Why the US tax reforms are a headache for family offices

Photo by cbies/iStock / Getty Images
Photo by cbies/iStock / Getty Images

US corporations might be happy with President Trump’s recent tax reform legislation, but for some American family offices, the reforms mean they are having to consider how they’re structured and even how they invest.

“A lot of times we are asked what is the most appropriate structure for a new family office, or whether an existing family office should restructure in light of developing circumstances,” says William Kambas, a US-based partner at the law firm Withers. “This tax reform (Tax Cuts and Jobs Act of 2017) is one of those key areas that can generate questions about whether or not a family office should restructure.”

Kambas says the decision will be influenced by what type of structure a family office in the US has adopted. “The level of positivity (of the tax reforms) is going to depend on the structure of the family office and its operations.”

A family office primary designed as an investment operation would not get the benefit of a 20% reduction...

Family offices structured as a corporate vehicle aren’t likely to feel any negative effects from the reforms. In fact, they should benefit from the reduced tax costs for so-called ‘C Corporations’. “Therefore, corporate family offices will likely see a benefit from tax reform,” says Kambas.

But those family offices structured as pass-through vehicles (partnerships, S corporations, and certain limited liability companies), won’t like the changes as much. “In these cases, we are going to see less generous benefits than we would have liked,” says Kambas. “A family office primary designed as an investment operation would not get the benefit of a 20% reduction, which family offices structured as corporate vehicles get.”

Kambas says the changes are leading to many family offices to ask lawyers what type of structure they should operate under. “It really takes some careful consideration,” he says. “I’m getting lots of calls from family offices and their advisors about this.”

Also, certain tax advantages from acquiring businesses have also changed under the reforms. “The ability to use net operating losses has changed as a result of the way we value underlying acquisitions,” says Kambas. “This will mean the economics of a deal are changing.”

For family offices acquiring stakes in businesses, these changes will be significant as they will no longer be able to reduce their tax liabilities as much as before when making acquisitions from cashing out of options and refinancing debt, which can produce net operating losses. “The value of tax deductions in these cases have gone down,” says Kambas.

For more thoughts on this, Withers has produced a detailed analysis on how the tax reforms will affect single-family offices.