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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

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 guest blogger is Stephen Paul, CPA, a staff accountant at WithumSmith+Brown. Passport-Shot

Ready or not, we’ll be flipping the calendar before you know it.  In between holiday shopping and sipping eggnog by the fire, take time this season to ponder your grand plans in life, and how you’re going to fund them.  Along with the customary year-end tax planning considerations (see the previous post in this blog, and www.withum.com), the coming New Year provides an opportunity to examine your financial picture holistically.  Review the prior year, solidify your goals for the future, and move confidently towards your unique definition of financial success.

Whether you work with a financial advisor or you’re a do-it-yourself guru, here’s a list of critical documents we should all have in place and review on a regular basis.

Personal balance sheet – a complete list of all your assets, liabilities, and net worth.

Financial documents inventory – don’t lose track of what’s out there.  Include:

  • Insurance policies
  • Custodial accounts for children
    • UTMAs
    • College 529 Plans and Education Savings Accounts (ESAs)
  • Estate planning documents
    • Will
    • Financial Power of Attorney (POA)
    • Medical directive
  • Family education – make sure your loved ones know who to contact in times of need.
    • Executors and trustees named in your estate planning documents
    • Attorney, accountant, financial advisor, insurance broker
    • Contact information for each and location of documents

Investment policy statement (IPS) – widely used by financial advisors, even DIY folks should invest time in writing an IPS for themselves.  You’ll be impressed with the results when you hold yourself accountable to your goals.  Include:

  • Clear and specific financial goals – don’t just say “save for retirement and down payment on a vacation home”; rather, “save $20k/year for the next 20 years for retirement and $5k/year for 8 years for a down payment on a vacation home.”
  • Outline what investments are appropriate to meet your stated goals; know your risk tolerance and what you’re comfortable investing in.
  • Define the target risk and return of your portfolio
  • Set a benchmark to compare to your portfolio performance

Investment performance analysis of the past year – how are you doing compared to your goals and your benchmark?

Goals-based cash flow projections – are you going to reach your goals?  Projections can help guide you.

Personal budget – your behavior in the present will make the most significant impact on your future goals.

While this list might seem daunting, once you invest the time and energy to compile it you’ll spend much less time in the future reviewing and updating the documents.  You’ll also be giving yourself a greater chance of reaching your goals.  And that, my friend, is the best holiday gift you could receive.

Author:  Stephen Paul, CPA

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Sometimes the retail solution is the best solution.  Take tax incentives for higher education.  We can argue until the cows come home as to who actually benefits from such incentives – the taxpayer or the institution.  Nevertheless, we can also agree that the taxpayer is harmed if s/he does not take advantage of them.  But. most of the incentives are what I call “tax gimmee’s” – they produce a nice, after-the-fact perk but do little to incentivize saving for college.  They are not planning opportunities per se; they are rewards for meeting certain income and educational criteria.  Into that bucket I toss the American Opportunity credit (up to $2,500), the Lifetime Learning credit (up to $2,000) and the student loan interest deduction (up to $2,500).  So, if you qualify, take ‘em, but don’t call ‘em planning opportunities.  Nobody has ever financed college based on these gimmee’s.CollegeFund

Now, the 529 plan is a completely different story and is the “retail” solution to which I alluded above.  529 plans, creatively named after the Internal Revenue Code section that spawned them, come in a number of different flavors.  “Savings plans” are like 401(k) plans (another creatively named technique) in that the grantor socks away a slug of cash, invests it, and ends up with a market return.  “Prepaid tuition plans,” on the other hand, are like pension plans – you put in a certain amount of cash and at the end of the cycle, voila, the tuition to a particular institution is locked in.  The common denominator is that the investment is tax sheltered during the build-up period and is withdrawn tax-free if used to pay qualified higher education expenses.  You can comparatively examine the various plans in the 529 universe at www.savingforcollege.com.

The reason I am so high on 529 plans?  They are for everyone – there is no income ceiling that limits participation.  And, while there is a cap as to the amount you can contribute, that cap is pretty high.  The grantor can set up a fund to benefit whomever s/he pleases, and within limits, can change the beneficiary designation without any adverse tax impact at any time.  Because contributions to 529 plans are considered present interest gifts, they qualify for the annual gift tax exclusion to the extent of $14,000 per beneficiary[1].  But wait, there’s more – this is the “gracious grandparent” technique at work here – grantors can front end load their gifts by funding up to five years’ worth of annual exclusions provided that they do not use the annual exclusion for other gifts during that time period.  So, assuming that they split the gift, grandma and grandpa can make a gift tax-free transfer of $140,000 today into a tax free 529 plan for that newborn angel.  Multiply that by “x” number of grandchildren and you can see the power of the “gracious grandparent” technique for both college savings and estate planning purposes.

