- 5/5/2025
Discover proven strategies for success when it comes to family office planning. In this video, I talk with Rustin Diehl about Family Office Development from the perspective of investment management to tax planning, we'll cover everything you need to know about how family offices can work to effectively manage your family's wealth. Whether you're a multi-generational family or just starting to build your wealth, this video will provide valuable insights and tips for creating a successful family office.
#familyoffice #digitalassets #cryptowealth
You can find Rustin on Linkedin at / rustin-diehl-80127717
If you are in need of Rustin's services, feel free to email us via our website and we can get you in contact with Rustin's office for a consultation.
#familyoffice #digitalassets #cryptowealth
You can find Rustin on Linkedin at / rustin-diehl-80127717
If you are in need of Rustin's services, feel free to email us via our website and we can get you in contact with Rustin's office for a consultation.
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LifestyleTranscript
00:00Well, good. I'm glad we get to talk about family offices today.
00:04Let's discuss it between the two of us and kind of have a dialogue on this topic.
00:11As you know, there are many, many family offices.
00:15They've just blown up in the last couple of decades.
00:19There's now thousands of them around the world.
00:22Families control a huge amount of the S&P 500 and all kinds of private equity, all kinds of different forms of wealth around the world.
00:32And to keep the wheels on the machine, to keep the machine running, they tend to institutionalize some of their functions into different structures, institutionalize them into corporations, LLCs, trusts.
00:48And sometimes the families are reliant even on third-party providers.
00:53And so in discussing family offices, I think a good start point is to say that if you've seen one family office, you've seen one family office.
01:03They are all different. They are function-based.
01:07And so that would be kind of a fundamental statement that a family office is very much customized.
01:12I sometimes hear attorneys or advisors talk about how you need to have X million of dollars in order to start a family office.
01:20So I'm just going to start by saying that's not true.
01:23It's based on your functions.
01:25It's what you need.
01:26And you can always find a start point to handle the things that you want to continue on, that you want to have institutional continuity.
01:34That's the purpose of a family office, to make sure you've got embedded functions in your family's structure that can manage assets, manage businesses, ensure that shared property is fairly allocated.
01:51That's the basics of a family office.
01:54So there's no one right or wrong answer on how you design them, on how you implement them.
01:59So we're going to go through, starting with some very often asked questions, and then walk through some of the functions, the features, and the different structures, and even the phases for deploying a family office as a family's functions and wealth change.
02:19Excited for it, man.
02:20I think this will be really informative for people that might be anticipating a liquidity event or even somebody that has, not to name names, met an individual a few years back worth about $120 million between all the businesses that he had, had like $9 million sitting in a bank account, not earning any interest, not invested.
02:46Anyway, there are people out there that just don't have any knowledge when it comes to this.
02:54And I think just having a basic course and some understanding of what the possibilities are for them and maybe where to start is a really fantastic way to involve them in a course that we can provide.
03:08So I'll let you take it away and just kind of go over the overview and then get on to the other components that you mentioned.
03:15That's great.
03:16So diving right in to a few frequently asked questions, and again, family offices are the subject of a lot of mythos, a lot of misunderstandings, and kind of magic thinking.
03:30People assume that there's a specific formula because they've heard about J.P. Morgan, the Morgan's family office, or the Rockefeller family office, some of the dominant ones.
03:40But I'll point out there have been the functional equivalent of family offices for thousands of years.
03:46Anytime you have an institutionalization of a family's wealth, of a family's purposes, of a family's activities, that's what a family office is.
03:57And they're kind of put together, these functions are effectuated and kind of cobbled together with a mix of corporations, a mix of a little dash of LLC, a little sprinkle of trust, and maybe a couple of different entities to sort of take on the burdens of fulfilling those family functions.
04:17So the short answer, what is a family office?
04:21Well, they're a company that manages family activities and businesses.
04:25And it doesn't even have to be a company that the family owns.
04:28It might well be an outsourced family office.
04:30We're going to get into some of the different designs.
04:33And really, as a family evolves, that family office will change.
04:37Thus, the statement that if you've seen one family office, you've seen one family office.
04:43You can't step into the same river twice.
04:45It's always flowed by and there's something else going on.
04:48And a family that previously needed a family office to deal with managing a farm property or a cabin.
04:57I've had clients with ski resorts.
04:59I've had clients with private jets that need them managed, with yachts, clients with big media repositories or intellectual property reserves that they need managed, families that need companies, real estate portfolios managed.
05:12Those things change.
05:14They may dispose of some assets or their family may grow and shift.
05:19So these family offices must be ready to move.
05:23So when we say family office, people, because of the word office, often assume that there's going to be four corners and a certain ceiling height and maybe an ingress and egress to the office and maybe an LLC or a trust holding it.
05:37All those things are not givens.
05:38So family offices are there to support the functions of the family rather than to be some sort of static structure.
05:48So we're more looking at form.
05:51Most people are looking at form rather than the flow of the family office.
