Family Office Set-up, Structure, and Compliance

Kirby Rosplock

Welcome to the Tamarind Learning Podcast. I'm your host, Kirby Rosplock. I'm thrilled to have leading authors from the second edition of The Complete Family Office Handbook joining me today. These are the top attorneys from Withers Worldwide and they were contributors to the first book edition, and now they're contributing once again to the second edition. So we get to hear more insights around the two chapters that they co authored. The first chapter by Ivan Sacks and Bill Kambas on the family office setup and structure is chapter number five. And then the second chapter we're going to hear more about is chapter seven, Legal and Compliance, authored by David Guin. And you can hear that they are still in the thick of Manhattan. So we're getting a little extra siren to go with the podcast. So welcome, gentlemen. So glad to have you here today and so excited to learn about what is new. What is new with family office setup and structure and why should our readers care? Ivan, any thoughts?

Ivan Sacks

Well, I mean, certainly one thing that we've all seen is there's just an explosion in the growth of family office and the interest in family office both by families and intermediaries in that advisory circle, but also by the investment market. And so there's a lot of different audiences now that are interested in trying to learn and increase their sophistication about what is family office, how does it operate, and what are the different legal and compliance tensions that it operates under. So I think the audience for this continues to explode the sophistication certainly in the United States with respect to the desire to understand and professionalize the advisory space in that. So we're very happy to have been a part of that with you to try to increase the learning.

Kirby Rosplock

And Bill, tell us some more of the key takeaways or things that you updated and emphasized in this second edition, chapter five.

Bill Kambas

Sure. Well, what we tried to do was stay within the same paradigm of the original chapter, but expand it for those developments that I've been rightly mentioned. That increased sophistication I think came on the heels of real growth in the number of families and the places that those families came from that had an interest in family office as well as the subject matter that family offices are tasked with being responsible for. So what we did was take that same framework because the general questions haven't changed. Is a family office appropriate for me? What's the right type of entity? What are the risks involved? Who should pay for this? Those questions didn't change. But what we did learn is how different families across the world and in the United States have approached those questions and through developments in case law and regulatory law. Here in the United States, we've learned about ways of refining that approach for greater stability, risk management, and also greater participation by the participants who need to participate in the family office or benefit from it.

Kirby Rosplock

That's really helpful, and I'm just curious Ivan, maybe you can tell us a little bit more, but in your experience with families and setting up family offices, having this kind of roadmap and a chapter to help give them ideas of how to pursue their goals, it must make it easier, maybe as their counselor, in figuring out okay, but let's tailor this. What does this really look like? Because obviously this book chapter is helpful, but it's not going to tell you how to do it necessarily. You have to customize and work with council like yourself. I'm going to put you back on.

Ivan Sacks

Been automatically muted there. I hope it's not an editorial comment. So now I'm back. I think that's right. It is quintessentially a bespoke exercise because every family is different and the place where they enter the phase of creating a family office always has unique aspects in terms of the interrelation of their goals, where they are as a family, what their investment pools and other interests are. At the same time. In the experts mind, there are a number of classical areas of consideration that always come into account in terms of form of structure, tax driven issues, and as Bill alluded to in the last few years, and is probably a feature of all of the increased popularity of family office. We've had some very interesting case law development, and that, coupled with the change of law under the tax reform that was adopted on January 1, 2017, has certainly created some interesting dynamics that are a subject of repeated advice. To every family that is considering family offices or have reached a period, a stage of maturity of their family office where we can try to refine that efficiency. So we talk a lot about form in the chapter the choice of entity between LLCs partnerships, pass through vehicles, the difference between a family office and the investment entities that a family office will often run, supervise or engage.

Ivan Sacks

With in terms of investment structures and really understanding that when we say family office, that is sometimes a rubric for a complex of interrelated entities that bring out efficiencies, bring out strategic goals. So we do go through that and try to discuss it in a way that relates to basic questions, relates to anecdotes and examples and stuff so that there are hankers for understanding.

