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), disallowing miscellaneous itemized deductions for 2018 through 2025, and the One Big Beautiful Bill Act (Pub. L. 119-21, 2025) made that disallowance permanent. The effect: a family that pays $10 million annually in investment-management fees for marketable securities receives no deduction for them.

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. The family office there managed investment LLCs for numerous members of a multi-generational family with differing investment goals, provided services comparable to an unrelated investment adviser, and was compensated through a profits interest tied to investment performance rather than reimbursement of costs; the Tax Court held it was engaged in 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.
• Compensation that resembles an unrelated manager's — in Lender, a performance-based profits interest — rather than reimbursement of costs.
• 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 is compensated on commercial terms (a profits allocation or arm's-length fees) by each client.
• 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) (disallowance of miscellaneous itemized deductions, made permanent by Pub. L. 119-21).
• 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.
• Commercial, performance-related compensation rather than cost-sharing.
• 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 One Big Beautiful Bill Act (signed 4 July 2025) made the §67(g) disallowance of miscellaneous itemized deductions permanent. Individual-level deduction of investment-management fees will not return, so the §162 trade-or-business family-office structure — and careful compliance with the Lender factors — remains central to family-office tax planning.

The SEC family-office rule has been unchanged in substance since 2011; offices that serve former family members, key employees, or unrelated co-investors should confirm that each client remains a "family client", or rely on staff guidance or exemptive relief. On the commodities side, CFTC staff no-action relief (CFTC Letter No. 14-143) addresses family offices.

Reviewed October 2026