Archive for February, 2016

This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche. Raymond Russolillo

I have been in and around family offices for over 30 years.  Frankly, I am still not sure what they are.

At best, the term “family office” is amorphous.   So is its history.  No one knows exactly when or how, but in Europe, the first family offices started in the 15th and 16th centuries just after the Crusades with land ownership being the main store of value being managed.  By contrast, the original U.S. family offices were created by wealthy merchants in the 19th century who hired trusted advisors to oversee their wealth and, by extension, their families while they traveled.  The concept grew and by the early 20th century families like Rockefeller, Phipps, and Pitcairn started their own offices to manage the family fortune for generations to come.  Today, many offices are started by those in technology and finance.  The fact is, then as now, no two offices are alike.

Since I like to simplify, I like to think of family offices as existing to take care of the “business of the family” rather than the “family business.”  It is a subtle, yet crucial difference.family office

In its simplest and most comprehensive sense, a family office is an organization or group of organizations which provide planning, compliance, and administrative services to one or more generations of a family.  These services are designed to preserve, enhance, and grow the already attained wealth of the family.  Importantly, the family office is not an operating company that creates wealth; it is a vehicle to manage and administer family wealth for current and future generations.  To the extent that a family office is involved with managing money for its clients, certain registration and compliance rules apply; these are beyond the scope of today’s discussion.

Ok, so I guess I DO know what a family office is!

These days, most family offices are started after the liquidation of a family operating business resulting in a large infusion of liquid capital to the family unit.  The patriarch/matriarch is often not as interested in “running the money” as they were in “running the family business” and the hiring of outside advisors and delegation of control often occurs.

There are two basic types of family offices, the single-family office (SFO’s) and the multi-family office (MFO’s).  Generally speaking, SFO’s are not economically viable unless there is a truly substantial amount of wealth, say $100 million or more.  As in days of yore, these offices come in a wide variety of flavors and can be as simple as a single employee organizing the multiple members of the family to full-fledged enterprises with a CEO, CIO, accountants, bookkeepers, and other professionals on staff at the beck and call of the family members.  MFO’s serve more than one family and may be private enterprises, combined to share infrastructure costs or may be public, commercial vendors organized around the wealth management model.  We tend to think of MFO’s being housed in private banks and money management firms.

A third type of family office is actually a variation on the theme of the MFO.  It is what I like to call the virtual family office (VFO).  In a VFO, independent high end service providers such as money managers, accountants, attorneys and bankers join forces to form teams to act as family offices without the family having to make the substantial investment required of an SFO.  The virtual family office also has an advantage over a traditional MFO in that the services are not limited to the offerings on the menu of the MFO.

Family offices can also be divided into three classes, with overlap of course, as follows:

  • Class A – Family Office Companies
    • Provide comprehensive financial oversight and estate management
    • Often charge a flat monthly fee
    • Advice is objective; report monthly to clients
  • Class B – Financial Services offered by lawyers, CPA’s and banks
    • Provide investment advice for a fee which may or may not be free from conflicts of interest
    • Can offer products and services outside the normal scope of a family office
    • Do not generally directly manage or administer illiquid assets in an estate.
  • Class C – Basic Estate Services
    • Monitors the estate and reports irregularities to the family or trustee
    • Provides basic administrative services such as bookkeeping and mail sorting
    • Generally run directly by the family

Once the province of the mega-wealthy, the family office has morphed into a concept from which a much wider group of high net worth families can benefit.  Traditional accounting, legal, and investment management relationships have often evolved to include related and much needed services that go far beyond the scope of the traditional relationship.  As one’s family wealth grows, so does the need for an integrated and comprehensive approach to managing the “business of the family.”

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This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche. Raymond Russolillo

A number of years ago, when I was employed as a manager at another accounting firm, I worked for a partner who used to say: “The dumbest thing a rich person can do is buy an airplane!”  He was convinced that, for all but those at the tippy-tippy top of the income pyramid, the 1% of the 1%, if you will, an airplane would be a waste of money.  And, back then he may have been right.

Of course, that was before 9/11 turned commercial flying into a daily nightmare whereby full-fare paying first and business class travelers (as well as bargain basement, standby student joyriders) are presumed potential terrorists and have to partially disrobe and unpack to prove otherwise.  What was a barely tolerable experience before 9/11 is now basically unbearable.

It was also before the “1%” added a few more zero’s to its average wealth.  Today’s wealthy are very wealthy and, while cost is always important, convenience and quality of experience is generally far more important.   Taking the hassle and the relative cost into consideration and suddenly that private plane doesn’t seem so expensive.

Consider this – Commercial airlines fly to about 550 airports in this country; general aviation has almost 10 times that number at its disposal!  You’re the boss in your own private plane, not the petulant overworked, underpaid flight attendant.  And best of all, you travel on your own schedule, without commercial aviation’s strip search and shoe removal rituals.  It does sound good.

