- By allocating profits to the family office management company, a profits interest structure reduces the family's taxable income.
- The system is highly modeled, with projected returns compared to anticipated expenses to ensure profitability of the family office management company.
- In addition to providing tax benefits, the system sets up a built-to-last institution for a family's investment.
An easy way for advisors to save their clients money is rare, but they do come along now and again. In this episode of Weaver’s Beyond the Numbers, Marcie Finnigan, partner with Weaver’s Private Client Services, discusses family office insights with Ryan Harris, partner at Kirkland & Ellis LLP. During this virtual fireside chat, we learn about a profits interest structure that Harris uses to benefit high-income clients who have a family office and are actively investing.
In a typical family office structure, the family pays tax on all earnings and pays non-detectable fees to third-party managers. With a profits interest structure, profits are allocated to the family office management company to reduce the family’s taxable income, leading to a higher net income after tax.
“What our profits interest structure tries to do is create the benefit of a deduction on all of those expenses,” Harris said. “So, for most families who are actively investing their capital either through third-party managers or in-house with a team, the impact of this structure on a net tax saving basis can be very impactful.”
Many clients are paying huge amounts in fees, but could be setting up investment vehicles in which the family office management company receives a share of the profits. That’s then offset by business expenses, including those third-party fees, or deductible trade.
It’s the kind of solution that won’t be for everyone, but is worth exploring, Harris said.
“I really think this is sort of a unique opportunity for advisors to have something really impactful to bring to their clients,” he said. “And that’s the reaction we’ve had in the marketplace.”
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