05:54I'm more looking at the flow and what's necessary to get that flow of things moving.
05:59So I mentioned earlier, we establish and support the family's purposes using a mix and a mash of trusts, LLCs, corporations, sometimes foundations.
06:12I've structured different types of nonprofits.
06:15I've even had families where I've taken private nonprofits public or the reverse, which you don't like to do to take a public private.
06:22We've had all kinds of things that go on as they as they evolve.
06:28Who should do a family office?
06:30There's no net worth to establish family office functions.
06:34Now, if you're going to do if you're going to saddle yourself, if you're going to do the work of putting in place a bunch of purpose trusts and subsidiary LLCs and corporations, you probably want to have enough wealth to merit those economics.
06:49But anybody who has a succession and continuity plan, even if it's just a small family business, ought to have some sort of family office function in order to ensure the continuity of the business.
07:02I was working with a client, for example, who had a chain of stores.
07:08And as part of their continuity planning, we had to establish some of their foundational systems.
07:16And so family office functions, apart from being established with LLCs, trusts and corporations, are often reliant on technological solutions these days increasingly.
07:28In their case, we had to implement some new enterprise management tools in order to keep up with some changes in the way they're doing their inventory, the way that they're allocating their cash between their businesses.
07:42So I would point out that sometimes we have a technological tool that could take the place of what we used to need a corporation running in a brick and mortar building to do.
07:52So these things sometimes have to evolve.
07:55They can progress in any number of directions.
07:59But and you'll see this over and over again, form follows function.
08:03But anyone that's trying to get a business to move forward, anybody that's trying to make sure they've got some intergenerational planning is a great candidate for some family office features.
08:14And so they can start setting up their family office functions as soon as they get working toward that continuity and succession plan.
08:24Where should they do it?
08:25Well, most people establish a family office in their home jurisdiction in their home state because family offices most often start embedded within an existing family business, which tends to be a few miles away from home, usually in the home state.
08:42As a family evolves, that might not be a good move.
08:45If you're in one of the top tax jurisdictions, think California, New York.
08:52Yeah, you might not want to forever keep your home jurisdiction over your family office.
08:59But the exigencies, the requirements of managing your business may well dictate that that is more cost effective in the beginning.
09:08But there are some top jurisdictions for family offices.
09:11I always point to South Dakota for general banking and for their trust jurisdiction features.
09:23I'm a very big fan of South Dakota.
09:24I've done a lot of work with South Dakota trusts.
09:27Love their purpose trusts at some phases of family office development.
09:32I'm a big fan of Wyoming for digital assets.
09:35They have done the most to enhance their digital asset statutory regime.
09:40In fact, they just came out with the, I think they call it a NUNO, a non-profit, unincorporated, decentralized organization.
09:54I can't remember the exact acronym for it.
09:55But this is just a few weeks ago that Wyoming passed a statute for a non-profit, unincorporated, autonomous organization.
10:03And previously they've put in place an excellent digital assets regime that avoids a lot of issues with banking laws and transfer laws.
10:13They also were a forerunner in implementing a DAO wrapper to an LLC.
10:18Wyoming is a forerunner state.
10:23They were the first state in the United States in 1978 to implement LLCs.
10:28And they were one of the first to implement DAOs and now the first state to implement an unincorporated nonprofit form of a DAO for charitable DAOs.
10:39So in the digital asset space, I'm a big fan of Wyoming.
10:42I do a lot of Nevada work.
10:44I don't ever hesitate to go to Nevada.
10:46I really like their LLCs and trusts as well.
10:49And I have some clients where I've done Alaska work as well.
10:53They were a forerunner on domestic asset protection trusts, which are, you know, we used to have to go offshore to put in place asset protection and trusts.
11:03People would go to, you know, the Grand Cayman, Bahamas, Cook Islands.
11:09Now we've got great laws in the United States.
11:12Starting in the late 90s, Alaska came out with a great trust and they've got good LLCs as well.
11:19So as far as U.S. jurisdictions go, those are a few of my top.
11:24Delaware is another good in the running, in the mix.
11:27I don't love a lot of their business franchise taxes.
11:31I see a lot of startups that are trying to be scrappy and get going form a Delaware corporation.
11:37And that's a wind parachute to be pulling that behind you.
11:43It's just propagated, right?
11:45They've done a really good job marketing that.
11:46And so people, they think that's the norm now.
11:51But, yeah, I would agree with you.
11:52I think there's some better options when you're just getting started.
11:55Yeah, when you're just getting started, go with a lightweight jurisdiction that doesn't charge heavy fees, that doesn't have a super strict court of chancery that's over all of the business litigation.
12:06You've got to hire Delaware Council, and it can get pretty expensive.
12:09But for an advanced and well-developed family office, they do have a pretty good trust company rule.
12:22If you want to put in place a private, unregulated private trust company or regulated private trust company, they're pretty good for that.
12:30Wyoming has got a good unregulated trust company.
