Key Duties That Families Require of Family Office Executives
See Annex A for a more detailed description of the items listed above.
Need to Align Qualitative and Quantitative Functions Within the Family Office
Non-Financial Goals That Families Should Consider in Gauging Whether Their Family Office is Being Successfully Managed
Methods of Compensation Utilized by Families to Align Their Short and Long-Term Goals and Values With the Performance of Family Office Executives
Recent Trends and Best Practices in the Marketplace for Compensation of Family Office Executives
Structuring Family Office Co-Investment Vehicles to Permit Friends to Co-Invest in Deals Without Jeopardizing the Family Office Exclusion From Registration
See Annex B for Case Study.
Investment Strategy and Implementation
Accounting, Reporting and Control
Banking and Liquidity Planning
Legal, Governance and Estate Planning
Risk Management/Liability Management
Education, Family Continuity; Mission Statements; Family Charters
Integrated Financial Planning
Case Study: Single Family Office Co-Investment Partnership
Background: Day Pitney is currently working with a single family office client now who has made a fairly significant direct investment in cryptocurrency/digital assets and wants to have two close friends that are knowledgeable about the crypto space (and who brought the investment to the family), but are not “family clients” (i.e., neither family nor key employees), participate in the investment along with the family. The client wanted to ensure that doing so did not violate the family office rule that requires that the family office only advise “family clients.”
“Family Office Rule” Analysis: In this particular situation, the family office was neither recommending this investment to the non-family client investors nor charging them any fees (in part because they brought the deal to the family but also due to a long and close relationship). Since the family office was not charging any fees (including no promote or profit split) and was not recommending the investment to the non-family clients, having them participate along with the family together in a single investment vehicle should not be deemed to violate the family office rule.
Investment Structure: We structured a Delaware LLC and had separate classes of units for the family members, key employees and the non-family clients. The family gave the non-family clients a “profits interest” in the LLC in recognition of the value provided by bringing the investment opportunity to the family. The profits interest is tax-efficient for the recipient and was subject to a vesting period. The profits interest was in addition to the capital interests issued to all members, including the non-family clients for each member’s respective cash capital contributions. Governance of the investment vehicle was ultimately controlled by the family office.
Loans to Key Employees: The family office provided a loan to two key members that matched the amount of cash put up by the key employees (CIO and COO) to boost the amount of their investment. The loans were at 3% interest (interest and principal to be deferred until maturity) and were secured by half of the equity purchased in the LLC (i.e., the amount of the interest purchased with the loan proceeds). The loan balance was required to be paid down with any distributions from the LLC.
Tracking Partnership: We also are working with the client to establish a tracking partnership to create flexibility for family clients and key employees to co-invest together in a single investment vehicle. A tracking partnership allows the partnership to separate its assets into classes or pools, enabling partners to participate in each asset class to varying degrees. For example, a tracking partnership may hold securities (Class A), commodities (Class B), and alternative investments (Class C). Some partners may want heavy exposure to Class C, while others are more risk averse. A tracking partnership allows each partner to have a fixed partnership “percentage interest” while holding varying percentages of each asset class. The partnership is treated as a single entity from both a state law and a federal tax perspective. The tracking partnership allows families to then decide how they want to allow key employees and/or family members to participate in some or all of the investments made by the tracking partnership and to vary the sharing ratios of each depending on a variety of factors (e.g., origination, finding co-investors, lenders and exit partners).
This communication is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This communication may be deemed advertising under applicable state laws. Prior results do not guarantee a similar outcome.
Warren Whitaker will be serving as chair of the 15th Annual International Estate Planning Institute, hosted by the New York State Bar Association and The Society of Trust and Estate Practitioners USA (STEP USA).
On March 8, Scott Beach will participate in a panel presentation entitled "Family Office Megatrends" at the 2019 Family Office Association (FOA) National Summit in Palm Beach, FL.
On February 21, Justin Hannan will co-present a webinar, entitled "IRC 1400Z Qualified Opportunity Zones (QOZs) for Individual Investors: Tax Deferral and Reduction Opportunities," for Strafford.
At the Family Office Association's Miami Retreat on January 29, Scott Beach moderated a session with Brian Batson, a partner with Krupin Partners, a firm based in Beverly Hills that specializes in insurance solutions for high-net-worth individuals and family office principals/executives.
On January 16, Carl Merino and Warren Whitaker participated in "Estate Planning Across Borders: A Guide for the Perplexed," a program at the annual meeting of the New York State Bar Association presented by the Trusts and Estates Law Section.
Jared Ross was quoted in an article, "Ultra-Rich Scout Direct Real Estate Investments," published by Banker & Tradesman.
Day Pitney Press Release
Scott Beach, chair of Day Pitney's Family Office Practice, was quoted in an article entitled "Less Than 20% of Family Offices Have Robust Succession Plans," published by Private Asset Management.
Von Sanborn was featured in an article, "Tax Screw-Ups and People Problems: Experts Reveal Biggest Blunders of Rich Families," published by Bloomberg.
Von Sanborn was quoted in an article, "U.S. Family Offices Face Increasing Competition from Foreign Families," published by Private Asset Management.