . , Family, wealth, and governance: an agency account, Entrepreneurship T heory and Practice, 2 0 1 5


C ontact us

o a and

e an it e and and st ia

anada ent a and o t e ica

sia acific

ete n iscGlobal L eader EY F amily Business Center of Excellence

peter. englisch@ de. ey. com

Ro e t o to eamily Office ervices eader

bobby. stover@ ey. com

Ric a d o ceamily Office ervices eader

richard. boyce@ au. ey. com

ete ockamily Office ervices eader

peter. brock @ de. ey. com

V isit us at

e co a i o fice

EY | Assurance | T ax | T ransactions | Advisory

Ab out EYEY is a global leader in assurance, tax, transaction and advisory services. T he insights and q uality services w e deliver help build trust and confidence in the capital mark ets and in economies the w orld over. W e develop outstanding leaders w ho team to deliver on our promises to all of our stak eholders. I n so doing, w e play a critical role in building a better w ork ing w orld for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global L imited, each of w hich is a separate legal entity. Ernst & Young Global L imited, a U K company limited by guarantee, does not provide services to clients. F or more information about our organization, please visit ey. com.

© 2 0 1 6 EYGM L imited. All Rights Reserved.

EYG no. CY1 0 6 1

BM C Agency GA 0 0 0 0 _ 0 3 5 2 2

ED N one

I n line w ith EY’ s commitment to minimize its impact on the environment, this documenthas been printed on paper w ith a high recycled content.

T his material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey. com/ f amilyof f ice

e y f a m ily g^ﬁce ide - ernst & young · = amily ofﬁce ide p a th w a y to s u c c es s f...

Documents