12:32I don't like their private trust company rule quite as well as Delaware.
12:36So as far as jurisdictions, where to do this, I think you start with where you're needing to be, with needing to build your business or in your home state.
12:46That's not a bad move.
12:47But if you're going to be setting up businesses, say like a trust with an LLC that's maybe doing some digital asset trading or staking or lending, maybe in Wyoming, that's not a bad place to start a family office as well.
13:02Just knowing that the top jurisdictions are kind of spread around the United States.
13:07And, of course, there are international jurisdictions as well for certain components.
13:11So, but most people, the realities and the requirements of life put them in their home jurisdiction.
13:18So why have?
13:20I've kind of talked about that at length, but why have a family office?
13:23Simple answer is you're trying to institutionalize your governance, the way that you're managing your family assets.
13:29You're trying to make sure that you pass on your culture and your capital to achieve your family's alignment in their purpose,
13:38alignment in their vision for what they're trying to be and how the family is developing over decades and perhaps even the longer term intergenerationally.
13:48Family offices achieve a greater degree of privacy than does outsourcing things.
13:53So sometimes people will put in place a private family office, single family office functions for that privacy.
14:00And sometimes they want to, they believe they can achieve higher returns on assets by the family office doing things themselves.
14:09So with a family, I would say on all these fronts, if a family, again, is looking for continuity, especially in relational capital.
14:21And I would point out to you that there's different types of capital.
14:24Like when you look at a publicly traded company, there's the book value of a company, what it's trading for is often quite different from its asset values.
14:34And kind of the delta, the difference between their book value and their intellectual capital or their book value and their asset value, that delta is their intellectual capital, which is everything from intellectual property to knowledge to relational capital.
14:54And that relational capital, keeping people working together, keeping people working together, keeping them doing deals together, keeping them educating each other, aligning in vision, that is a big, big boon to families.
15:09We can't underestimate there is an actual dollar value to relational capital as a component of the family's intellectual capital value.
15:18And a family office helps to appropriate more of that value and pass that on.
15:23So in short, anyone who's trying for continuity and succession in their family's value, including true monetary value of their intellectual capital, their relation capital, ought to start implementing some family office features.
15:38So in development of a family office, the top bullet point here, the top mantra is that form always follows function.
15:53Functions first.
15:54We must begin with the end in mind and be mindful of costs.
15:58You don't necessarily, I get sometimes a call where somebody says, hey, I chat GPT, what's the most tax efficient structure for my family office?
16:08I got this question the other day and chat GPT spat out to my client.
16:13You need a Delaware C corporation with a Nevis trust and a Nevis LLC.
16:19And I love Nevis.
16:20I'm in contact with invest Nevis and, and look at their LLCs.
16:23I'm happy to set those up, but that's a heavy burden.
16:26And this client was not yet there.
16:29And so I would say that maybe in the end, that could be, that could be important, but don't get the form of this thing before the function.
16:39That client, we, in the end, we determined that they were better off with a lighter version of this so that they can preserve their flexibility, preserve their capital.
16:50If you're having to pay a lot of administerial and institutional costs, think like attorney's fees, CPA's fees to file these, registered agents, managers, trustees, all those fees add up to where you might have so many institutional costs on your family office functions that you can't keep them going.
17:11And the form doesn't end up enduring because you didn't put function first.
17:15So build these things to be adaptable and to mature over time to the functional needs you have.
17:23The other thing I'd mention, apart from getting fixated on the form, like they have to have just the right jurisdiction of corporation, just the right trust, just the right LLC.
17:32And it's true, you need those things, but you need to keep the function first.
17:38And the name is another area people can tend to get a little hung up on these things.
17:42Naming is great, and these ideas of how you're going to form it and the structure it will take, that's great.
17:50That's like the architecture.
17:51But I'll say that, what's in a name?
17:53They mature over time, and I tend to build family offices as well as the trust so that they are capable of regenerating themselves.
18:02They're capable of spinning off from the parent family into new family offices that may well have a different name.
18:11So in other words, rather than worrying about passing on the whatever, you know, three to 20 letters of your last name, which is quite arbitrarily assigned to us, could have been a different name.
18:23But rather than worrying about the name, worry about passing on the DNA, worry about passing on that key purpose of the family.
18:35And that's why I say that culture and purpose ultimately win.
18:39And so passing on this culture, which in general, I sometimes do a significant amount of work with families putting in place their purpose statement, their mission statement.
18:50But I can tell you the common features in all of these is that everyone at a fundamental level wants their family to actualize.
18:58They want everybody to grow up and do something good with that maturity, you know, become your best self and serve in some sort of a community.
19:08And that community might be the family business.
19:11That community might be the neighborhood.
19:13In some families, that community might just, it might be bigger.
19:17It might be a political office or, you know, a mayor or a governor or something at the federal level.
19:23But try to find a way to grow up, to increase consciousness, to increase people's maturity, and so that they can serve effectively in a community and do some good with that maturity.
