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Family offices have faced challenges in getting the most deductions for managing their assets and operating costs. The 2017 Tax Cuts and Jobs Act (TCJA) made it so that fees for services like investment advice and investment management are no longer deductible, making the challenge even more demanding. Family offices might want to explore alternative strategies or consult a tax professional for tailored advice to navigate these changes.

Strategies to Best Structure a Family Office for Tax Benefits

When managing money wisely, setting up a family office intelligently is crucial for getting the most tax benefits. Below are some essential strategies that can assist in organizing a family office effectively, showing how careful planning can lead to better tax advantages.

1. Set up the family office as a business entity

One common solution is to organize the family office as a business, allowing it to deduct specific fees as legitimate business expenses according to Internal Revenue Code § 162. This approach has been deemed practical and legal, especially considering recent court decisions, offering a way to save on taxes affected by the TCJA. However, it’s important to note that executing this strategy requires careful planning in setting up the family office and managing its activities to enjoy the expected tax advantages.

Treating the family office as a business under Internal Revenue Code §162 allows fees for services like investment advice to be fully deductible. This deduction can significantly reduce taxable income. However, it’s a complex process, and success depends on precisely structuring the family office and its operations. Missteps may lead to unintended tax consequences, so seeking professional guidance is highly recommended to ensure compliance and optimize the strategy.

2. Wealth transfer planning

A well-thought-out wealth transfer plan can be implemented to minimize estate taxes and facilitate the smooth transition of assets between generations. The tax implications associated with intergenerational wealth transfer can be managed by utilizing tools such as family limited partnerships, trusts, and gifting strategies. A seamless transition of assets from one generation to the next is facilitated by employing a well-crafted wealth transfer plan, providing families with financial continuity. Collaboration with experienced estate planning professionals can further enhance the effectiveness of these strategies, ensuring that the family’s long-term financial goals align with current tax laws and regulations.

3. Investment portfolio management

Tax efficiency can be improved by the careful management of the family office’s investment portfolio. We seek to guide a client’s existing asset allocation and optimize the tax efficiency through selective planning – for example, targeting investments that generate capital gains tax over ordinary tax, long-term investments that grow consistently through qualified dividends, investing in assets that allow passive losses to offset passive income, etc. Furthermore, overall tax efficiency can be enhanced by strategically timing asset sales and taking into account tax implications during the investment decision-making process.

As an affiliate of Calvetti Ferguson, CF Financial provides personalized wealth management for business owners and entrepreneurs aiming to clarify their vision, invest according to their values, and secure their financial future.

4. Review strategies with a professional

Getting guidance from a tax professional is crucial when shaping a family office for the best tax advantages. Tax professionals have the expertise to navigate complex tax laws and can offer personalized strategies tailored to the specific needs of the family. Their insights can help optimize the family office structure, ensuring it aligns with current tax regulations, maximizes available benefits, avoids unintended consequences, and coincides with the family’s legacy. This collaboration with a tax professional provides a strategic edge in managing the family’s financial affairs, ultimately contributing to the overall success of the family office in achieving maximum tax efficiency.

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Calvetti Ferguson works with middle-market companies, private equity firms, and high-net-worth individuals across the country. Regardless of the complexity of the compliance, assurance, advisory, or accounting need, our team is ready to help you. Please complete the form below, and we will follow up with you shortly.