Of course there is a huge, huge difference between the Cessna 150 that my dad used to own, fly and maintain himself, and the eleven jets (including a Boeing 707) that John Travolta owjohn travoltans.  Like everything else in life, you can drive a Hyundai or a Ferrari and they will both get you there but one is just a car and the other is…..A CAR!
So, just in case you are thinking about starting your own personal airline anytime soon, here are a few practical things to consider.  And, of course, if you do decide to take the plunge, please, please, please do that proverbial deep dive to quantify and qualify your potential purchase.

  • Why are you buying a plane?  Is it strictly for personal use or is there a business component?  If there is a business component, how much of one is there?  Can costs be shared in an efficient and equitable manner?
  • If business usage is a possibility, will it be “private” business usage or “public” business usage?  In other words, will the primary use be personal, subjecting the plane to the more relaxed Federal Aviation Regulations (FAR) Part 91 or will the primary use be that of a common carrier, subjecting the plane, its maintenance schedule and pilot competence and training to the more stringent rules of Part 135?  
  • How are you going to manage the risk?  What form of ownership works best – corporate, LLC?  If you will be sharing ownership, how will that be structured?  (Hint, hint – it will impact your insurance premiums.)  And, of course it is a given that you will need to use a specialty insurer to properly underwrite the risk.
  • How important is it for you to have an airplane standing by at all times to shuttle you wherever you have to go?  Remember, it’s not just the cost of the machine; it’s the people on your payroll who have to fly the darn thing!  But for the control freak, ownership really does have its privileges.
  • Will a fractional ownership arrangement (i.e., NetJets) provide what you need at a fraction of the cost?  Sometimes, a “timeshare” is ideal – lots of flexibility with little of the headaches.
  • What taxes will apply?  Oh boy, what a minefield this one is!
    • Depending on usage there may be a Federal transportation Excise Tax (FET).  Of course, the IRS and the FAA don’t necessarily agree on what constitutes “commercial usage” so you may be in for some differing interpretations.
    • State sales and use tax comes into play. Most states impose a sales tax on the purchase and delivery of an aircraft within their state, and nearly all have a similar tax on the use of the aircraft within their state.  A couple of years ago, a client insisted that he did not owe the State of New Jersey any use tax even though he clearly purchased, took delivery, and housed the plane in the State!  Luckily for us, he is no longer a client…..
    • There are rules on imputed income for the personal use of a business aircraft so, if a plane is held mainly for business usage, be prepared for a tax bite when the usage is actually personal.
    • There are rules concerning depreciation and allowable losses and material participation, basically determining what is deductible and when. Not particularly clear.    What is clear is the need to determine up front why and how you own and operate the aircraft in order to determine the tax impact.  Comprehensive assessment up front coupled with detailed records on the back end is critical to optimizing the tax bite.

So, if you end up deciding that it is indeed worth the hassle and you go for the gold (Donald Trump’s private 757 has gold plated seat recline buttons, safety belt hardware, power outlet covers, faucet handles and sink basins, for crying out loud!) please invite me over for a little spin.  Somewhere in the Caribbean is really nice this time of year!

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This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche.

In an earlier post we described an interesting charitable technique known as thRaymond Russolilloe “conservation easement.”  In a nutshell, this technique allows you to swap some (permanent) flexibility with respect to your property for a healthy charitable deduction.  It is designed to encourage taxpayers to preserve open space for conservation or recreation purposes and to protect certain historic structures.   I encourage you to read the prior post for more details.  We think it is a great technique because, as we said then and still maintain now, it is the very essence of having your cake and eating it, too.

But, as in all things tax, you have to make sure you dot your I’s and cross your T’s.  A recently decided Tax Court case (David R. Gemplerle, et ux. v. Commissioner, TC Memo 2016-1) underscores the tax truism that form prevails over substance, especially in cases like this.

The Gemperle’s owned and lived in an historic home.  In 2007, they granted a facade easement on the property to the Landmarks Preservation Council of Illinois.  The Council guided them through the process, including the hiring of an appraiser who subsequently determined the value of the easement to be $108,000 which the taxpayers then claimed on their 2007 tax return.  On later examination, the IRS disallowed the deduction for the simple reason that the taxpayers did not attach a copy of the appraisal to the return as filed nor did they fully complete Form 8283, Noncash Charitable Contributions.  The Tax Court agreed with the IRS position, basically eliminating the deduction and, on top of it all, assessing  a 20% accuracy related penalty and a 40% valuation penalty.

In court, the IRS argued five points:  (1) the absence of a “qualified” appraisal; (2) the existence of some technical deficiencies with respect to the facade easement itself; (3) the failure of the taxpayers to include a copy of the appraisal with the return; (4) the failure of the taxpayers to attach an appraisal summary as required by regulations and; (5) the ultimate failure of the taxpayers to prove that the decrease in value was indeed $108,000.  The Tax Court stripped the issue down to its simplest and harshest essence – they threw out the taxpayer’s case because of the taxpayers’ failure to attach a copy of the appraisal to the tax return.  Because they were relying on this simple test of fact (was an appraisal attached? – No) they did not even need to consider any of the IRS’ other points.

We can argue this heavy handed decision on the part of the Court, but the moral of the story should be clear to taxpayers and practitioners alike – if the rules say to attach certain documentation to a return, do it!  Particularly in the area of valuation, form will often beat out substance.

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