Part III · Structures · No. 06

The family office

A dedicated entity that manages a single family's wealth — investment, tax, estate, philanthropy, and lifestyle administration. The federal tax structure draws on Lender Management LLC v. Commissioner, the SEC family-office exclusion under the Investment Advisers Act, and a body of profits-interest compensation case law.

What the structure is

A single-family office is an entity established to provide management services to one family (or a small group of related families) — investment management, accounting, tax planning, estate administration, philanthropy oversight, and lifestyle support. The office is typically structured as an LLC or limited partnership whose investment activities span the family's holdings: marketable securities, private investments, real estate, art, and (often) the luxury assets discussed throughout this reference.

The tax problem it addresses

Before the 2017 Tax Cuts and Jobs Act, individuals deducted investment-management expenses under §212 as miscellaneous itemized deductions, subject to the 2%-of-AGI floor. The TCJA enacted §67(g), suspending miscellaneous itemized deductions through 2025. The effect: a family that pays $10 million annually in investment-management fees for marketable securities receives no deduction.

A family office that conducts a trade or business — rather than merely managing the family's investments — deducts expenses under §162 as ordinary and necessary trade-or-business expenses. §67(g) does not apply. The deduction is preserved.

The leading authority for trade-or-business characterization of a family office is Lender Management LLC v. Commissioner, T.C. Memo. 2017-246, which held that a multi-generational family office providing comprehensive services to multiple family entities at arm's-length fees qualified as a trade or business under §162.

Mechanics

A trade-or-business family office typically requires:

• Multiple service recipients — different family-trust and family-entity clients, not merely one individual.
• Arm's-length fees charged for services, supported by transfer-pricing analysis.
• Genuine operating personnel — investment, accounting, tax, legal, administrative staff employed at market compensation.
• A profit-motive structure, often with a profits-interest compensation arrangement for the office's investment professionals.
• Documentation of services provided, time devoted, decisions taken on behalf of each client.

Under the typical structure:

• The family office is an LLC or LP.
• The office's clients are individual family members, family trusts, family LLCs holding the actual investment assets.
• Office personnel receive salary plus a profits interest in investment success (carried-interest-like compensation).
• Office bills each client at arm's-length rates.
• Each client deducts the fee paid as either a §162 expense (if the client is itself a trade or business) or §212 expense (subject to §67(g) suspension at the individual level).

The key tax win is at the office level: the office itself is a trade or business and deducts its operating expenses (compensation, office, technology, third-party fees) as §162 deductions.

The applicable statutes and authorities

• 26 U.S.C. §162 (trade-or-business expense).
• 26 U.S.C. §212 (expenses for production of income).
• 26 U.S.C. §67(g) (suspension of miscellaneous itemized deductions through 2025).
• Higgins v. Commissioner, 312 U.S. 212 (1941) (investor-versus-trader doctrine).
• Whipple v. Commissioner, 373 U.S. 193 (1963) (trade-or-business of investing).
• Lender Management LLC v. Commissioner, T.C. Memo. 2017-246.
• 15 U.S.C. §80b-2(a)(11)(G) and 17 C.F.R. §275.202(a)(11)(G)-1 (SEC family-office exclusion from investment-adviser registration).

Substance and audit risk

The IRS examines family-office trade-or-business characterization closely. The leading factors:

• Multiple, genuine clients with separate economic interests.
• Arm's-length pricing.
• Substantive services beyond pure investment management.
• Continuous, regular, profit-motivated activity.
• The frequency, extent, and regularity of the office's investment activity supports trader-style characterization.

The SEC family-office exclusion (Rule 202(a)(11)(G)-1) requires that the office serve only "family clients" — defined to include lineal descendants of a common ancestor up to ten generations removed, certain spouses and ex-spouses, certain non-profit organizations funded by family clients, and qualifying trusts. The federal-tax test under Lender overlaps with but does not perfectly track the SEC family-client definition.

Cost and complexity

Family offices range from single-individual-with-assistant to professional staffs of fifty or more. Annual operating cost scales with the breadth of services provided. The threshold at which a dedicated family office becomes economically rational is generally several hundred million dollars of assets under management, though specific circumstances vary.

Common combinations

• Multi-family office. Serves multiple unrelated families; commercial advisory firm.
• Embedded family office. Within an operating-business holding company.
• Philanthropic foundation alongside. Family foundation as a related but separate entity.
• PPLI integration. Family office advises on PPLI strategy. See PPLI.
• Luxury-asset management. Family office oversees yacht, aircraft, art, and real-estate holdings.

Recent developments

The §67(g) suspension of miscellaneous itemized deductions is scheduled to expire after 2025. Whether Congress extends, modifies, or allows it to lapse will substantially affect family-office economics: if §67(g) expires, individual-level deduction of investment-management fees returns (subject to the 2% floor); the §162 trade-or-business structure becomes less compelling on the margin but remains advantageous.

The SEC and CFTC have continued to issue staff guidance refining the family-office exclusion, particularly for offices that serve former family members, key employees, and adjacent participants.

Reviewed May 2026