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When to form a family office

The family office model has existed for centuries, beginning with European families and later adopted by American industrialists, like the Carnegies, Phipps and Rockefellers. GenSpring Family Offices improves upon the family office model in three ways: creating a multi-family office with multiple locations; advising on all elements of wealth and providing sustainable wealth management.

Each family member benefits from a consolidated group of professionals in the family office – investment and financial managers, estate planners, tax accountants, philanthropic administrators, and compliance personnel all dedicated to, and knowledgeable about, each family’s unique situation.

A family office is usually created when: (1) the liquid assets of the family grow to such a size that professional management is required for the investible assets of the family that cannot be provided by the family business professionals, since they usually do not have the expertise to manage these assets or, if they do, it cannot be done effectively without the business suffering; (2) the family’s business is sold creating liquidity that again needs to be managed by the appropriate professionals; or (3) the family has attempted to manage their personal financial affairs, but the business has suffered, with the time they have spent doing so, or they realize that they are not equipped to manage the level and complexity of their own assets.

Relying on objectivity, not fees

A family office differs from financial planners, investment managers, stockbrokers, bankers, and accountants in the services it provides and its role as a trusted family advisor. The “true” objective family office sells no product to their clients except that of their service and it collects no fee from any person or organization except the client of the family office.

The family office is not paid a broker fee for insurance placement, securities purchase, real estate purchase, custody, commissions or transactions fees, unlike that of brokerage houses, investment management firms, and investment banking firms, private banks, and product-compensated financial planners. The real difference between a family office and many of the organizations that provide product to the family office industry is that the family office has a “serve” culture and the others have a “sell” culture. In the “sell” culture, the client does not pay a fee for the service; the client pays a fee for the product.

Taking care from A to Z

The full-service family office not only plans, but also executes and manages all of the financial affairs of a family over generations. The typical full-service family office will provide the following services: investment management, which includes asset allocation and investment policy development, in addition to performance reporting and monitoring; bill paying; cash flow management and accounting for investment assets in addition to all personal assets; tax projections and advice with tax return preparation; philanthropic management, including the grant making process and all necessary filings; estate planning, execution of the plan, and trust administration; regular organized and facilitated family meetings; insurance placement and management and personal services as needed by the family.

Final Thoughts

While there are many issues for a family to consider when deciding to form or join a family office, the most important factor is the objective and wishes of the family. Family members should work together closely to make sure the family office model they choose is the correct mode with the right services for themselves and future generations. The development of a family governance structure with the participation of the family members would help insure that the family office continues to serve the family needs.

Patricia M. Soldano is chair of the GenSpring Family Office’s western region which includes Phoenix. Learn more at www.genspring.com.


Families should act now to preserve wealth

Families who have had to face the estate tax know that it can destabilize their family businesses and create major headaches for their children and grandchildren.

Unfortunately, for more than a decade it’s been nearly impossible for families to do informed planning with any solid understanding of what Washington’s future intentions may be. In fact, the only thing that has seemed certain and permanent in the estate tax world is the persistence of a situation that lacks any trace of certainty or permanency.

This challenging and unpredictable environment has made many families reluctant to take advantage of what could be a once-in-a-lifetime window of opportunity. Now is a key time for families to think creatively about preserving their wealth and carefully weigh their options.

Use it, or lose it

The 2010 Tax Act has lowered the estate, gift and generation-skipping transfer (GST) tax rates to their lowest point (35 percent) in 80 years and increased the exemption to an historic $5.12 million ($10.24 million per couple). Unfortunately, Congress was only able to agree on these parameters until the end of 2012. Absent further legislative action, the estate tax will automatically revert to pre-2001 levels in 2013, meaning a confiscatory 55 percent rate (up 20 percentage points) on all assets over $1 million (down $4.12 million). For many families, this means 2012 is an opportune time to “use it or lose it.”

On the menu: death taxes

As the two parties serve up differing visions of tax reform, death taxes are also on the menu. As Congress scavenges for revenue, many on Capitol Hill have their sights set on high-net-worth and high-income Americans. In the estate tax sphere, serious threats have emerged to legitimate planning techniques.

These proposed changes include making two-year rolling grantor retained annuity trusts (GRATs) and 100-year GRATs impossible, altering the tax treatment of grantor trusts and limiting the GST tax exemption to 90 years.

Some have even sought to turn the well-established economics of valuation on its head. Instead of valuing assets at what they’re worth, politicians have proposed ignoring restrictions on ownership (such as lack of marketability, liquidity and control) when determining a family’s estate tax liability. This change could lead to peculiarly distorted outcomes, as similar interests would be worth one amount to a family member, another amount to an unrelated party and an entirely different amount to the Internal Revenue Service.

In the current budgetary environment, the risk of these harmful revenue raisers is only increasing with time. Since most of these provisions have been proposed only prospectively, now could be the time to get GRAT, grantor trusts or dynasty trusts off the ground before Congress changes its mind and the rules of the game.