Kirby Rosplock

And Ivan, you mentioned some of the case law that's come know since we last wrote the book. I mean, I'm just wondering Bill, maybe you can comment on how much has it really materially changed some of the planning considerations or perhaps sort of funneled people's interest to try to emulate how that case law worked out or didn't work out. I don't know if you want to comment. Sure.

Bill Kambas

Case law is always instructive and this was no different. What it did is those two things - it helped solidify planning that we'd been doing for decades. In some cases already the professionalism that we were embedding and insisting on for our clients was reinforced when we got the Lender Management LLC versus Commissioner case commissioner versus Lender Management LLC, which was a family office and it showed how important that professionalism is and how one structure might work for a given family. We also had other cases that were set up that worked through the courts and didn't always result in decisions, but where we saw there was greater challenge. And so that case combined with historic cases on the active trader business rules were really instructive and helped focus the discussion because as you said at the second part of your question, there was greater interest. And perhaps it was the tax changes that occurred with the Tax Cuts and Jobs Act. Perhaps it was the Lender Management LLC case. Perhaps it was the growing sophistication of families over the last few years, but the questions just kept coming up and the combination of the case law, the sophistication that we're able to embed in the structures, the learning that we have from private equity, venture capital and corporate holding company structures all apply in this context.

Bill Kambas

The families were asking questions. We were being... calling on sort of great resources out in the marketplace to refine this practice area.

Kirby Rosplock

Now I want to shift it over to David and hear more about your chapter. You became the sole author this go round of chapter seven on compliance and a tremendous amount of work goes into the legal compliancing aspects of a family office. Now, it's not always the favorite topic to talk about compliance, but tell us what you think are some of the key takeaways writing this revised chapter, what family offices are doing, the new issues they're confronting and how compliance is going to the next level.

David Guin

Sure. So I guess there's four themes I would talk about. One, the rules themselves really haven't changed much. So the underlying rules are pretty much the same now as they were when we wrote the original chapter. But there's sort of four themes I want to hit on. One is that the means that we are adopting to address the rule do continue to evolve. So the family office rule was pretty much brand new. When we wrote the chapter the first time around, there wasn't a whole lot of guidance and there wasn't a whole lot of practitioners did not spend a whole lot of time coming up with their own strategies. So our strategies continue to evolve. So there's new ways of complying with the rule that we've adopted that give a little bit more flexibility to families. So that's number one. Number two is the adoption of the Family Office rule is now spilling into other compliance areas. So for example, many family offices have to file. The Institutional Investment Manager reports. One of the things you can do there is request confidential treatment. The technical rule on confidential treatment requests says that the filing would have to identify holdings of a natural person, a trust or an estate.

David Guin

We've been able to use the SEC's adoption of the Family Office Rule and expand that and say, look, if the filing would identify the holdings of a group of people or a group of estates that are identifiable as a family, you ought to afford that expanded group confidential treatment. We've been successful in getting the SEC to do that. Number three is pretty much what it's always been. Even if you are a family office, that qualifies for the Family Office rule, understanding what your other compliance obligations are. As I like to say, the SEC often looks at a family office as it would any other commercial enterprise and they want the rules to apply to the family office the way they would apply it to a commercial enterprise. Because of course, what they're worried about is creating loopholes. We don't want to create loopholes that people can drive through. So coming up with specific strategies to deal with those in the context of a family office is important. You do need to comply with the rules, but there are special things about family offices and special techniques we want to adopt to get the family offices into compliance.

David Guin

And then the last thing I would say is we're increasingly applying the Family Office Rule to non-US structures. So for a couple of reasons. One, we have US families that have non-US components to their overall structure and we have seen a fairly sizable increase in non-US family offices establishing bridgeheads in the US. And now therefore, having to worry about compliance with US rules. And so applying these rules to non-US structures has been an interesting endeavor.

