The family office has become wealthy families’ preferred vehicle to manage, preserve and protect wealth for future generations. The meaning of a family office varies wildly depending on the family — a trait that demonstrates its inherent flexibility to serve family needs. At its most generic, a family office manages and administers a family’s affairs. That said, almost all family offices perform wealth management and investment functions on behalf of the family.
It is not surprising that non-U.S. families typically establish their family office in the family’s home jurisdiction. However, family offices are becoming more international as families grow and interact globally. As such, the trend is to build family offices that operate across borders — leveraging diverse expertise and investment opportunities. In addition, jurisdictional diversification can provide protection for families whose home jurisdiction has an uncertain economic or political climate.
For many non-U.S. families, the United States has become an ideal jurisdiction for a family office branch or, in some cases, the complete migration of the family office. These families often have material ongoing contacts with the United States or desire a framework to develop those contacts in the future. United States contacts that often lead a global family to establish a U.S. family office include:
- ownership of U.S. business interests or substantial U.S. investments;
- family members in the U.S., whether for college or part-time residency, or family members with U.S. citizenship or so-called “green cards”; and
- future plans for one or more family members to immigrate to the U.S.
Other families wish to develop a U.S. presence to serve family members as they interact with the United States. There are a myriad of factors motivating these families, such as the following:
- U.S. Base for Direct Investing Activities — Many families desire a U.S. family office presence to execute and support direct investment activities in the U.S., Latin America and beyond, capitalizing on a U.S.-fixed base and the stability of the U.S. regulatory and financial system. These families draw upon a large pool of world-class professionals (such as financial advisers, lawyers, accountants and trustees) for family office staffing and expertise, optimizing deal flow and facilitating oversight over U.S. and Latin American investments.
- Flexibility — Now, more than ever, family structures must be flexible to address tomorrow’s changes. More and more families have utilized U.S. structures, including a family office component, to take advantage of their adaptability and enhance the family’s ability to address global legal and political developments.
- U.S. Regulatory and Legal Stability — The “rule of law” governs and custom dictates adherence to national, state and local laws. Incidence of corruption is low. When dealing with non-U.S. jurisdictions, the U.S. federal government has substantial leverage to protect the interests of U.S. business institutions, including family offices.
- Privacy and Confidentiality — A U.S. family office can be structured to foster the family’s privacy and confidentiality concerns, keeping investment management within the family through creating their own fiduciaries and investment managers. In addition, the U.S. is an excellent jurisdiction for maintaining financial privacy — an issue of paramount concern for families facing security threats (including kidnapping and other threats of ransom) in their home jurisdictions due to their wealth. Some of these families doubt their home countries’ ability to secure family financial information reported under regimes such as the Organisation for Economic Co-operation and Development’s Common Reporting Standard (CRS), currently operational in 55 countries (with more than 100 countries operating under CRS in 2018). Financial privacy is deeply rooted in U.S. law and public conscience.
- Governance and Management — Families utilizing U.S. vehicles in their structures have available state-of-the-art family management and governance techniques afforded by jurisdictions such as Delaware and Florida. These techniques can be incorporated into a U.S. family office structure, allowing a family to implement family governance mechanisms that evolve over time and facilitate the smooth transfer of family decision-making to subsequent generations.
- U.S. Immigration Strategy — Despite heated political discourse related to undocumented immigration, many channels to legal U.S. immigration exist for wealthy non-U.S. families (including the EB-5 program providing for investment-based permanent residence, whose minimum investment criteria — generally $500,000 or $1 Million — may increase soon), and the Trump administration has promised immigration reform to make the process more streamlined and open than in the past. A U.S. family office can be established in conjunction with a U.S. immigration strategy, ranging from a so-called “green card” (which, while permitting permanent U.S. residence, subjects an individual to worldwide U.S. income taxation), to other U.S. visa options that permit longer-term U.S. stays without subjecting the individual to worldwide U.S. income taxation. A U.S. immigration strategy can be combined with other passport options in the E.U. and elsewhere to provide a family with maximum flexibility in travel and residency.
Advance U.S. tax planning for any non-U.S. family contemplating a U.S. family office branch (along with planning for U.S. investments in general) is imperative. While a U.S. family office may increase risk of U.S. tax exposure, such exposure can be substantially mitigated, or in most cases, wholly eliminated with proper U.S. tax advice. In short, by utilizing the right structural techniques, a U.S. family office branch need not expose family members to worldwide U.S. taxation and, indeed, any exposure to the U.S. income and transfer tax regime can be minimized.
Any questions about the tax, operational, securities, privacy and other matters related to a U.S. family office base may be directed to the members of McGuireWoods’ global private client team listed below.