Not everyone has heard of the ever-growing, niche family office industry. You may even wonder yourself what it means. To put it plainly, it is set up to service ultra-high net worth individuals and their families, whether it be for one generation or multiple generations.

From an accounting perspective, it entails handling and advising their bill pay, money movement, credit and debit cards, payroll, gifts, budgets, projections, general ledger accounting, and related reporting for both the individuals’ investment portfolios and, more importantly, lifestyle expenditures.

The latter part is what personally excites us, as it provides a glimpse into the habits of how and why those who have large sums of money choose to spend it.

Family office work also means liaising with third parties such as attorneys, trustees, real estate brokers, owners’ reps, estate managers, housekeepers, personal assistants, interior designers, engineers and other professionals on additional personal matters, including private aviation, yachts, vacations, construction and renovation projects, luxury home rentals, and weddings, to name a few.

Another area that can be very intriguing is charitable giving, including via a donor advised fund (DAF) or private foundation(s). In combination with the personal spend, this gives an accountant a holistic view of what is important to the client in terms of their daily affairs and what greater impact they are hoping to make in terms of social, business, environmental, educational and other causes throughout their lifetime.

While listing the types of transactions family offices are privy to seeing, it’s important to stress that these activities and any details surrounding specific clients are kept in strict confidence. Even an engagement letter between a firm and a client may now contain a non-disclosure agreement to doubly protect the client’s identity and information, since they typically don’t want their private life out in the open as public knowledge.

Furthermore, their assets may be held in trusts, LLCs or other entity structures to further mask who is truly behind a real estate purchase/sale, for example, or protect them from being sued for their entire worth by dividing assets into different legal entities.

Why Hire a Family Office?

The answer is straightforward: to make their life easier and hopefully less complicated. Generally, there are various moving parts at any given time, and it can be difficult to keep things organized for them to make wise and timely decisions. Choosing to engage a firm to keep track of the laundry list of items and related cash inflows and outflows frees up an individual or the family’s time to focus on more important and pressing matters, such as their family and/or business(es).

Also, many ultra-high net worth individuals do not have a finance or accounting background; hence, sticking to a budget or creating a projection may not be in their wheelhouse.

As a result, seeking a family office that can service them along with other like-minded families (making it a multi-family office) keeps the fees for doing so lower than if the individual were to start their own family office or add a full-time accountant onto their payroll (otherwise known as a single-family office).

What Do Family Offices Add?

The fulfilling part of being a family office accountant is collecting, tracking and presenting an individual’s or family’s cash flows to them in a way that empowers them to make more informed decisions in real-time. If they know exactly where every penny comes from and ends up, then they are also aware of how much is liquid and available to invest or spend elsewhere.

Another way in which a family office helps clients is by providing accounting services for their startup entities that don’t yet have an accounting team in place. While their business is getting off the ground, the family office accountants keep the books, tracking research & development costs that will ultimately be amortized after the product launches in the market, as well as all other operating expenses for the founder/entrepreneur (i.e., the family office client).

Before accepting outside investments, these entities often convert to C corp status for various reasons, one being the gain exclusion benefits afforded to Qualified Small Business Stock (QSBS). As part of that process, valuations and cash flow forecasts are often necessary, and the family office team is well-positioned to deliver the reporting and hand-off to the newly built-out corporate finance team.

Wealthy families that have the luxury of a unified family office and tax team under one roof reap significant benefits.

Taxes, unfortunately, often constitute the largest expense on a family’s profit and loss statement. Strategic tax planning for long-term income, state and estate tax minimization can be a family’s most effective cost-saving measure.

The real-time data and reporting generated by family offices provide the foundation for optimal tax planning. Moreover, family offices can streamline the tax team’s time-consuming tasks of gathering and analyzing investment and expense data.

How Can Family Offices and Tax Teams Best Collaborate?

• Proactive investment and income tracking: New investments and income streams are identified at their inception.

• Real-time revenue reporting: Material receipts and revenues from distributions or liquidity events are tracked in real-time, preventing overlooked income.

• Assured tax payments: Family offices often pay taxes on behalf of clients, ensuring timely payments and providing instantaneous confirmation.

• Expense optimization: Tax teams can analyze personal expenses to identify opportunities for maximizing tax efficiency, such as offsetting rental or consulting income and obtaining reimbursements from managed businesses.

• Gift tax compliance: Gifts to individuals are promptly identified and closely tracked for gift tax reporting.

• Future tax liability forecasting: Tax teams can provide projections of future tax liabilities to assist with family office budgeting.

• Debt-financed distribution tracking: The usage and location of loan proceeds or debt-financed distributions are easily traceable and used to determine interest expense deductibility.

• Itemized deduction reporting: Itemized deductions are summarized and provided directly to the tax team.

• Asset cost basis tracking: Cost bases of assets are meticulously tracked from acquisition, including follow-on investments or improvements. This information is invaluable for liquidity planning.

• Estate planning support: Family offices can provide comprehensive balance sheets, including tax basis and fair market value, to support estate planning efforts.

What is the Main Takeaway?

By seamlessly integrating the expertise of the tax team with the real-time data and operational support of the family office, wealthy families can achieve significant cost savings and tax efficiency, as well as gain peace of mind. This collaboration ensures that every financial decision is informed, opportunity maximized, and detail carefully handled, allowing families to focus on what truly matters to them. This holistic approach is the key to maintaining and growing wealth across generations, all while reducing the administrative burden on the family.