The presidential narrative

The future of the 2010 Tax Act isn’t likely to be determined until after the November elections in a lame duck session or when the new Congress is seated in 2013. Families are working with allies on Capitol Hill and in the family business community to minimize the potential for harmful outcomes and maximize the prospects for sustainable estate tax relief.

However, much will depend on the narrative and outcome of the upcoming presidential and congressional campaigns, any emerging lessons or political mandates related to tax policy and the resulting relative leverage of the parties. Regardless of whether Congress acts or how the politics shift, the bottom line for families is that now is the time to know and explore all the options, before they potentially disappear on Jan. 1.

Patricia M. Soldano is chair of the GenSpring Family Office’s western region which includes Phoenix. To learn more, visit www.genspring.com.


Wealth Management Q&A With GenSpring Executives

Here are answers to some common wealth management questions from Pat Soldano, chairman – Western Region, GenSpring Family Offices, and Mark Mushkat, senior advisor – Western Region, GenSpring Family Offices:

What is the biggest mistake people make — that could be corrected by an effective financial adviser — when they try to manage their assets on their own? They misjudge the time, expertise and resources necessary to truly manage their assets effectively, and achieve an appropriate level of return for an appropriate level of risk.

What has been the biggest change in wealth management strategies in the wake of the recession? Investors have become more risk-averse and become less trusting of the wealth management industry in general. They are questioning their advisors more and trying to understand if their advisors are doing what is in the best interest of the investor or the advisor and/or their firm!

Is there one particular trend you’re seeing in clients or is there one particular strategy you’re steering clients toward that may be different from strategies employed five years ago? GenSpring has concerns about the risks of the stock market relative to its expected returns. As this market will likely remain highly volatile, we expect comparable returns in other asset classes without as much risk as stocks.

Are there things that people can or should do between now and the end of the year to protect or build their wealth? Take advantage of the $5 million per person gift tax exemption, by using as much of it as practicable, based on their spending needs, before it may go away at the end of 2012. This will take assets out of their estate that would other be subject to a 35 to 55 percent estate tax at their death.

What advice would you give someone who is just reaching an age where they are starting to worry about protecting and building their wealth? Careful financial planning is key to effective saving, investing and spending. It’s important to consider taxes, inflation, market risks and expected returns in asset classes like stocks, bonds, CDs, real estate, etc.

What advice would you give someone who is established, but wants to protect and build their wealth for the next generations? Our families find it helpful to have clear objectives spelled out in an Investment Policy Statement. This document is a road map for good times and for bad, and it’s useful to share with guardians of future generations to maintain a consistent and disciplined investment plan.



Can You Be Too Social With Social Media?

Plucked from a recent headline on a national news website: “Rich kids are oversharing on social media – are yours?” The story went on to detail true life examples of wealthy youth using social media to boast about luxury private jet travel, $100,000 bar tabs and the use of #ferrari, #mansion and #hamptons Twitter hash-tags. These cases surely got due attention from their parents, but they also clearly illustrate how high-net-worth individuals and their families are in the crosshairs of a new generation of risks created by social media that can quickly harm a family’s reputation.

Equally as confounding are the security issues social media participation presents. With GPS locators on cell phones and sites like Foursquare, social media immediately lets the world – and the underworld – know the whereabouts of these youth 24/7/365.

A few years back, web security meant passwords, firewalls and anti-virus software. Today, a secure Internet presence is defined by an individual’s ability to influence what the web says about them and their family. For instance, if you are wealthy, do you want others – business partners, friends, employees etc. – to know that your children are flying on private jets and racking up $100,000 bar bills?

Indeed, wealthy individuals and their families face online reputation challenges because they are high profile, easy targets. And in many ways, they often have the most to lose since they are tasked with protecting what is often a hard-fought family legacy.

Historically, and certainly today, the wealthy have always been the subject of wanted (and unwanted) media attention, but with social media the stakes are much higher in that anyone can play the part of publisher. This includes unknowing youth who might, even mistakenly, miss-use that power to broadcast their actions and whereabouts. In addition, media coverage used to come and go quickly and would only live-on in archives or dated press clippings. Not so today as web content, including social media, is readily accessible and easy to revive and proliferate on an ongoing basis.

Wealthy families need to manage these risks and establish clear boundaries with their children and, to an extent, their children’s friends. Unless they manage these risks, they will leave themselves vulnerable to damaging effects on their family, friendships, business associates and on their own personal lives as well.

The building blocks of online reputation management include:

  • Ongoing risk evaluation and education
  • Targeted campaigns to remedy problems as they arise
  • The creation of family contracts on privacy management
  • A pre-defined crisis response plan that can guide a family when a true crisis hits

The task of managing online reputation for high profile individuals can be daunting, but worthwhile. Management of a family’s cyber presence is the foundation upon which the family’s legacy may rest for generations.

Online reputation risk must be managed proactively, not reactively, as it is nearly impossible to put the proverbial “cat back into the bag.” Once the damage has been done, it’s done. To be sure, it’s a lesson that families of some jet-setting youth recently learned in spades.


Patricia M. Soldano is chair of GenSpring Family Office’s western region which includes Phoenix. To learn more, visit www.genspring.com.