19:36So that tends to be the purpose.
19:38Obviously, that can take any number of directions.
19:41Sometimes families kind of identify with some type of thing.
19:45I've got one major family office I've been working on for some time that goes together with some businesses, and this family happens to own a bunch of museums together in aggregate.
19:58They're quite a bit of museum space that handle a lot of art, including automotive art, and some of those automotive pieces of art move and have motors that, you know, it's art that gets grease on you and drips.
20:10And so their family office purpose, apart from helping to actualize this family's kids and help them to do good in a community, their purpose is also to maintain this family art purpose, to preserve these historic automotive pieces of art.
20:27So obviously, you can get narrowed into a purpose.
20:29I had another family, as I mentioned earlier, with a ski resort.
20:33And so part of their family function was to keep that running.
20:37I've had lots of families with farms.
20:38I do a tremendous amount of farm planning, and that's another one.
20:42But again, back to the earlier point, build these for regeneration.
20:47If you have a child and you're big into art and your child is not, let them spin off and wish them well, but give them the DNA so that at a fundamental level, they're at least able to move forward with a good secure base that's protected.
21:03And that helps them to mature and that helps them to mature and to do something good with that maturity in a community.
21:08So don't want to get too fixated on a specific niche purpose.
21:13More than anything, these family offices are to help families to grow up and mature and hopefully mature in a way where the various pieces of the family can work together long term.
21:26But there have been studies, demographic studies, and you go down the road just a few generations.
21:34I hear sometimes people wanting to have a family office continue for seven or nine or I've had hundreds of years.
21:41They've done studies where, I believe it's nine generations down the road, you have enough family members in the average family, based on demographic studies, to fill up Pyongyang Stadium with 140,000 members of your families.
21:56That's more like the shareholders of a corporation and the spheres of affinity, the degree of relationship between 140,000 people is going to be attenuated, is going to be less naturally.
22:11Humans, homo sapiens are really made to kind of keep in mind a couple hundred people at one time.
22:19So to keep the relational capital going, generation after generation after generation with one name and one niche purpose is probably unlikely.
22:30And so that's why I would say, back up to what's in a name, build your office to your family office and your family purpose to regenerate and to allow for spinoffs with the parent family office DNA in the spinoff.
22:46Next question is, is back to my core of making or buying a family office.
22:53And that's really a factor of how much is it going to cost?
22:56What knowledge and skills do we have?
22:58What are the laws and regulations?
23:00Do we need the privacy in an area?
23:02The family may well need privacy.
23:04And then, as I mentioned, with new technologies, you might not need a lot of the former things that you would need to build from scratch.
23:12So on that make or buy, we'll be talking more about that, but I'd suggest to keep things light, you want to phase these things in and where possible, where you don't need the privacy, where the law and regulation permits or where you lack knowledge, consider outsourcing and do a bit of a hybrid family office where maybe you embed certain functions at the family level.
23:35Maybe you own certain functions, maybe you own certain functions, even in companies, but then outsource other functions.
23:41I know a lot of families, they may not have multifamily real estate investment experience.
23:47So I had one family that outsourced that particular function.
23:50They were a family with a large electronic engineering company.
23:55And they definitely had their competencies.
23:57They had an excellent family office for purposes of managing intellectual property, for purposes of managing R&D.
24:05And they had several cabins and private jets.
24:08And we built functions for allocating those fairly between the children to avoid dissension, to avoid family disputes.
24:17Often call those resentment avoidance mechanisms.
24:21But we built in allocation mechanisms for those things.
24:24But when it came time to look at that family's multifamily real estate investment, they didn't want to do that.
24:33They didn't want to take it on and they outsourced that to another group.
24:36So you keep in mind, they just didn't have the knowledge there, didn't want to deal with it.
24:40So always think whether you're going to make yourself and own the structure yourself versus buy or outsource is a big part of the development fundamentals for family offices.
24:51So, again, in starting with the end in mind, purpose, culture wins every time.
24:57So start with a good family charter.
25:00I think a family century vision is a good idea.
25:03But backing into that, you've got to have something actionable right away, some perch to start from, to get to a century.
25:10To go to a century-long continuity and a family purpose, you're going to have to have some tactical plans on just the next 12 months, right?
25:20It's just this fiscal year.
25:23We're going to have to have midterm.
25:24We're going to have to be looking at next five and 10-year plans.
25:27And then also with this century plan, we're going to be looking at that.
25:31But I'd point out to you that if you look back at a family a century ago, those families weren't thinking about the possibility of autonomous organizations.
25:42They weren't thinking about AI performing functions.
25:45AI was kind of maybe just a glint in the eye, a glimmer in the eye of human consciousness back 100 years ago.
25:55You know, we had Lady Atta Lovelace and Charles Babbage talking about these things, just these crazy people.
26:04But it didn't get implemented until now.
26:06And in 100 years from now, your family vision may well be to try to secure us some sort of a seastead with a spaceport.
