EP-129 THE FAMILY OFFICE Q&A with DENTONS' EDWARD MARSHALL

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The FAMILY OFFICE – a term that is surrounded by mystique.

It conjures notions of massive wealth, mahogany infused offices, private jets and money that has reached escape velocity. When one probes deeper, it connotes secrecy, exotic opportunities and risks, mixed with rigid control and discretion.

But what is the reality behind the term “family office”? At what level of wealth do families bring it all in house? What functions do they actually perform? How much do they cost?

For families that are intrigued, what questions should they ask before going down that process and what should they focus on?

We’re going to speak with EDWARD MARSHALL, Head of the Global Family Office at Dentons, the international law firm. Ed has deep experience in the space and is a terrific starting point for families looking to engage the process of developing their own structure.

Ed and his white papers and research can be found at DENTONS’ site here: ED MARSHALL and his twitter account is here: ED MARSHALL TWITTER. A link is here for his informative book (with Bill Woodson): FAMILY OFFICES: A COMPREHENSIVE GUIDE FOR ADVISORS, PRACTITIONERS, AND STUDENTS

Here are some of the areas we hit on:

When a client comes to you looking for a family office, what problems are they trying to solve?
What is your process for helping them define what they need?
Why not outsource everything?
How do you make this a digestible process?
Build, Buy, or Partner?
Cost
Talent
Confidentiality
Regulation
Scope Creep
The Rule of 3:
- It’s could take 3 years to build
- It could costs $3 Million
- You will probably want to shut it down 3 times before it’s up and running

Below is a brief summary of the question and answer process from Dentons to help families get their bearings around the family office process:

Focus areas

Getting started

What experience do you have working with family offices and family businesses?
Is your experience local, national or global?
What are the legal services that you typically provide to family offices that look like ours?
Does your experience with different family offices provide you with best practices that you can share with us?
What are the key legal issues to consider before, during and after a liquidity event?
Are all of your legal services billed hourly or can you deliver work on a flat-fee-per-project basis?
How would you build a team to handle the legal and non-legal matters relating to my family office?
Do you (or your firm) have access to a network of family office general counsels?
Are the business entities currently affiliated with our family office optimally structured across all areas that we should consider, such as income tax, estate tax, securities regulation, privacy, etc.?
What legal considerations and potential pitfalls exist with respect to embedded family offices (i.e., where employees of the family business perform the same function as a single-family office)?
If members of the family are investing together and/or separately, what legal structuring should we consider?
Would our family office benefit from a holding-company structure? Should one or more trusts own the family office legal entity? What is a family office management company? Should we consider using a holding company for our investments?
What are the advantages and disadvantages of using a family limited liability company (FLLC) or a family limited partnership (FLP) in our family office or family business?
How can we exercise optimal control of a family office or family business through the use of legal entities and strategies?
How can we build governance strategies into our family office to ensure alignment of family interests, values, goals and succession plans?
What is the regulatory environment in the jurisdiction where our family office will be located? If the family office provides services to family members who are located in multiple jurisdictions, does that raise any regulatory issues? What are the local jurisdiction requirements for advisors to the family office? What would be the best jurisdiction for all concerned?
Have we titled all assets owned by the family effectively and efficiently?
What are the legal issues to consider when (a) outsourcing or (b) bringing family office services in-house?
What shareholder and operating agreements should we create to support the family office operations? How will such agreements define the relationship between the family office and related entities?
In what jurisdiction should we form the family office, and why?

General Investing

If we are considering direct investment strategies, what specialized entities should we create and why? What are the legal considerations if we participate in club deals with other family offices?
Can you provide legal and non-legal due diligence prior to an acquisition or disposition?
How can we properly structure profits interest structures?
What are the decision points around creating special purpose vehicles (SPVs) for individual investments? Should the SPVs be owned by a trust or a holding company, and why?
How do we evaluate all of our investment activities to ensure we are following applicable securities laws?
Based on our current and/or planned activities, does the family need to register or make other filings with relevant securities regulators (e.g., in the US, the Securities and Exchange Commission (SEC) or in Singapore, the Monetary Authority of Singapore (MAS))?
What are the legal considerations to insourcing rather than outsourcing our investing activities?
If our SFO wants to transition to an MFO or RIA (registered investment advisor) model, what are the legal and non-legal considerations to keep in mind?
What legal considerations are there for family offices that invest in cryptocurrency or blockchain-related assets (e.g., NFTs)?
How do we properly structure cross-border investments? What do we do if we have family members investing together and they have different citizenships and/or places of residence?
How can we conduct a red-flag review of illiquid investments (e.g., private equity, hedge funds, direct investments, etc.)?
How can we use investment policy statements (IPSs) to help guide and interact with the family’s investment advisors (in-house or outsourced)?
If we invest successfully, does the family office team get compensated? How are such arrangements designed to align the family office team with the family?
What securities regulations should one be mindful of when considering a family office?

