Collaboration of Advisors and Family Offices

The Importance of Collaboration in High-Net-Worth Estate Planning

In my prior article, “Planning for Gilligan is different than planning for Thurston Howell, III” I mention the fact that for high-net-worth clients, it is very important to get all the advisors on the same page. Collaboration is critical. There are income tax issues, estate and gift tax issues. There are financial planning decisions that impact all aspects of taxation. There are insurance questions. Questions over the appropriate entities to create. Questions as to which bucket we should look to when paying certain expenses. This Article will examine in greater detail who the appropriate members of the team are that should have a seat at the table and compares this team of individual advisors to the highest level of collaboration in creating a Family Office. It will describe what a Family Office is, when is it needed and what are the key advantages over having individual unrelated advisors.

Assembling the Right Team of Advisors

In high-net-worth Estate Planning, the professionals that should be involved are the Estate Planning Tax Attorney, the CPA and the Financial Advisors. These are a must. And, in some cases, there should also be seated at the table a Life Insurance Specialist and maybe a Banker or Lender.

Understanding the Role of the CPA in Complex Entity Structures

Let me give a few examples where these different roles are needed, and different perspectives are warranted. In many high level, high net worth Estate Planning cases there will be numerous business entities like LLCs, S Corps, C Corps, etc. There may also be highly leveraged real estate. Transferring some of these entities into Irrevocable Trusts, or other entities could have severe income tax consequences. And entities like S Corps may lose their favorable income tax status if they are held by some of these entities or other trusts. We want the CPA at the table to address these questions.

Balancing Cost Basis and Estate Tax Reduction

Often times there is tension between “cost basis” in assets that will receive a stepped-up cost basis at death and the ability to reduce Estate Taxes. Selecting the appropriate assets to go into these various high-level Irrevocable Trusts will generally force you to choose between losing a stepped-up basis at death or eliminating Estate Taxes.

Coordinating Asset Buckets for Distributions and Cash Flow

When a client needs cash flow to buy groceries, there needs to be some collaboration and discussion as to which bucket of assets we look to first, and which buckets and boxes do we look to last. And what are the income tax consequences of these entities making distributions to the beneficiaries. The income tax issues involved with a Family Limited Partnership are some of the most complex sets of rules in the Federal Income Tax Code. Unfortunately for me, Federal Income Tax consequences of a Family Limited Partnership was the first class I took when getting my LLM from NYU. And worse yet, it was the first course I took. In my experience CPAs are much better at the income tax issues then Attorneys and Attorneys are much better at the Estate and Gift Tax issues. Thus, both need to be at the table.

The Critical Role of the Financial Advisor in Freeze Techniques

The Financial Advisor is a critical advisor as well. In high-net-worth Estate Planning, cash flow is extremely important. For example, in doing a “Freeze Technique” as discussed in other Articles and Videos, the client needs cash flow from a Green Box, to service the Installment Note in a Red Box. That’s what establishes the classic “Freeze”. The Red Box assets are frozen in value tied to the Note, and the Green Box assets appreciate in value. Remember, “once green, always green”. So, if a Promissory Note for $5 million is created, and it is amortized over a 20-year period with interest at 5%, the Green Box Trust needs cash flow to service those payments to the Red Box. To create this cash flow, we turn to the Financial Advisor to look to the make-up of the assets and how they are invested. Should we give up some growth potential to invest in more conservative income producing assets. Or should we stay in Capital Gains growth investments and liquidate some of them as needed to create cash flow and pay long term capital gain vs. ordinary income from the income producing assets. And, if we sell assets, which ones have the largest cost basis to result in the least amount of capital gain.

Strategic Use of Life Insurance in Estate Planning

Some clients like to “prepay the Estate Tax liability and create liquidity by buying Life Insurance. With these clients, we need an Insurance Professional at the table to help select the best suited policy. As a CLU myself, I am aware of all the different “bells and whistles” with life insurance. And it is much more complicated today than when I sold for Northwestern Mutual Life in the 1980s. Should the client get Term insurance or Cash Value Insurance. And where are we going to get the cash flow to pay the premiums. Will the cash flow come from other investments in the Trust, or will the cash flow come from the client in gifting each year into the Trust using a Crummey Withdrawal power. Or will the client need to sell assets and trigger capital gain to pay the premiums. And, what about “premium financing” type policies. We need a CLU or other knowledgeable life insurance professional.

Should Advisors Be Independent or United in a Family Office?

Now that we have identified who we want at the table during this design and planning phase of an Estate Plan, the next question is do we want all these advisors to be independent of each other, or do we want them closely connected and under the same roof of a “Family Office”. What are the pros and cons of a Family Office and when should it be considered. Let’s address the latter issue first. And we should also distinguish between a true Family Office and what is commonly called a “Multi Family Office”.

What is a Family Office and How Does It Work?

So, in its simplest terms, a Family Office is where all the advisors described above, or at least the first three that were mentioned, are all under the same roof and are employed by one singular company. A Family Office will structure a monthly fee for a particular client that will include the services of a Financial Advisor, a CPA and an Estate Planning Attorney. The amount of the fee will depend on the level of service that the client wants. The main advantage to a Family Office is that you have much better collaboration and a more predicable fee when all the advisors are well coordinated.