26:14Who knows?
26:15I mean, crazy as that sounds, the things I just mentioned, AI and DAOs, are just as crazy 100 years ago.
26:23Or something I've never imagined is likely to exist.
26:26So on that century vision, I don't know that it makes sense to say, I want to hold on to my, for example, XRP for 100 years.
26:35That may sound utterly illogical.
26:38So build your visions for flexibility.
26:41And I recommend focusing mostly on maintaining that relational capital, on helping the family to mature and do good with that in a community.
26:49If they're always bringing value to a community, they will always be relevant.
26:54People who can deliver value and who look for ways to do good are always relevant.
27:00And so teaching them to mature, to request adequate and fair compensation for the value they bring, helping your family do that,
27:07has really got to be at the core of your century vision.
27:10But having said that, you certainly can set goals to build wealth, to own real estate or own, you know, sea space, airspace, you name it.
27:24All kinds of assets are available.
27:25You can certainly set asset-specific visions.
27:28But on the century vision, I don't know.
27:31I think that those things, all planning gets set aside.
27:35There's just nothing quite like having a plan and then having it set aside.
27:42But there's just nothing that can quite take the place of planning.
27:45It's absolutely essential, although all plans will end up being wrong and will end up going a different direction.
27:52But putting in place a family office, it's always good to begin with the end in mind.
27:58Think about what you want to see with your family in the long, long term,
28:02and then back into that with your current actions.
28:06So you're fortifying that.
28:09As far as their functions and services, I've outlined some of this, but in greater depth, I kind of put them into four buckets.
28:16And again, not all families are going to want to provide all these services in-house.
28:21And that's where it comes to outsourcing.
28:23I'd say that the advisory doing their own tax and legal, there are families that have law firms.
28:31And law firms, these law firms sometimes function as family offices.
28:33There are families that own CPA firms that function as family offices.
28:37They have their own tax and legal entities.
28:40And a lot of other families may hire those out.
28:42They may not want to own a law firm.
28:43They may not want to own a CPA firm.
28:46Compliance, risk management, and insurance.
28:48When we talk about a family office, on the risk management and insurance side, in the long term, you have to risk adjust everything you do.
28:58All the returns you think you're going to get have to be risk adjusted.
29:01And so putting in place risk management is one of the most overlooked features in family offices.
29:07And so sometimes, in addition to trusts, LLCs, and corporations, we might make a captive insurance company in some family offices.
29:19I know that the micro captives or even a shared captive insurance company might be necessary to reinsure certain family risks for which there is no carrier available.
29:33So with family office, looking at the advisory side, I always want to mention that risk management is probably the most overlooked area, and getting the right insurance in place is important.
29:46And if we outsource, it may well be that we need to go to Lloyd's or some other carrier and custom manuscript the insurance.
29:53I had a client who wanted to do a shared fleet service for their family, and getting insurance that would cover all the different users of those cars required that kind of custom manuscripting.
30:07We had to go out to, in that case, we went with a U.S. insurer, but Chubb is an example of one that can do some pretty custom manuscripting.
30:16So we had to work with some of my partners in insurance to do that.
30:20We also want to insure lives, and there are, of course, private placement options in the life insurance place, as well as your carriers, both publicly traded as well as mutualized companies that we work with on the life insurance space.
30:36So these things, again, with the advisory, they can be captive of the family and controlled by them in the form of, like I mentioned, micro-captive insurance companies for risk management, all the way out to publicly traded carriers for insurance.
30:54But a big part of a family office is risk management, along with the tax, legal, and other compliance on the advisory side.
31:02For financial planning, a lot of family offices, prominent ones, started out with investment management.
31:08Take, for example, Bessemer Trust.
31:10Started out as a single family office.
31:12The Bessemer family turned into an investment manager, an RIA.
31:16And now a lot of family offices end up doing investment management.
31:20And this is where it gets so confusing for people.
31:23When they hear family office, they may think they know what we're talking about because they've seen a family office.
31:29But again, if you've seen a family office, you've seen one family office.
31:33Not all family offices want to have a registered investment advisor at the core of them.
31:39Some of them want nothing to do with that.
31:40They'd rather outsource their family office, outsources to Bessemer Trust or some other family office.
31:47It could be to any number of places, but we have to look at it in terms of core competency.
31:58Philanthropic management, I do a tremendous amount of work there.
32:01I teach courses with the university on analysis of philanthropic giving.
32:08And I find that we spend so much time doing due diligence on our investments and research on our investments.
32:14And we ought to have a function to do the same thing with our philanthropic efforts, looking at a total return to community and to the family on those.
32:25And so on philanthropic management, there are many ways to look at that.
32:29But there are, of course, groups that can provide everything from you can you can set your own private foundation, which a lot of people, again, I see fixation on private foundations.
32:39But I would point out those are subject to so many excise taxes, to so many restrictions that often putting in place your own family foundation could be less cost effective than, say, outsourcing to a donor advised fund and just simply setting up a family giving fund.