Kirby Rosplock

Thank you for the overview. I mean, there seems to be a lot of increased interest due to the scrutiny at times that families, particularly those that are financial families that might have multiple entities. I know there was a recent individual that you connected with on sort of balancing how do you manage fund structures and broker dealer or an RIA and still retain being a family office, and how to sort of separate the compliance needs of different entities that are sometimes bring more visibility right to the family office.

David Guin

We've been pretty successful in creating sort of side by side regulated and non regulated entities. So family offices who have a traditional family office but they have some aspect of their business that requires registration and we have a pretty tried and true sort of side by side structure that we've actually made it through SEC exams. So we're comfortable that the would would respect the structures so you can get around those things to some extent with careful planning.

Kirby Rosplock

Yeah. Bill, did you want to add something?

Bill Kambas

I did, and I apologize for the brief interruption there, but I did because David mentioned a couple things that are directly applicable on the tax side as well. And it's just to illustrate that while David was focusing on the SEC regulations and registration requirements and compliance, there is a good overlap and parallel on the tax side, which is that the IRS is also looking at structures. New initiatives were announced even after we were doing a lot of the writing for this chapter that are directly applicable to the management of the business of running a family office, which harkens back to the professionalism that Ivan mentioned early in the call. But that idea for professionalism, for an active business, for businesses to be treated similarly, situated businesses to be treated in a similar manner and the compliance with the appropriate regulatory agency is applicable on the tax side as well. I just thought I'd expand that it's broad compliance and regulations.

Kirby Rosplock

And I feel remiss because I didn't add this to the question list in advance. But in light of the more recent unfolding of this whole election, do you foresee other impacts that might be germane to just raise as it relates to setup and structure compliance that might be questioned, brought into a new cycle in this coming year if Biden's officially elected president elect?

David Guin

From a compliance standpoint, more strictly compliance were we were beginning to see as President Trump often touted sort of a relaxing of the regulatory landscape. I don't think that will continue under Biden. I don't think it will necessarily get worse, but I don't think we will see an emphasis on loosening up the regulatory requirements applicable to family offices. There was a proposal out recently that would have affected beneficial ownership reporting. They would have substantially increased the reporting threshold and the SEC has recently announced that they are abandoning that effort and they will leave the reporting threshold where it currently is.

Kirby Rosplock

Interesting. And Ivan or Bill, do you have anything?

Ivan Sacks

Yeah, I mean, on the tax side, certainly it is on the Democratic Party's agenda to promote tax reform, and with the current split in the House and the Senate in terms of the parties, that may well be moderated, but there's probably more likely some change in tax reform ahead, which will certainly have implications for family offices like all financial structures. So there we have to wait and see certainly there's also some things on the agenda in terms of estate tax and gift tax reform which could have an implication for the way we structure family offices with strategic issues in mind in terms of multi generational planning.

Bill Kambas

I think that's exactly right. I'll expand on it briefly to underscore something I was saying earlier. The Trump administration directed treasury or the Treasury Department under the Trump administration, increased enforcement substantially and also recognized that compliance had fallen off, especially on high and ultra-high-net-worth families and the interconnectedness of entities within the family enterprise. Biden has said that to pay for his caring economy, he wants to scrutinize a number of structures, including, but not limited to the qualified opportunity zones and other structures around real estate. So that compliance, the emphasis on compliance is expected to continue. And I think that's what we're going to see with the potential change in administration is just that compliance will remain a top focus for treasury.

Kirby Rosplock

I am so appreciative to have all three of you here today on today's brief window into the Complete Family Office Handbook, Second edition, with hearing from our luminary attorneys from withers worldwide on chapters five and Chapter seven. To read more about setting up and structuring your family office, the chapters authored by Ivan Sacks and Bill Kambas, please read chapter Five. It could be really helpful. And to read more about compliancing and legal issues in the family office. David Guin's chapter, chapter seven is exceptional. I'm very grateful to have you all here today as your host, Kirby Rosplock on the Tamarind Learning Podcast, and we look forward to reading more work from all of you. Thanks again.

Bill Kambas

Thank you.

Ivan Sacks

Thanks, Kirby