Matz and Severson Quoted Discussing Family Office Tax Strategy With CNBC

Wealthy families are revisiting the “Lender” model, a tax strategy that can allow family offices operating as a trade or business to deduct investment expenses. The approach has received renewed attention following the permanent suspension of miscellaneous itemized deductions, but qualifying depends on each family office’s specific facts and circumstances.

Kevin said families do not necessarily need to replicate the Lender family office, but the Tax Court ruling provides useful guidance. He noted that Lender Management served four generations and dozens of geographically dispersed family members, some of whom barely knew one another, helping demonstrate that the office operated at arm’s length as an investment-management business rather than simply managing shared family wealth.

Kevin also highlighted Lender Management’s compensation structure, under which the office received profits interests in each of the family’s investment LLCs.

“That means if you don’t generate the benchmarks, you do not get compensated,” he said. “There is true entrepreneurial risk.”

Kevin said a flat management fee for managing mostly marketable securities likely would not have passed muster with the court. He added that families can minimize the risk of an audit by closely following the circumstances of the Lender family office and supplementing it by structuring the family office entity that is to receive the profits interest as a C corporation.

Sarah added that the model can require families to establish stronger qualifications for family members working in the office.

“People outside the Lender model have a crutch because they have ostensibly greater freedom when they’re setting up their family office. It just invites an apathy that you can’t have in an operating Lender model because you know you’re being supervised,” she said.

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