32:57And then maybe having a family philanthropic giving committee that vets nonprofits, looks at what they're doing, looks at the family's mission, whether those nonprofits are in alignment, and then instead gives grants under the family giving fund.
33:14That's what I've set up most commonly for my clients is family giving funds.
33:19I tend to discourage doing private nonprofits unless we have a very specific purpose and reason for doing so.
33:27We don't get as much tax deduction on a private nonprofit as well.
33:31We're limited to 30% against AGI.
33:33We're on a public deduct 50%.
33:36So there's good reasons to sometimes outsource because of laws and tax, as I mentioned on the previous slide.
33:43As far as personal life and budgeting and bill paying, that's another thing that under governance or financial planning comes in.
33:56But making sure that we're managing each family member sometimes becomes a salient point depending on how they're set up.
34:03And we'll get in as we go through this course on family office development, we'll get into how you structure each family member because not only does the family office to serve all of the applicable generations need to have a structure, but the point of setting up a family office to regenerate, to spin off and be fruitful and create new family offices, you do want to set up each family member for success.
34:29And so in the side of financial planning and getting everybody's personal life and budgeting in place makes sense.
34:38And in that sense, we often provide a lot of, on the strategic side, a lot of family education.
34:47And I have been doing increasingly financial literacy trust features in which there are family education requirements for financial literacy prior to people getting money.
34:59Money fuels bad mistakes.
35:01And so a family that just dumps money into the hands of a beneficiary, absent education, can see that beneficiary literally crash themselves sometimes, substances or vehicles.
35:16So getting good literacy, good financial education, and then carefully putting in place the wealth transfer regime based on, on ascertainable indicators on, on, on kind of performance indicators on metrics can make a lot of sense.
35:33Yeah, you want to, you want to make sure that, um, that the, the, this is kind of silly, but I, I hearken it to, uh, like a dog chasing a car, a lot of people, you know, what, what does the dog, everybody knows they want money and they know that they can use it as a tool.
35:52Right. And they see the benefits that it can have. Uh, let's say if you can drive the car correctly. Um, but a dog that doesn't have any education or somebody that's running after a vehicle that doesn't know how to drive it. Um, they're not going to do very well with that. Right.
36:07So I, I, I really like this, you know, putting things in place to make sure people have the competencies and the skillset that allows them to be capable of managing those assets when they come into them.
36:17Yeah. Yeah. It should probably be a provision that people are looking at.
36:21Absolutely. Absolutely. And, and, and these kinds of provisions to make sure that the family's purpose goes on, you have to have these provisions. It, it, it, there's nothing quite like money to ruin somebody. So their vision doesn't get fulfilled.
36:35Uh, in terms of governance, this is probably one of the areas that's most universally applicable to family offices.
36:46Uh, getting, making sure you've got trusts and, and LLCs and corporations and everything managed well is, is just key. And this is the quotidian day to day. Just got to do it. Essentials of life, making sure bills are paid, books are kept, things like that. Um, we've got the tax reporting in place, records repositories, just some of those day to day options, uh, and, and necessities are, are one of the big things on governance.
37:15I would add to that, uh, uh, advisory committees. We see a lot of that, uh, where we've set up specific entities, uh, for the administration in form of advisory committees.
37:25Uh, but these are the functions. And I'll point out that these functions, as you can see, they are not LLCs and corporations, but we may well need to form an LLC or a corporation to perform these functions.
37:37Some of these functions, uh, may even be tax deductible if they're applicable to a specific investment by certain family members.
37:45And we have a lot of court cases that have come in, in recent years, as far as deductibility of family office expenses. We're not going to get into that now, but I'll point out that we often want a specific entity for a specific function.
37:58Once the timing is right, once the deductions are, are important. And even in a certain instances, you can't make full, uh, you can't fully expense or depreciate certain assets without the right people administering those.
38:12So family offices, uh, until they, uh, until they implement all these functions and get them in place, aren't going to need these structures, but these are the key functions.
38:22And you'll eventually build your, your, your form of your family office, your, your LLCs, your trusts, your corporations, those forms, you'll build those to serve these basic functions.
38:35So a taxonomy of family office designs. This is just looking across the board at how they're set up.
38:42And these are terms of art that we use to kind of describe them. And this is my, my, my kind of simplified taxonomy of what you're going to see, um, embedded family offices.
38:53That's where a lot of them start. And many, many, many of my clients, it's exactly how they run. They have a business running and inside of the business, they've got staff.
39:03And maybe they designate a corner office in their, in their building that has a few secretaries that book all the families travel, maybe a bookkeeper, uh, perhaps, uh, they have, uh, somebody who manages certain assets.
39:17Uh, they may have a couple of trustees in this suite of offices, but they might just put it into the, the, the, the corner of their existing business and utilize and leverage.
39:27Maybe their CFO for both purposes. I was on a call earlier today with a CFO for a family office.