Investing and owning real estate

What is your shared family capital vision?
What structuring considerations are there with respect to personal real estate owned by individual family members?
What structuring considerations are there with respect to real estate owned by the family business or the family office?
What are the structuring considerations if the family office wants to invest in real estate, or to finance (or refinance) its existing real estate investments? What if only some members of a family want to invest or participate in a real estate financing?
What special considerations exist for specialty real estate asset classes, such as multi-family housing, hotels and hospitality assets?

Venture capital and private equity

Should we have a standard form of side letter ready to provide to the manager of any fund into which we are investing?
How do we ensure that our interests and those of other investors are aligned with those of the fund manager?
Do we need any specific reports prepared for our investment e.g., on the ESG status of underlying investments made by the fund?
How much legal due diligence should we undertake as an investor or co-investor in an early-stage investment?
What are the risks associated with SAFEs (simple agreements for future equity) and similar convertible instruments?
Which warranties should we give and which should we avoid when making direct investments?
What minimum rights should we seek to negotiate as a minority investor, and why?
How can we take advantage of double taxation treaties when structuring our investments?
How does one mitigate one’s risks when serving on the board of a portfolio company? How can we use insurance to address these risks?
How do our rights differ when investing in a club deal as opposed to a fund?
What co-investment and other rights should we negotiate when investing into a fund?
What are the pros and cons of investing in secondaries?
Where are the legal risks of paying finders fees for deals?
What are registration rights and why do we need them?

The Lender Management strategy (US-based family offices)

What are the facts and circumstances of the 2017 case of Lender Management, LLC v. Commissioner of Internal Revenue, and are they relevant to my family office?
What is the difference between Internal Revenue Code Sections 212 and 162, and is this relevant to my family office?
What are the factual differences between the Lender case and Hellmann v. Commissioner of Internal Revenue, and are they relevant to my family office?
If my family office is organized in a Lender Management-type fashion, do we need to or can we manage investments for non-related other families?

Taxes

Have we optimized our family office entities and investment strategies to minimize adverse tax consequences?
How should we best interface with the family office’s accounting advisors to optimize tax planning and compliance?
In preparing for an audit, what steps should we take to ensure our family office is in compliance with all applicable laws?

Litigation

To avoid conflicts of interest, should family members whose interests are or may differ from other family members retain separate counsel? If separate counsel is retained, how will the family office share information with family members without waiving attorney-client privilege or raising the issue of possible partisanship?
How should we prepare for and what are ways we can avoid potential litigation on behalf of the interests of the family?
Have we considered that our that actions of individuals or entities are invariably challenged after the fact and judged in hindsight?
- Are we doing everything by the book?
- Are we observing all corporate formalities?
- Are we acting in a procedurally correct fashion?
- Are we ticking all the boxes?
Have we considered that attacking the substance of a deal is difficult and uncertain and that it is often easier to challenge whether the correct form was followed (e.g., a flaw in the process that be argued to make the substance suspect.)?
Have we considered potential outcomes of a decision in a manner that allows us to consider broader outcomes and avoid tunnel vision or overly optimistic/pessimistic outcomes (e.g., reasonably optimistic best case, reasonably pessimistic best case, reasonably optimistic worst case, reasonably pessimistic worst case, etc.)?

Operations and governance

If we decide to hire an in-house GC for the family office, what experience, qualifications, compensation and other factors should we consider in doing so? Is it better to hire a generalist or someone who specializes in a particular legal discipline?
What should we have as a process for establishing a board of directors/advisors to help manage the family office? How can we consider the use of and hiring of independent directors?
How do we select the staff that will run the family office? What characteristics and backgrounds are important in general and for their specific roles?
How do we go about developing and testing a business continuity plan for the family office?
How do we pay for the operations of the family office and what are the legal implications of the various funding sources?
Does the technology our family office uses for operations meet all local, regional and global laws, policies and regulatory standards?

Employment

What kind of pre-hiring evaluation should we be doing (and are allowed to do) for potential family office staff?
How can we create an effective staff screening system? How can we create effective security and risk management policies that govern staff after they are hired?
What arrangements should we use to employ/engage staff (i.e., should they be employees, consultants, etc.) and who should employ/engage them?
How can we create effective employment/ engagement agreements and compensation strategies? Should we include severance provisions in our agreements?
How can we ensure that our employment manual complies with all federal and local labor laws?
What non-disclosure agreements, non-competes, non-solicitation and related provisions can we require of family office staff?
Do we need any immigration permissions for family office staff to work in the desired location?
What are the tax implications of how we operate family office staff?
What legal and compliance obligations do we need to be aware of and adhere to once we have employed/engaged family office staff?
Are we following all of the local, state, federal and international laws, policies and regulations with respect to our family office staff? (e.g., wage-andhour laws, drug testing and substance abuse management, etc.)
Are we in compliance with ERISA and any state/local laws and regulations applicable to our benefit plans?
Are we compliant with local, regional, national and global rules around qualified/non-qualified retirement plans, executive compensation, and perks and fringe benefits (e.g., use of private aircraft, corporate cars, etc.) for family office staff?
How can we manage exit strategies from the family office or family business for inactive family members, and what legal risks do we need to be aware of?

