When To Establish A Family Office?
Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host Victor Menasce. I often get questions from investors about how and when to form a family office. This is particularly urgent when there’s a generational cascade of wealth from parents to kids and eventually grandchildren.
This is an area where I am somewhat opinionated because I learned about all of this when I was 18 years old. My mother, unfortunately, died when I turned 18, and my father didn’t have the understanding or the inclination to manage the family portfolio. That task fell to me. My mother had set things up in a holding company and set up a testamentary trust with my father as the income beneficiary of her estate and my sister and I as the capital beneficiaries of the estate.
We had a lawyer and an accountant who fulfilled an important role in helping me guide a set of decisions that were right for our family for the next 20 years. The most frequent question I get is, not just when to set up a family trust, but how much net worth is required to form a family office? When I think about this, the size of the assets determines the scope of the solution, but the problems that persist are independent of the amount of wealth.
Families are complicated and almost every family has a spectrum of personalities and beliefs that form, irrespective of parental guidance. Fortunately, my sister and I got along very well. But, I’ve seen many families where differences get amplified when it comes to money and individual beliefs.
Money is just fuel. Whatever beliefs you have about money are simply accelerated based on the amount. If you believe money should be used to buy income-producing assets, the more money you have, the more you’ll buy. If you believe money is for buying luxuries, then you’ll buy more luxuries. And if you believe that money is for philanthropy and solving social problems, you’ll vector your investments in that direction.
It all starts with bringing clarity to the goals, not just for one individual but for the family as a whole. This is what I call “family governance”. It starts with a blurred vision that manifests itself as scattered attention, unclear investment focus, and way too many meetings. Without a clear chain of command, you end up with multiple lawyers and accountants providing conflicting advice.
There’s a lack of clarity, and families can often experience deal flow deficiency because they don’t find what they’re looking for, simply because they’re not clear on what they are searching for. And then there’s reactive rather than proactive investing. Family members often have differing time constraints, and they view the management of family money sometimes as a side responsibility rather than a primary responsibility.
Family feuds do happen, and sometimes childhood injustices spill over into adulthood. This emotional baggage can affect family dynamics, and it can cause a lack of trust among family members. All of these dynamics can be improved with the formation of a family office. It doesn’t necessarily mean hiring full-time staff. The process is the same whether you’re talking about a million bucks, a hundred million, or a billion.
Money should be divided into four buckets – the security bucket, the income bucket, the growth bucket, and the dream bucket. The risk for each of these buckets is different. Your security bucket, for example, might consist of gold bars in a safety deposit box. Managing money means establishing governance that makes things run smoothly between family members.
When you get above a certain level, you’re going to get a lot of moving parts. There might be tax or transaction deadlines. Failing to meet these deadlines results in errors that are more costly than perhaps the fee of the money manager for the entire year.
Busy people are often too busy to manage all these tiny details. Sometimes hiring a financial controller who works under the direction of a trusted accountant, even meeting just once a month for an hour, is enough to set the wheels in motion for the next several weeks.
Establishing a family office is mostly about bringing alignment between family members on how the money should be managed and invested. It’s really about the family first and the money second. As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.
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