39:33And he also helps to run a healthcare system that the family owns and he does both.
39:38They end up running both functions. And that is the most common setup for a starting family office is as they start in a family inside of a business.
39:46Um, eventually kind of the next way we see them go is they'll start to outsource.
39:52They may outsource and they can outsource of course, to the third one, a multifamily office.
39:57Bessemer trust I mentioned earlier is an example, one example of many, many, uh, family offices that are multifamily offices where numerous families rely on that family office for certain functions.
40:10Maybe not for all functions, but for certain functions where they might not want to be doing certain, certain activities.
40:17So in an outsourced family office, uh, we can have it virtual where the family office may have no brick and mortars at all, but rather relies, uh, by outsourcing on, on different, uh, different advisory firms, different trustees, uh, different investment managers, and so on around the country.
40:39Even to manage the family office.
40:41And sometimes we get a hybrid where perhaps they'll rely on a mix of, of outsourcing, uh, to family, to multifamily offices, and also have a single family office, which is the classic family office that people tend to think of.
40:55When most people talk about family offices, their, their vision is probably something like I've got a business, an LLC or a corporation, and it is my family office.
41:05But that family office is not going to have every competency you need.
41:10Uh, so we tend to outsource and that's where a hybrid comes in on the single family office.
41:15I'd mentioned that some family offices have a profits interest structure where they allow ownership by family members.
41:21So it can actually kind of be change hands and you can have restrictions on transfers, but the family members that, uh, work in the family office, uh, may well have a profits interest structure.
41:33And some single family offices even offer equity or some form of synthetic or phantom equity to non-family members.
41:40Usually there's a restriction against that, but we do see that in some cases, uh, especially as the single family office transitions and matures into a multifamily office.
41:51The last one I'd mentioned would be a private trust company, um, that, that could, could be a part of a family office.
41:57We do see a lot of trust companies functioning as family offices.
42:00And I would say that under a private trust company, it, it, it could perform a lot of the administrative services.
42:07I mentioned that's kind of a fundamental and those again would be kind of a form in a sense, a single family office, but more of a trustee.
42:14They're required to comply with, well, uh, state level, uh, financial institutions, acts and regulations on trust companies in order to do that.
42:24Um, although, uh, there are unregulated and regulated trust companies, depending on what they're doing.
42:29There are also certain benefits to single family offices and trust companies, uh, in, in terms of exemption from securities and exchange, uh, the SEC commission rules is the SEC rules as far as, as, uh, registration, uh, of, uh, and, and licensing.
42:49So sometimes that can be a, an effective way for a family to, to, to manage their assets, but this is the main forms that family offices take, um, final slide I want to go into is the maturation of a family office goes in phases.
43:04And then if you've gotten nothing else, if you've seen one, you've seen one, and that's because they're unique, like humans, they're unique snowflakes, family offices are a unique, each one's a unique snowflake that does different things.
43:16But in phase one and two, kind of the beginning phase, those two phases, we're setting up both individual and legal structures.
43:25We're setting a business structures for, for individuals, as well as businesses.
43:29It sets again, the DNA on the individual side for basic estate planning, for managing creditors, for asset protection, for tax planning, to be tax efficient and, uh, and for estate planning as well.
43:43Uh, so those are, those are the basic, um, structures you're going to need for an individual.
43:48We usually see that each individual in a family is going to need some revocable trust.
43:53They're going to have asset protection, trust, LLCs.
43:57Uh, I, a lot of my clients set up life insurance trusts for their children.
44:01I see a lot of that, um, marital agreements.
44:04That's a big one that I always mentioned that a lot of families will require a marital agreement in order to avoid dilution by divorce.
44:11So they sometimes, uh, setting up the DNA for how your kids' plans are going to be, at least if they're going to participate in the broader family structure, that's a good start point.
44:21And setting your own DNA, start, you know, lead with by example.
44:25So setting up your own trusts and getting your own, uh, your own structure, your own asset protection and tax planning in place.
44:32Great start point.
44:33And, uh, I'd say for phases one and two, do the same thing for your businesses.
44:38There's a lot of advantages, uh, to, to doing that, setting up things specific to types of assets, whether it be real estate, different types of equities, uh, whether that be stocks, bonds, different securities, even digital assets, setting up, uh, you know, structures to ensure and re-insure businesses.
44:55Uh, but we've got lots of different, uh, business planning.
44:58That's gotta be the fundamentals.
44:59If we don't, if we don't have those individual and business functions set up first, there's no point in advancing to set up a family office further.
45:09After that, in, uh, the next couple of phases, phases three and four, we're going to do much more advanced estate and philanthropic planning.
45:18We're going to be doing more advanced risk management.
45:20There's nothing quite like once you get enough, uh, arrows up in the air, they're going to come back down eventually.
45:26And most of them are not going to hit you, but one of them is, and be ready for it.
45:31The more activities you have, the more risks.
45:34I always say so many maneuvers, so many mistakes.
