Gina Nelson is senior vice president and head of fiduciary services at Chilton Trust, a wealth management firm headquartered in Palm Beach, Florida. She spoke with Crain Currency about creating a road map for estate planning as it relates to midsize family offices, which can often be overlooked.
You often hear about tax planning for smaller family offices and multi-family offices, but midsize family offices fall between the cracks. Can you talk about the unique challenges that they face?
When we talk about planning for midsize estates, the heart of the issue is that these are clients who are borderline taxable. If the [Tax Cuts and Jobs Act of 2017] law sunsets at the end of next year, as expected, they will be taxable. But giving away a big portion of their wealth means that they don't have the assets they need to live out their lives in the lifestyle that they've become accustomed to. When you get really large estates giving away $5 million here, $10 million there, that is not going to impact how they live out the rest of their life. For these midsize estates, it does.
So the tax planning becomes a balancing act between trying to make it as effective as possible but still allowing them to live out their lives. And so maybe we're not taking the most tax-effective approach, but we're weighing that tax effectiveness versus comfort and lifestyle and doing sort of a compromise between those two. So maybe we get some but not as much to make it completely nontaxable.
Can you give me more specifics about situations faced by your clients?
A lot of these people have a lot of their net worth tied up in real estate. And so the qualified personal residence trust (QPRT), they can get it out of their estate at a very reduced rate, still maintain the use of it, rent it after the term ends, rent it back from the new owners.
And then using retirement assets — which I think is one of those things that's sort of underutilized for people, particularly with charitable intent, because if they leave it outright to charity, essentially it's out of their estate, right? So you're going to get the offset via the charitable deduction. I just recently had a meeting with a client in which we discussed a QPRT and using a charitable beneficiary on the IRA. That pretty much gets them out of a taxable estate situation. And it hasn't impacted their lifestyle because obviously, when the first spouse dies, the second spouse is going to have access to the IRA during their lifetime, and then we don't have the potentially taxable event until the second death. And that's been addressed by getting both the home and the retirement assets outside of a taxable situation. I think we look for things that are flexible and things that aren't going to affect them as much during their lives. And if they outlive what they expect to, they're still going to be able to have the assets they need.
What do you consider best practices for planning for these midsize firms?
I think what we're doing a lot of is starting the conversations now. Historically, we've gone through periods before where we have expected tax changes coming. And we know what that ends up looking like. So we know the last part of next year is going to be crazy. Assuming that nothing changes and we are going into a sunset. As of Jan. 1, 2026, people are going to be hustling to try and get trusts into place and get things set up. And attorneys get to a point where they can't get all of that done. So we're trying to start those conversations early.
For example, for clients where spousal lifetime access trusts (SLATs) make sense, but we actually don't have a great feel yet for if we should fund those with $1 million or $4 million, we can go ahead and get this SLAT set up, fund it with $1 million now. And as we get later in next year — and we have a better idea as to whether the law will change, whether it will sunset and what their needs might be — we can just add to it.
What are some things to look for when selecting the right fiduciary?
People have a natural inclination to go one of two ways. One is a family friend or a son or a daughter if they're the responsible kid. We trust them to make these decisions. But what people often don't think about is the position that puts the family friend or the family member in. First of all, most people who don't work in the space don't understand all that goes into administering a trust — the record-keeping, the tax preparation, the decisions that need to be made. So just from an administrative perspective, it's burdensome. More than anything, from a family dynamics perspective, if you have a sibling who has to go to their brother to be able to get money out of the trust, that just creates a natural friction. And particularly if the sibling who's the trustee has to say no.
If a client really wants the comfort of having someone who knows the family dynamic, what works really well is pairing them with the corporate trustee, because they can take the administrative burden and can also play the bad guy, right? We can be the ones who step in and say: "No, I'm sorry. We don't think this is an appropriate use of trust funds." And that allows that familial relationship to not be strained.
And when you're looking at a corporate trustee, you want to look for a trustee whose overall values align with yours, who can make decisions based on your particular family situation and who can be flexible enough to adapt to changing dynamics.