By the way, you don’t have to be a grandparent to employ this technique.  Aunts, uncles, even parents – it is powerful stuff.

I have only scratched the surface here and there are many caveats and nuances.  However, suffice it to say, the 529 plan should be a consideration in every family’s wealth planning.

[1] Or $28,000 if a married couple elects to split gifts.

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This week’s guest blogger is Tom Farrell, an investment advisor with PWM Advisory Group, LLC, an independent registered investment advisor and joint venture of Pinnacle Associates Ltd. and WithumSmith+Brown.TFarrell

 

Does your wealth management plan connect all your dots?

As a child, playing connect-the-dots helped bring an image together that, at first, seemed scattered and perhaps even chaotic.  The same can be said when constructing a comprehensive wealth management plan.  Often times it is imperative to incorporate a particular area of life that may not seem so obvious when identifying goals and objectives.  For example, the live-in nanny who’s here for the summer helping with the kids at the beach house increases the risk of liability.  Protecting the wealth that’s been created is a crucial piece of an effective wealth management plan.  The “dot” in this example becomes an updated umbrella liability policy.

Goals: some are clear and others are complicated

It’s important to begin to define some of the more complicated goals so they can be combined with traditional topics like retirement age, vacation home and gifts to charity.  Many families deal with difficult relationships with the next generation, their spouses or the sale of a business.  It’s analogous to fixed and variable expenses in budgeting.  A sound wealth plan will consider: when the burden of funding lifestyle expenses will shift from the business or the employer to the portfolio; whether the business sells in two years or five; if the adult children will be treated equally or fairly when it comes to gifts or distributions; even if the charitable goal can be fully funded now versus a more flexible annual approach.  Testing for these and other variables allows for a more customized wealth plan.

Needs versus wants/wishes

A good wealth plan will test for funding the goals that are essential to financial independence and peace of mind.  This is where the planning should begin not end.  Once the crucial goals have been built into the plan they help to serve as the foundation from which further testing can be applied to the less integral “what ifs” assumptions (think vacation home, funding the wedding(s), college funding, and philanthropic endeavors).

Finally, it is imperative to understand how the volatility of investment returns, state/federal income taxes and inflation impact the results of the wealth plan.  A wealth plan can often include decades of time until a future date of death and much can and will change as time passes.  It is recommended to err on the side of conservatism when creating the plan and incorporate lower projected rates of returns, a long-term average rate of inflation and higher than expected federal and state income taxes.  This approach helps to reduce the probability of misleading or “rosy” outcomes in any given plan.  In the end a great wealth plan helps to provide confidence that as many of the relevant inputs as possible have been considered and all the “dots” have been connected.

Important Disclosure: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group. [“PWM”] ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from PWM. Please remember to contact PWM in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. PWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the PWM current written disclosure statement discussing our advisory services and fees is available for review upon request.

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You are reading (and I hope you will continue reading) the first post in Withum’s new blog series, Private Wealth Matter$.  You may be familiar with its predecessor, Charitable Nation, a blog more focused on all things charitable.  We decided to expand our coverage to many more topics of interest to those with wealth because…

Private Wealth Matters!

Many years ago, a client’s son got married.  Back then, his family was on the Forbes 400 list but lived a relatively modest lifestyle.  The children knew they were rich but had no idea how rich, although one would think the Forbes 400 list would have been a dead giveaway.   Anyway, prior to the wedding, Mom and Pop wanted to educate Son and future Daughter-in-Law about their wealth.  They weren’t concerned about the risk of a greedy Daughter-in-Law getting ideas because the family had a long history of tying up their money in trust.  The trusts were of the “sprinkling” variety with distributions at the discretion of the trustee(s), so it made sense for Son and Daughter-in-Law to understand and plan accordingly.  I will never forget both kids’ eyes getting as wide as saucers as they saw the assets, sorry, income available to them because…

Private Wealth Matters!

At the other extreme, I recall a family office consultant telling a story about a billionaire client who essentially had no use for his children or succession of ex-wives.  He hadn’t done any financial/tax/estate planning and did not intend to because he really didn’t care.  In fact, he wanted his family to end up with as little as possible.  I guess this is the exception that proves the rule because…

Private Wealth Matters!