45:39And after you make so many maneuvers, you're going to have a statistical probability of problems.
45:44You're going to have a mistake, a rate of mistakes that happens after so many maneuvers.
45:49That's why we have statistical process control modalities like Six Sigma and TQM.
45:55It's because so many maneuvers, so many mistakes.
45:57So in the third phases, we're looking at more advanced estate and, uh, tax planning, more advanced risk management.
46:05And with the tax planning, we're really looking to freeze values of assets to keep the estate tax from eroding them,
46:11to avoid the values, uh, from being more than they need to be by, by, by maybe splitting them up between family members in family partnerships.
46:21And we're looking to keep the income tax as efficient as possible, usually through grant or trust.
46:27So I call that, I got this from the oceans firm in Nevada, but they call it freeze, squeeze, and burn.
46:32That's the basic tax planning.
46:34As we get more and more advanced, I'll mention that on those first two phases,
46:38where you're setting up your initial plan, perhaps some asset protection trust,
46:43uh, maybe a revocable trust and some, maybe an LLC for your basic businesses or your basic assets, perhaps digital assets.
46:50Um, those, those plans, we're more interested in balancing capital gains tax against estate tax,
46:57because at that phase, capital gains tax can actually be more costly than estate tax,
47:02which is a big surprise to many people because capital gains, people think of it as the 15% tax and estate tax.
47:08They think of as the 40% tax, but it's much more nuanced than that.
47:13Capital gains tax can be as high as 20% federal plus your state will lay a, an additional state tax on top.
47:20Plus if it's a passive, you'll get an additional passive investment tax, the net investment income tax of 3.8% to fund Medicaid gets layered on top of all that.
47:30So capital gains can stack up to 30, 30 something percent, and there's no exemption from it.
47:35You can get a step up if it goes through, if your money goes through your estate, but you don't get an exemption from capital gains,
47:44but you do have an estate tax exemption.
47:46So I'll just point out that in phases one and two, the tax planning that we're doing is to balance estate and capital gains.
47:54In phases three and four, we start shifting toward more of the estate and generation skipping transfer tax planning.
48:01Um, in phases three and four, we also start to initiate those basic family office functions,
48:06usually starting with distribution and investment advisory committees,
48:11which are often LLCs embedded within a purpose trust that may have no owners.
48:16We don't really want those owned.
48:17We don't want your family purpose owned by an entity that could profit by changing the purpose.
48:23And so usually I'll embed the advisory committees that sort of embody the family's charter,
48:29the family's mission and vision statement.
48:31I'll embody those in a purpose trust, uh, that, that can keep that continuity of relational capital,
48:38that continuity of intellectual capital going forward.
48:41And that's, that's where we start, uh, to kind of initiate formal family office structures.
48:46Now that we've got our, our, our fundamentals in place, the individual planning, the business planning,
48:51and the more advanced tax planning, we're now starting to, to build our family purpose, uh, trust with,
48:58with advisory committees to make these, these other trusts, these other businesses run right.
49:02And according to the family's vision, um, as we move forward, then phases five and six,
49:08we're starting to institutionalize the family offices, uh, asset structures.
49:13We're starting to, to, to manage property or we're managing families, the family's education and insurance.
49:19We start to get much more bespoke and customized functions in phases five and six with different types of businesses.
49:27And then in phase seven, we're doing, uh, we're starting to implement regeneration structures.
49:32We're spinning off for their family offices, uh, and, and, and more advanced business and personal structures in phase seven.
49:39So that's where the family starts to kind of regenerate and propagate itself and it's, it's family DNA.
49:46And again, uh, what's in a name, let the family rename them.
49:50If they want your purpose is what needs to go forward.
49:53If you've got your purpose and your, your vision dialed in on a, uh, a scalable on a, on a, on a, a sustainable purpose,
50:01which usually again revolves around maturation and service, then that's the point at which we're starting to regenerate.
50:08But between phases one and seven devils in the details.
50:12And that's where Jake, we've discussed that we're going to be in the next, uh, in the, in the next, uh, uh, we're going to be the next rollout of this,
50:25discussing those in more depth and going through the details and, and diagramming the structures.
50:30And some of the examples of how we see those go out and some best practices in setting up these family office structures.
50:36So as we advance with this course on family office development and put out the specifics and the diagrams and the, uh, uh, details on these phases of family office development,
50:49you'll see that throughout those, these fundamental principles of building the family office with the end in mind and putting function before the form and putting your purpose and vision as the driving motivator.
51:01That's, what's going to help to develop your unique, your one of a kind, uh, family office that suits your family's need, uh, and can provide the continuity.
51:10You're wanting the succession you need in your business, uh, can provide the tax strategies, as well as the asset protection and risk management that families are after.
51:22Yeah, this is great.
51:24Um, hopefully, you know, this has provided some value for you guys.
51:29Um, with that, we'll go ahead and wrap up.
51:40Um, with that, we'll go ahead and wrap up.
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