Family offices need to find their voices
By CHRISTINA WING and LIZA TRUAX
The rise of the family office is a phenomenon that needs no additional documentation. There are 10,000-plus single-family offices in existence, the majority of which have been minted in the past decade. This trend has been well-tracked by investors, fund managers and entrepreneurs alike.
What is less evident from simply observing the historic rise in assets under management and number of family offices is what type of investors these groups have been historically, what they are evolving toward today and how those changes will enable them to influence the global economy going forward.
At their nascence, family offices were predominantly passive investors — a place where the family accountant or consigliere oversaw fund investments that didn’t merit paying a wealth management fee. The main investment purpose of these vehicles was to reduce costs and risk while preserving wealth.
Alongside the rise in assets in the space, a similarly dramatic shift in investment strategies took place. More assets led to bigger budgets and the ability to compete for better talent. With executives and investors increasingly coming from the hedge fund and private equity world, family offices began to gain access to the best alternative funds and eventually the best deals themselves.
According to the 2023 UBS Family Office Report, family offices globally have 19% exposure to private equity, of which 9% is in direct investments and 10% in funds, and an average of 45% in alternative investments — dramatically higher than other pools of capital. In 2023 an estimated $167 billion was deployed directly into investments by family offices.
Today, family offices boast rising assets, top talent and access to premier investment opportunities. The next frontier is for them to use their influence to effect change in their portfolios and communities.
Unlike their private equity counterparts — which are often maligned (rightly or wrongly) by the media, politicians, and business owners for “gutting” companies — family offices are perceived as much more benevolent investment partners by both business owners and general partners (GPs). Business owners are more likely to listen to their family office investors and implement their suggestions for these key reasons:
- Timeline: Like business owners, family offices are generationally focused. They understand the trade-offs between investing in the short term and results in the long term. It also tends to make family offices more patient through market volatility.
- Values: As they represent a concentrated shareholder base with specific goals, family offices are able to advise businesses toward outcomes that reflect more than just profit maximization.
- Credibility: Most family offices made their wealth through industry, and many are still structured as a holding company today. This background as operators makes business owners believe that family offices can offer more value from an operating perspective, versus private equity firms that are often perceived (again, rightly or wrongly) to be financial engineers rather than business builders.
At the same time, private equity (general partners) GPs are likely to listen to the input of their family office LPs for two reasons:
- Consistency: Family offices have proved to be good LPs throughout market cycles, as their ability to take on illiquidity allows them to continue investing when other capital types might not be able to.
- Networks: Given the “clubby” nature of the space, each family office LP tends to be a gateway both to other investors as well as deal opportunities, so developing good relationships with and understanding the needs of family office LPs can be critical to productive business growth.
Collectively, these characteristics position family offices to be uniquely influential in their portfolios. With this in mind, some groups have drifted toward pursuing outright activism — for example, Yamauchi No. 10, the family office owned by the Nintendo heirs, has created an explicit partnership with the U.S. activist firm Taiyo Pacific Partners to invest in Japanese equities.
Some, such as the Rockefeller Family Office, have been very public with their intention to eliminate investment in fossil fuels. Still others, such as the Emerson Collective, are explicitly impact- and advocacy-oriented.
Despite these examples, surprisingly few families engage with their investments in this way. Of those family offices with direct private equity investments, only 20% report being active shareholders. Data is not tracked on any advocacy that family offices engage in with respect to their LP investments.
This is a missed opportunity, as the power of influence can be as impactful as activism without being as dramatic. In particular, concentrated ownership allows family offices to promote values-based outcomes much more effectively than a firm with a diverse investor base. As family offices continue to grow their size and harness their power in the investment community, serious consideration will need to be given to how they want to wield that influence.
As each family office and the industry overall mature, they will need to find their voice — and use it to affect change. Owners should look at their family offices as another way to create a disproportionate impact through what they invest in — whether it be creating jobs, improving environmental and social outcomes, or simply nudging the economy toward some vision of the future they maintain.
Even those family office investors who aren’t explicitly impact-oriented have the ability to quietly push their investments toward initiatives that in the short term impact communities, with the view that in the long term — the time horizon that family offices care about — they will impact business results.