Family Offices, a
wealth management entity created for asset protection, investment and
succession planning vehicles tailored to the specific needs of high net worth individuals
and family specific to the needs and preferences of the family to protect its
legacy and wealth from generation to generation.
A. Why to form a Family Office (FO):-
a.
Ease of Collective Investment:- To allow family
members to invest collectively with reduced investment costs and access to wide
range of investment opportunities. Provided opportunities to young family
members for exposure to ever evolving financial world and part of critical
decision making process.
b.
Tax Savings:- Been structured in a manner to get
benefit under tax schemes and permissible to deduct investment management fees and other
administrative expenses that are generally non-deductible by individuals.
c.
Ease of
Co-ordination and Management with external advisors:- Enjoy shared services for
tax, legal, accounting & investment by external advisors to all the family
members.
d.
In addition to the above, the additional reasons to
form a Family Office are:
i.
A long term investment horizon, perhaps spanning
generations;
ii.
Unencumbered by regulatory constraints placed on institutional
investors;
iii.
Diverse and non-traditional asset allocation;
iv.
Significant interest in private equity direct invest
and co-invest opportunities;
v.
Focus on wealth preservations vs. growth. The more
generations served, the stronger the focus on preservation;
vi.
Liquidity preference driven by the relative cash needs
for the family;
vii.
Use of family pooled investment vehicles to promote
co-investment.
B. Types
of Family Offices:-
In general, there
are 3 types of Family Offices as listed below:
i.
Embedded Family Office:- When there is no formal
family office been incorporated, but a senior employee (such as CEO, CFO etc.)
of the family business shall provided services to the many family owned
businesses as they are under a single
family office.
ii.
Single Family Office:- An entity that provide services
to one family.
iii.
Multi-family Office:- An entity that provides services
to multiple families.
C. Legal
structure of Family Offices in India:-
For setting up a
Family Office, various factors are taken into considerations which includes but
not limited to long-term investment objectives, vision of the family concerned,
the risk appetite, future requirements of different family members, applicable
legal, regulatory and tax regime of various jurisdictions involved, etc. In India, a Family Office can be set up as
following legal entities:
i.
Private Limited Company;
ii.
Limited Liability Partnership;
iii.
Private Trust
A
recommended legal structure is where the exposure and liability of family
members is limited. Based upon the vision and requirement of family members,
the incorporation documents of Family Office is structured. Further, tax
liability is an important factor to be contemplate for the jurisdiction and
structure of Family Office.
Post
incorporation, for proper governance of the Family Office, a family council is
been constituted consists of family members and trusted advisors to oversee the
operations of the Family Office. In addition to the family council, a Chief
Investment Officer is also appointed who shall be responsible to identify and evaluate
strategic investments and manage the investments including but not limited to
engage the external advisors for investment allocation, accounting, tax and
legal compliance.
D. Common
Business Activities of Family Office (FO):- In general, the Family Office,
provide following services:
i.
Financial reporting, accounting and tax preparation
services;
ii.
Investment management services which includes to
create a large investment pools that can be accessed by multiple family
members;
iii.
Direct investment in operating companies, financial
instruments, real states and other direct investment as agreed in the family
council;
iv.
Asset Management, Insurance, Family Education,
Co-ordination, Succession Planning and Risk Assessment;
v.
Philanthropy
As Family Office(s)
have witnessed enormous growth among high net worth (HNW) individuals and
families to invest in India and cross border among various sectors including
but not limited to technology, real estate, financial instruments etc., the
legal, tax and regulatory framework for Family Offices can be complicated,
requiring the expertise of competent advisers. The following are common considerations
to be contemplated prior to incorporate and operate the Family Office (FO):
i.
Legal
Considerations:-
a.
Should the Family Office be structured as a company,
partnership, trust or some other legal entity?
b.
Who shall own and control the Family Office?
c.
What is the appropriate legal jurisdiction for the Family
Office?
d.
What other legal agreements are necessary such as
employment agreements and service agreements?
e.
How to settle the dispute among the family members,
exit of any family member(s) and succession planning?
ii.
Tax Considerations:
a.
For tax purposes, how should the family Office be
structured?
b.
Will the Family Office activities rise to the level of
a trade or business?
c.
Are there gift or estate tax issues concerning Family
Office ownership and successions?
d.
Will there be tax impact for family members?
e.
How will the role of the Family Office impact
international family members and/or structures?
f.
Is there sufficient flexibility to cater for change in
tax and regulatory rules as well as family circumstances?
This article
is for information purpose only and should not be taken as legal advice. To know
further details, clarification, assistance or any advice on Family Office, its structure,
operations, regulatory compliance, or any legal issues on Family Office, you
may connect with us at admin@equicorplegal.com / 08448824659 and visit www.equicorplegal.com