Making Sense of the Modern Family Office: Why Structure and Formalization Matter

More ultra-high-net-worth families are organizing their financial affairs through some version of a family office. But no two are alike. As the saying goes: if you’ve seen one family office, you’ve seen one family office.

A “family office” can range from a simple investment entity to a fully integrated enterprise managing everything from investments and tax to philanthropy, governance, and concierge services—whether handled in-house, outsourced, or a blend of both.

When a Family Becomes a Family Office

Families that have already engaged in multigenerational planning—using irrevocable trusts, LLCs, and other vehicles—often have the foundation of a family office, even if it isn’t formally structured as one. The natural next step for many is to formalize governance, clarify decision-making, and professionalize administration.

A Tax Motivation to Formalize

Within the last 10 years, certain court cases—most notably Lender Management and Hellman—have encouraged families to consider a more formal family office structure. Crucially, these cases appear to offer a roadmap for transforming certain family office expenses into fully deductible business expenses.

Typically, individuals cannot deduct investment-related costs as “trade or business” expenses. However, in the Lender Management case (and later suggested in Hellman), the Tax Court ruled that the family office’s activities could qualify as a business. Why? Because it provided investment and financial services to individuals (in the Lender case, to related family members) in exchange for compensation (profit or carried interests), effectively operating as an advisory business.

The court concluded that “selling one’s investment expertise to “others” is as much a business as selling one’s legal or medical expertise.” That recognition allowed the family’s office expenses to be treated as fully deductible “above-the-line” business expenses rather than disallowed personal investment costs.

What This Means for Families

While Lender Management and Hellman may have provided a path to more favorable tax treatment, they didn’t provide blanket approval. To qualify, a family office must be carefully structured, properly compensated, and professionally managed to demonstrate that it operates as a genuine business enterprise. With thoughtful design—supported by experienced tax, legal, and financial advisors—a family can both strengthen its governance and achieve potential tax efficiencies.

Our Wealth Planning team can help you navigate whether a formal family office structure makes sense for your family’s unique situation.