Many families are turning to family offices as a way to meet their needs, to provide greater control over their wealth and to handle their affairs. Since every family has its own unique set of needs, there are as many types of family offices as there are families. Some provide basic administrative support while others oversee asset management or run the family’s daily affairs. Once the family office is established, it is likely to serve multiple generations, across which there may be a range of different needs that require various wealth management strategies. A well run family office successfully synthesizes these strategies to ensure that they support the wealth management goals of the family as a whole.
Here are a few ways a family office can benefit a family:
Because of the growing complexity of managing, protecting and growing family wealth, family offices have evolved to address these new challenges and needs.
Helping a family set up its family office
Our client sought help in setting up a family office following the sale of the family-owned business to an outside entity. Prior to the sale, services typically provided by a family office were handled by the business. Our client asked PwC to evaluate all family office functions, processes and activities and then make recommendations on governance and operating structure and efficiency.
PwC studied current operations, family hierarchy, legal entities, third party relationships, asset/liability management, and operational/technical efficiency. We interviewed all employees, took inventory of all family office activities and documented all processes. Based on this information, PwC conducted a gap assessment that noted observations, implications and recommendations based on PwC’s knowledge of standard industry practices. Finally PwC provided the family with a recommendation for service offerings, an implementable strategy, suggested business requirements, current and future state process flows, and recommendations for an enhance technology and operational platform.
Our study identified discernible issues such as key-man risk, technology and security flaws, money movement processes with inherent risk, and a lack of basic governance. The business evaluation gap assessment and future state recommendation provided the family with a more integrated business solution that addressed its unique challenges while promoting and preserving its unique identity and values.
Planning for charitable commitments while increasing children's stake in the family business
Our client was the senior shareholder of a family owned S Corporation. He asked for our assistance in planning for large charitable commitments while at the same time focusing on succession issues with his children who currently ran the family business. He was seeking a tax effective way to dilute his ownership interest in the business while increasing his children's ownership percentage as well as the liquidity needed to manage his significant charitable commitments.
We looked at the impact of a stock redemption to see if a tax-free distribution could be accomplished rather than a sale or exchange resulting in a capital gain.We examined the interplay between the shareholder’s basis in his S Corporation stock and the Corporation’s accumulated account (“AAA”). Based on the Internal Revenue Code’s attribution of stock ownership rules between the family shareholders, it was determined that the redemption of the senior shareholder’s stock qualified as a tax-free distribution up to his basis in the stock which was less than the Corporation’s AAA account.
An S Corporation is a very difficult asset to use in funding charitable commitments and is not without its risks and challenges from tax authorities over value and other stock and shareholder attributes. The partial tax free liquidation of the S Corporation stock provided a tax effective outcome that resulted in significantly more cash to the senior shareholder for funding his charitable commitments. This allowed him, in a tax efficient manner, to make his contributions to charity in cash rather than S Corporation stock. Furthermore, the redemption accomplished the desired goal of reducing the senior shareholder’s stock holdings while increasing his children’s stock ownership percentage.
Realizing value from assurance services to a family office
A high-net-worth individual and former CEO of a large company, retired and established a family office to administer his various personal, business and philanthropic activities. The retired executive was a "hands-on" manager, however, he traveled frequently, owned several homes, engaged multiple investment advisors, and his private foundation was increasing the amount of grants it made each year, all of which caused him to be reliant on the actions of the people in the family office. The family office consisted of six individuals, each of whom carried out different functions (i.e., bill pay, foundation management, personal assistance). After a year of operating the family office, he wanted to verify that there were sufficient internal controls in place within the family office, that assets and private information were safeguarded and that financial transactions were properly approved, authorized and recorded in an accurate and timely manner.
PwC met with the retired CEO to understand his focus, the family office mission, his operating style (rigid, flexible, corporate-like, etc.). Then we set out to understand the existing internal controls, current system of checks and balances, the process for initiating, approving, authorizing, recording and reporting financial transactions, and the policies for reporting overrides to the internal controls. In analyzing the policies and procedures of the family office, as well as interviewing the people involved in the day-to-day activities, we identified several areas where the internal controls could be strengthened by enhancing the annual budgeting process, developing a protocol for non-routine transactions, and verifying banking protocols and notifications.
The internal control analysis resulted in a thorough, yet practical listing of observations, risks, and recommendation that the retired CEO could implement to strengthen the internal control in the family office.
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