The Growing Importance of Cybersecurity for Family Offices

As family offices grow in complexity to manage multi-generational wealth and diverse investment activities, their legal structures and jurisdictions have significant tax ramifications that must be carefully evaluated.

The Prevalent Family Office Structures

While family offices can take various forms, there are a few predominant entity structures employed based on their unique tax considerations:

Single Family Office (SFO)

• Typically established as a limited liability company (LLC), partnership or trust

• Can allow pass-through treatment to avoid double taxation on investment income

• State income taxes may still apply based on residency and sourcing rules

Multi-Family Office (MFO)

• Organized as a business entity like a corporation or LLC taxed as a corporation

• Allows admitting outside investor families to achieve economies of scale

• Subjects ordinary income to potential double taxation absent proper structuring

According to the Global Family Office Report 2022 by Campden Wealth, 61% of family offices are structured as SFOs while 23% operate as MFOs.

Jurisdiction and Tax Residency

The location of a family office's establishment and management can dramatically impact its tax obligations:

• Full tax residency subjects global income to taxation in that jurisdiction

• Territorial systems only tax income sourced or remitted to that country

• 27% of family offices are domiciled outside their historical home country

Common factors driving jurisdictional decisions include favorable tax regimes, asset protection rules, and proximity to investment opportunities.

Estate and Wealth Transfer Planning

For multi-generational family offices, structuring vehicles that facilitate efficient wealth transfer while minimizing estate taxes is a critical priority.

• Grantor trusts, dynasty trusts and family-limited partnerships are common tools

• The U.S. estate tax exemption currently stands at $12.92 million per individual in 2023

• For non-U.S. families, differing residency rules and compliance obligations apply

As one advisor remarked, "Family offices often underestimate the degree of complexity around wealth transfer and end up with hefty tax bills."

Operational Tax Matters

Beyond investment flows, family offices must also weigh tax factors related to their day-to-day operations:

• Payroll taxes for employees based on office locations and functions

• VAT and sales tax obligations depending on the provision of services

• Potential self-employment taxes for participating family members

International informational return filings further add to compliance complexities when global activities are involved.

With multi-jurisdictional families, assets and pursuits, advanced tax planning is critical for family offices to retain and compound their wealth responsibly across generations. Working closely with professional advisors well-versed in these nuances is highly advisable.