Private wealth can help and it can hurt.  Some go to inordinate lengths to keep as much of it out of Uncle Sam’s hands as possible.  Some want to give it all away.  There are those like Warren Buffett who once famously said that he wants to give his kids enough “so, that they could feel that they could do anything, but not so much that they could do nothing.”  There is no boiler plate plan that will enable you to enjoy your lifetime wealth, minimize its taxation, support your favorite charities and enrich future generations.  There are, however, building blocks that can be efficiently integrated in ways that make sense for you.  Exploring some of these building blocks is the purpose of this blog.  Over the coming weeks, we will bring you thoughts from experts internal to Withum as well as external money managers, attorneys and other specialists.  We’ll keep it short; we’ll keep it fun.  We encourage you to participate in the dialogue by posting comments and calling us if you need more in-depth assistance.  We do all this because…

Private Wealth Matters!

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Affluenza – n  Also called:  sudden-wealth syndrome – the guilt or lack of motivation experienced by people who have made or inherited large amounts of money. 

And collectively, the other 99% sighs and says “get over it!”  Money may be the root of all evil but we all want more of it.  How else do you explain the explosion in state lotteries and legalized gambling or the obsessive drive to get into the “best schools?”  (not just college or grad school, but nursery, grade and high school as well!) 

“I’ve been rich and I’ve been poor.  Believe me, rich is better.” – Mae West

“Hey, all you need is a dollar and a dream!” – New York State Lottery

But we do know and can grudgingly accept the fact that the acquisition of sudden wealth, earned or inherited, can be devastating to the acquirer and his/her family.  Consider the self destruction of certain entertainers, athletes, and scions of billionaire families that we read about all too often.  While affluenza is an affliction many of us wouldn’t mind having, it actually has the potential to ruin lives and families. 

Apparently, the ultra-rich among us may be taking heed.  According to the 2012 U.S. Trust Insights on Wealth and Worth™, some 45% of baby-boomer-age high and ultra-high net worth Americans feel that it is not important to leave an inheritance for their children.  Hmmm, maybe affluenza is a disease that will take care of itself!  But then again, probably not.  Old habits tend to die hard, and estate planning – and the leaving of a financial legacy – have been societal habits for hundreds of years. 

So, what can we do about this problem?  Most high net worth individuals (HNWI’s) are very concerned about their estate planning.  In fact, I would venture to say that the majority of HNWI’s are more concerned and interested in estate and gift planning than income tax planning.  The disposition of their financial legacy is a big deal to them, whether it is getting money to the kids and grandkids so they don’t have to sweat and struggle, or endowing a chair or naming a building at the old alma mater.  And here is where traditional estate planning both excels and fails – it excels by concerning itself with the tax efficient transfer of assets to beneficiaries and charities but it fails by doing nothing to assist the families in psychologically and emotionally preparing for the eventual transfer of wealth.  Perhaps this is why family wealth typically does not last very long – “From shirtsleeves to shirtsleeves in three generations.”   

I am reading a very interesting book right now called Beating the Midas Cur$e by Perry Cochell and Rodney Zeeb.  While the book is several years old and the statistics may have shifted a bit due to the events that have occurred on Wall Street in the last four years, the premise is still rock solid – we need to rethink our approach to planning in a way that puts family before fortune and, by so doing, greatly increase the chance that both will survive and thrive for generations.  The authors have developed The Heritage Process™ which is their specific consultative approach to helping clients determine and control their true legacy while interweaving it with traditional estate planning.  It sounds tough, but it is actually not rocket science.  It is a process that focuses on values and vision and, ideally, starts early, when kids are still in the cradle.  It is a process that does not assume that children or grandchildren will automatically soak up the lessons learned through the school of hard knocks by the matriarchs and patriarchs of the family.  It is a process that explicitly acknowledges that money management, philanthropy, and social responsibility must be taught and reinforced throughout life.  It is a process that, quite frankly, scares the heck out of traditional planners who would rather shy away from the “soft” stuff that deals with feelings and emotions and focus instead like a laser on the numbers.  But as you can see, they do so at their peril.   

Warren Buffet, the Oracle of Omaha once famously said:  “…a very rich person should leave his kids enough to do anything but not enough to do nothing.”  Determining that proper mix – the right amount financial inheritance offset by philanthropy and coupled with the appropriate values and visions of the family – that is the challenge.

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