Managing your family legacy through a family office

As wealth grows, so do the challenges of planning for and managing it. For affluent families, wealth planning involves deep questions about legacy and shared values, as well as countless details and strategies to sustain wealth, invest it, transfer it efficiently and prepare loved ones for the responsibilities that come with inheritance. When the demands seem overwhelming, a family office may be the answer.

Staffed with experienced professionals, a family office can help establish a clear vision of what the family hopes to achieve, foster greater communication and sustain wealth across generations, says Jonathan Hommer, Head of Family Office Planning in the Planning Center of Excellence, Bank of America Private Bank. A wealth planning specialist, Hommer works closely with families and their staffs to ensure the family office is delivering the best planning practices and administering sophisticated wealth strategies in the most efficient manner. Here, Hommer describes the benefits and challenges of family offices and what it takes to make one work.

What is a family office, and what is its purpose?

In the simplest terms, a family office is a private company whose employees help manage a family’s assets and needs. Under that broad definition, the purposes are almost unlimited. Usually, the mission revolves around wealth planning to support the current and future needs of multiple generations and help families meet their philanthropic goals. That may require expertise in areas as diverse as trust and estate planning, investment management, accounting, and oversight of homes, private aircraſt or yachts. Depending on the needs and which services are provided in-house or by outside experts, the size of a family office can range from a handful of employees to a large group of specialized professional staff.

What prompts a family to start a family office?

A single event such as the sale of a business may leave a family with significant assets and liquidity but without the management support that the business used to provide. In other cases, a family may have a specific desire, such as gaining greater control over its investments. Sometimes, though, the need simply arises over time, when wealthy families sense that managing their affairs is becoming a full-time job. Multiple advisors may be giving different or even contradictory guidance to different family members. A family office can provide structure and clarity on how the family establishes priorities and makes decisions and how wealth is invested, managed, shared and ultimately transferred.

How can a family office help protect a family’s legacy?

Protecting a legacy requires efficient transfer of wealth and ensuring that new generations are ready for the responsibilities. Family offices work with wealth planning advisors in areas such as tax planning and family education. Tax planning uses trusts and other vehicles to protect assets, provide flexibility and maximize the amount that ultimately goes to family members or philanthropy. Estate planning strategies such as cascading grantor retained annuity trusts (GRATs) and sales to dynasty trusts are complex and require extensive documentation and monitoring. Having tax and estate experts on the family office staff or available through outside advisors can prevent these requirements from becoming a burden for the family.

The second, more personal function involves preparing younger family members for the responsibilities of wealth and helping to create a family culture that can sustain the family for generations. This in turn requires clear communication on money, wealth and values — subjects that many families find difficult to discuss. Oſten, grown children start receiving funds before being asked to take part in family decision-making. Ideally, wealth and responsibility go together. Family office experts can help create a plan that encourages that connection.

What are some ways to foster that family culture?

A first step might be for the staff to survey all family members to gauge how they feel about the current level of communication within the family and how well they understand the family’s mission and purpose. This can be eye-opening for senior generations, who may assume they’ve been communicating well when in fact a lot of information has not been understood as intended. As a remedy, the family office might formalize the communication process through family meetings and facilitated discussions. Eventually, the family may endow a trust to fund family meetings and other events aimed at sustaining the family culture.

The family office might also establish a process for onboarding younger family members when they’re in their late teens or twenties. They could be educated about the operations of the family office, its mission and assets, and the roles of staff and family members. Education includes helping them develop the skills they’ll need to one day lead the organization and family. We’ve found that younger family members, when engaged in this way, tend to be conscientious, thoughtful and eager to become a part of what their parents have built.

How does a family office typically manage investment strategies?

Wealthy families own many kinds of assets, from marketable securities and commercial real estate to private investments and alternative assets. Family office staff, oſten working with outside investment experts, play vital roles in developing a well-balanced investment policy across asset classes, overseeing investment advisors and monitoring performance and risk. Depending on their expertise and level of interest, family members may choose to manage some investments themselves, with staff providing administrative support.

For example, families with experience as business owners may use direct investments as part of their strategy. This involves investing in real estate or privately held businesses related to the family’s expertise and mission. Direct investing offers the potential for enhanced returns, without the management fees and carried interest that come with private equity. But it can also be complex, illiquid and risky. While Bank of America Private Bank generally doesn’t manage direct investments, we can help family offices analyze how these alternative investments can fit in a family’s overall portfolio.

What are some of the challenges of creating a family office?

Because no two families are exactly alike, each family office must serve unique purposes. With so many potential functions and services, it’s important to clarify a mission at the outset. What specific problems is the family office intended to solve, and will the benefits outweigh the costs? Hiring, motivating and retaining an engaged and skilled staff brings its own complexities. And every family office must deal with the growing challenge of data and information security to maintain privacy. Family and staff also need to figure out what the family office can realistically manage in-house and what functions ought to be outsourced. No matter how small, large or highly accomplished the staff may be, there are bound to be gaps that experienced consultants can fill.

How can Bank of America Private Bank help?

With more than 150 years of working with wealthy families, we have the resources and expertise to help family offices achieve their goals. Our 200 professionals work closely with family members and staff on everything from creating a mission statement and deciding how the family office will be organized to wealth and estate planning. Our aim is to ensure that the family office is executing at the highest level and to offer comprehensive, flexible support services that the family or family office can engage whenever they’re needed.