The Advantages and Challenges of a Family Office Model

Unfortunately, in some high net worth planning, there are two or more advisors that just don’t get along. Sometimes there is a “power struggle” as to who generated the ideas, who is the quarterback of the team or simply a difference in opinion as to which strategies should be employed. Sometimes there is simply a competition as to who is the smartest guy or gal in the room. And an argument can be made that the overall fees for a Family Office for all these services under one roof is less costly than having a collection of individual advisors billing separately. And, with separate advisors, sometimes one or more of them is only needed for certain things at certain times, yet they are all sitting around the table for every meeting, and all have “their meters running”.

Collaboration in a Family Office is also much simpler in that the people you want to talk to are right down the hall. You don’t have to trade countless emails back and forth just to set up a time to talk. You just walk down the hall and say, “let’s talk about Mr. and Mrs. Smith.”

When Should a Family Consider a Family Office?

So, the next issue is to discuss is when a Family Office is really needed. What level of net worth should a family have to consider the Family Office concept. How much wealth? Or what are the complicated assets? Obviously, there are different opinions on this issue, but my experience is that a true Family Office shouldn’t even be in the discussion unless the assets are north of $100 million. And some people would argue that you really need $150 million to $200 million. Most of my clients explore the Family Office concept when they are north of $150 million to $200 million. Certainly, when you are north of $200 million there should be a discussion. And maybe the discussion is to have a “Multi Family Office”, meaning that the Family Office serves 4 or 5 families. Certainly, in that $100 million range to the $200,000 million range this is better suited for a Multi Family Office.

Complex Asset Structures and the Need for a Family Office

To be a true single-Family Office, you probably should have assets north of $200 million and maybe even hold off until you get in the $300 million range. Some of the considerations should also be whether your assets are simple to manage or complex. For example, do you have $100 million in brokerage accounts, or do you have $100 million in 30 different LLCs holding different forms of investments, mineral rights, real estate, closely held businesses, etc. The more complicated the assets are, the stronger the need for a Family Office for lower values of net worth. The simpler the assets are, the more the argument is made that a Family Office may never be needed.

Accounting, Bookkeeping, and the Mini Family Office Approach

One of the biggest services of a Family Office is the day-to-day accounting and bookkeeping services that are needed. We have clients that may own two different professional sports teams, along with a series of 100 different LLCs holding assets in 10 different Trusts. Accounting for all of this is a full-time job. And keeping track of the values and the classes of assets in the different cross sections of Red Boxes and Green Boxes is very difficult. Most of these clients cannot keep up with that level of bookkeeping without having at least a “CFO” type of a person that is a high-level CPA. Thank goodness, there is now available to everyone the same Accounting Software that the big Family Offices are using. These clients want to create their own “mini version” of a Family Office by having this CFO type person keep track of all the Assets, and then having a reputable Estate Planning law firm like Dana Whiting Law on retainer to handle the legal issues. And, they will also have one or two independent Financial Advisors managing the cash and the stocks and the bonds. They may also have a CPA firm on retainer that can step in when heavy lifting is needed. Like any Family Office, or your own personal financial business, the first component to being organized is the accounting and bookkeeping needed. And this CFO type of person runs the Family Office software that is out there. And, depending on the size of the client, this CFO may have 3 or 4 families that he or she can take care of.

Customization Is Key in High-Net-Worth Estate Planning

Like most things at this higher level, there is no such thing as “one size fits all”. There is no such thing as “one Trust fits all.” Or “one strategy fits all.” At this higher level, this higher net worth, the individual needs and wants and goals and desires of the clients are much different. And are they concerned only about the kids and grandkids, or are they planning now for the great grandkids? We have clients that have provided for kids, grandkids and great grandkids. And one of the big issues for these larger net worth families is what they call “family governance”. What are the overall goals of the entire family? What will be their legacy? What charities do they want to serve? How do they educate kids and grandkids to handle wealth, without being spoiled rotten? An education component can be an important component of a Family Office.

I hope you can see the need for collaboration among professionals as we get into the higher net worth planning. And I hope you can see the different types and variations of providing for this collaboration. At one end is the independence of all advisors. At the other, is the Single-Family Office. And there is everything in between. This is another reason why you need competent Estate Planning lawyers who can advise you as to what other clients are doing and have done. That’s a real advantage of having more than 40 years of experience in this area. As we say in Arizona, “this is not my first rodeo”.

Let Dana Whiting Law Guide Your High-Net-Worth Estate Plan

At Dana Whiting Law, we understand the complexities of high-net-worth estate planning—and we know it takes more than just one expert. Our firm is here to be your trusted legal partner, working seamlessly with your full team of advisors or helping you build one. Whether you’re evaluating the need for a Family Office or simply looking to structure your estate plan with precision, we’re here to help. Contact us today to schedule a consultation and take the first step toward a more coordinated, tax-efficient legacy plan.