Physicians Reduce Taxes with Family Office Management Companies

Individuals with a high net worth often want, or need, help managing numerous aspects of their businesses and lives. Beyond financial concerns for a business or practice, high net worth individuals and their families may need help in many other areas—like business and personal tax planning, accounting, estate planning, investment advice, legal matters, charitable giving, and a host of other aspects.

Many physicians acquire significant assets over their career but may not have the time or expertise to efficiently manage and grow those assets. To help manage the demands of managing significant wealth, many may turn to setting up a Family Office Management Company (“Family Office” for short).

What is a Family Office?

Family Offices are a type of private wealth management company designed to meet the specific needs of the individual and their family and, thus, can vary greatly in design, size, and services offered. A Family Office can be designed to serve a single family, focusing on only that particular family’s needs, or multiple families, where the office serves multiple, unrelated families.

A Family Office is an option to help manage the assets of an individual or family after they grow to a certain size. The legal structure of the business often falls under a limited partnership or limited liability company structure, but depends on the needs of the family.The Family Office can be staffed by as few as one person but can also retain several professionals with different skill sets to meet their needs.

Perhaps the most striking characteristic of a Family Office is that it is designed specifically to serve the needs of the family (or families) rather than to sell a specific product. The Family Office often reflects the needs, values, and interests of the family it serves. They are used to provide the family with objective advice and decision making geared towards the efficient use and investment of their assets for many, or all, aspects of life.

What are Family Offices Most Commonly Used For?

The services typically offered by a Family Office are usually a mix of personal—services focusing on the family’s day-to-day life including travel, managing residences, and organizing individual’s expenses—as well as professional services—those services that tend to focus more on tax, accounting, legal, investment, administrative, insurance, and/or charity matters. The needs of each family and their collective assets and/or businesses are highly unique. Each Family Office should be designed to cater to each family’s needs—for both business and personal purposes—and encompass a range of services to accommodate those needs.

For doctors and physicians, these services may include managing the finances of a practice, tax planning to utilize all available credits and deductions, services to complete a valuation of the practice, address insurance needs for the practice, and a host of other services depending on the practice and the needs of the practitioner.

Who Uses a Family Office?

Until recently Family Offices have been traditionally utilized by ultra-high net worth individuals whose assets exceed $400 million. However, Family Offices have begun to be utilized by individuals well below that figure. Recent changes in the tax code, along with some favorable court decisions, have emphasized the benefit of utilizing a Family Office for families in certain circumstances who have far below $400 million in assets. Doctors, physicians, and other high-income individuals are beginning to utilize these types of structures to better manage their assets, investments, and funds.

What Tax Advantages Do Family Offices Provide?

Family Offices have risen in popularity due to recent changes based on the 2017 Tax Cuts and Jobs Act (TCJA) and tax court decisions. Family Offices are eligible to operate as a trade or business that can deduct its ordinary and necessary business or trade expenses against the Family Office’s income.

If a Family Office operates in a business-like manner and meets arms-length requirements in its transactions, it may qualify for deductions that individuals cannot utilize. In the long run this structure can benefit taxpayers who previously utilized those, or similar, deductions on an individual basis.

Taxpayers should note that each family’s situation is unique. While a Family Office might work for some, it may not be ideal for others. Taxpayers should consult their tax advisors and tax counsel to discuss the use of a Family Office for tax planning purposes.

What Other Advantages Do Family Offices Offer?

Family Offices provide the family several key benefits beyond tax. First, the Family Office provides a level of privacy that protects the family’s private information, decisions, and overall confidentiality. Families are able to select their staff, design the staff’s employment contract to protect confidentiality, designate which third-parties are allowed to be involved in the Family Office’s work, and so on.

Second, the Family Office allows the family to retain significant control over their assets, investments, and other decisions. The custom design of Family Offices allows a level of control that other service providers often cannot supply. Additionally, each family can retain control even when not actively managing every aspect of their investments because the Family Office is designed for their specific needs.

Third, the Family Office allows the family a level of personalization that may not be available with other service providers. Families can choose what services they require, how those services are to be utilized, and who will be aiding in completing those services. The degree of autonomy that a Family Office has can be determined by the family—they could choose to let the Family Office employees manage all aspects of their assets and investments or remain heavily involved in the day-to-day decision making of the Family Office.

Is a Family Office Right for You?

When it comes to managing your family’s assets, a Family Office Management Company may be a great way for your family to organize your investments, assets and day-to-day decisions. Learn more about Family Offices and Corvee tax software by requesting a demo today!

Does a Family Office Management Company make sense for you? Get started today to find out.