Impact investing and philanthropy

How can we optimize our charitable-giving strategy? What legal entities, tax considerations and related strategies should we consider to optimize our philanthropic impact?
What are the important legal structuring and tax considerations with respect to impact-investing?
What are the tax and legal considerations of such philanthropic vehicles as charitable lead trusts, charitable remainder trusts, donor-advised funds, scholarships and private foundations?
What are B corporations and what is their potential relevance to our family office?

Trusts, estates and wealth preservation

Should we be using pre- or post-nuptial agreements in our family? What about agreements specific to citizens or residents of different countries?
What are the trusts-and-estates law considerations for each member of the family?
If family members are subject to multiple jurisdictions, what are the local, national and global legal structuring and planning considerations?
How should family members evaluate both on- and off-shore life insurance requirements and navigate life insurance planning? When and how should we consider the pros and cons of irrevocable life insurance trusts, offshore life insurance, split-dollar life insurance, private placement life insurance and insurance-dedicated funds?
How should we create wills and trusts for families in multi-jurisdictional situations?
How can we plan for liquidity to satisfy estate taxes that will be due after the death of a principal?
What legal considerations are there for the administration of estates with specialty assets (e.g., art, collectibles, wines and spirits)?
How can we educate the next generation on legal matters and best practices pertaining to the family office, their expected obligations to the family and their potential inheritance?
Should our family office consider establishing a private trust company (PTC)?
What are the legal and tax consequences of using a family bank strategy?
Do our legal entities allow for the sale, gifting or transfer of family office ownership among family members?
Should agents of family members, such as investment advisors, trustees, attorneys, etc., be required to sign non-disclosure agreements for the family office?
How can we support family members with issues concerning trustees?
How can we plan around the cash flow needs and general financial planning concerns of family members?
Should the family office hold regular meetings with the members of the family? Should there be meetings between the beneficiaries/each of the family members and the trustees?
Are the conflict-of-interest policies up to date? What’s in place to assure full disclosure?
What should we implement regarding practices and policies for maintain confidentiality and continuity in the event of the divorce, death or incapacity of a family member who is in the bloodline of the matriarch or patriarch who established the family office wealth?

Public policy

Should we take a proactive stance and attempt to influence the public policy dialogue with respect to the scope of the family office exemption and related issues?
Will our family office be subject to additional regulation should the SEC act on its stated desire to produce amendments to the Family Office Rule?
If our family office wishes to engage politically and at the public policy levels, should we try to achieve our goals independently or as part of a coalition of likeminded, similarly-situated family offices?
How can we measure return on an investment in political and public policy engagement?

Risks and threats

How can we set up a family office to maximize the family’s privacy? How can we protect ourselves in the event of a breach of privacy (e.g., stalking, blackmailing, public disclosure, theft, etc.)?
Have we structured the family office to maximize our liability protections?
If our family office is not subject to specific regulatory oversight, how can we implement our own compliance processes and policies to prevent risks and prepare for future potential requirements?
How do we establish controls and procedures to prevent fraud?
How do we ensure that our legal and non-legal questions are covered under legal privilege? Are there steps we can take to ensure that communications and advice from third-party advisors (e.g., security companies, accountants, banks, etc.) are protected under attorney-client privilege?
What legal agreements and strategies should we have in place prior to the death of a matriarch or patriarch?
Does the family office need director-and-officer as well as comprehensive general liability policies with respect to the performance of duties by family members and employees, as well as coverage in connection with those serving on boards and in officer positions of portfolio companies to protect family office assets from third-party exposure?
What legal and non-legal strategies can we implement to avoid family feuds and litigation after the death of a principal? How can we handle intergenerational conflicts, especially where family members are located in different jurisdictions?
What legal and non-legal strategies should we have in place to help protect us against risks and threats (e.g., cyber, physical, fraud, lawsuits, natural disasters)?
How can we conduct a thorough risk-and-threat audit of our family office?
How can we build a system for responding to medical emergencies and do we have adequate preventative health care measures in place?
Should we consider having a social media policy for family members and the family office?
What type of internal compliance policies do we need to avoid transactions involving restricted/ denied parties, or structures susceptible to money laundering?
How can we prepare for inquiries from the media?
What is our communication policy on public events?

Specialty areas

How can we ensure that our private aircraft meet local, regional, national and global regulations (e.g., FAA in the US; International Civil Aviation Organization (ICAO) on an international scale)?
How do we properly structure private aircraft acquisitions, dispositions, insurance, finance, leases, tax issues, use policies and ownership entities?
How can we ensure that our active-investor trading policies comply with local, national and global laws and regulations?
How can we ensure that we are following anticorruption laws (e.g., Foreign Corrupt Practices Act (FCPA)) in our home country and other countries where we operate and invest?
How can we properly structure sports and entertainment investments (e.g., team ownership and control vs. non-control/passive investment)?
How do we properly protect intellectual property assets?
What steps should we take in responding to requests for information to satisfy Know Your Client (KYC) requirements from third-party vendors for the family members and the family office?

DISCLOSURE:

Frazer Rice is an employee of Next Capital Management, LLC.

This podcast is not investment, legal, or tax advice, nor does it reflect the opinions of Next Capital Management.

Any opinions represented in the show are Frazer’s or the guest’s individually.

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