Accounting
The family office: CAS for the wealthy
The purpose of a family office is to organize and centralize the management of a family’s personal and business financial affairs, and to maintain the financial house in as good an order as that of a well-run public company.
The origin of the family office concept came from extremely wealthy families, with net worth in today’s money of more than $250 million. The family office was often a separate entity, with employees ranging from a CEO or CFO and a chief investment officer, to a staff of bookkeepers and personal assistants that could do everything from monthly financial statements through booking travel and personal care appointments.
In a traditional family office, no service or calling is beyond the scope of the office’s services. Employees may be called upon to pick up a car from the auto dealership or bail out a troubled family member facing a precarious situation.
Many of these wealthy families have made their money from success in business. The family office staff is separate from the business financial staff and will not be involved in the operations or even the accounting for the business.
They will, however, be extremely familiar with the business as it relates to the family. The family office will stay on top of business matters as they directly relate to family wealth, with issues such as loan guarantees, cash management, timely reporting to shareholders and the family office, dealing with tax planning or other benefit planning as it relates to family members, obtaining current valuations of the company and ensuring that the value of the business is enhanced by smart family and succession planning. The family office may also assist with acquisitions and sales of various business entities via the lens of the family estate plan, capital resources, investment objectives and the best use of talent and resources.
Answering the eternal questions
Clients, no matter how wealthy, always want to know the answer to this question: “How am I doing”? The right family office set up can answer that question from a financial and a personal perspective. What’s surprising to me, however, is that many entrepreneurs cannot really tell you the IRR or CAGR of their closely held business interests. To me, this is an important benchmark that a family office should provide.
The family lawyer or accountant may be suitable to sit in the chair of the executive of the family office. Clearly it is a role for an educated, well-versed financial executive, and not a salesperson. This person should be knowledgeable in many areas, including accounting and recordkeeping systems, law, finance, markets, taxes and risk management.
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In addition to their own personal experience and knowledge, this person should be able to build a team of subject matter experts in any area to support the family’s needs. For example, some family offices own property, businesses, alternative investments or investment accounts overseas. The traditional family office may or may not actually manage the financial assets. It is worth noting that asset oversight is different from asset management. Oversight typically involves coordination and working with investment advisors and money managers, and not actually selecting individual investments. The family office may perform due diligence on investment managers and consultants, but not oversee the actual day-to-day management of the assets. The family office plays a vital role in the independent calculations and evaluation of performance — for each portfolio individually and for the entire portfolio collectively.
Family offices that do get involved with day-to-day asset management are typically those whose fortunes were built by managing investments and those that are so large (typically north of $1 billion) that they have built or acquired their own investment management staff.
The common tasks that a family office may oversee include:
- Comprehensive oversight of family assets.
- Contemporaneous recordkeeping of all financial assets.
- Daily management of property and other real asset holdings.
- Preparation of financial reports showing cash flow, income, gains, losses and statement of assets and liabilities.
- Coordination of the advice and services received from all the clients other professionals.
- Being responsible for implementation and ongoing management for each matter under oversight.
- Offering personal concierge services to the family members for personal or business matters.
- Family and entity governance and carrying out the wishes of the family matriarch or patriarch.
- Oversight of philanthropic activities, foundations or gift trust accounts.
Each family has its own set of unique issues, and each family wants to delegate some or all these matters. But in the traditional family office, where the entity is owned and controlled by the family, there are typically no conflicts of interests or other profit-making activities. The entity’s sole purpose is service to the family.
All in the families
The type of family office services that could be provided by a CPA firm is known as the multifamily office. The MFO is a professional services firm that delivers family office services for more than one family. The origin of the multifamily office comes from traditional family offices where the family decided to use their team to help others for a fee. But beyond a traditional family office that decides to serve others, many for-profit private enterprises have flourished in the multifamily office model, including progressive law and CPA firms.
The multifamily office frequently serves families less wealthy than the single family office, but performs many of the same critical functions with respect to the financial side of family life. For the CPA firm with clients whose net worth exceeds $50 million or so, this model offers the opportunity to deliver a very personal and important service for the right CPA firm. The right firm is likely to be already deeply involved in many families’ financial matters and often has a strong personal relationship with the founding or senior members of the family who may have created the wealth.
Of course, the accounting firms that serve these types of clients are frequently larger firms with old-school partners who want nothing to do with matters beyond accounting and tax. This is another matter that falls into the practice management category. But fortunately, as aging partners retire, the younger generation sees the benefit of delivering elevated levels of service to the firm’s better clients.
A multifamily office is intended to be a for-profit entity. And as such, before you as an individual or CPA firm decide to offer these services, you must carefully document your services, compensation methods and the required licenses, if any. You would also want to be sure that your E&O insurance policy provides adequate protection.
Smaller firms also service clients whose net worth exceeds $50 million, yet most seem “too busy” to elevate their services to the level of family office for their best clients. This is a lost opportunity to serve one of the firm’s best clients at the highest level, and deepen the relationship like no other service. If you still do not want in, at least help your client find a firm that is already set up to serve in this capacity.
Getting paid — and licensed
Many CPA firms are still tied to the hours and rates economy and will track their time and simply send bills each month based on the time spent. While this can work, it is not the most common method of compensation. More common than hourly would be flat fees for a list of covered services.
Some firms will also add fees for assets under management or oversight and help to interview and select the actual asset manager. If your firm also intends to offer asset management, consider segregating your fees for AUM versus traditional family office services. If the asset management division becomes significant, a separate entity may also make sense.
Be careful with the asset management part. You do not want to detract from the significant role of the basic family office and drag the relationship down to the less personal and significant commoditized services of asset management.
Whether your family office fees are based on hours or flat-fee billing, the issue of licensing will still apply. CPAs can avoid registration as an investment advisor if their investment advice or financial planning advice is merely incidental to the practice of public accounting, and not advisory in nature.
Naturally, this is a very subjective standard and many CPAs that I talk to do not register. For many firms, however, they could be dancing on the edge of a highly regulated industry and should seek professional counsel as to whether registration as an investment advisor would make sense.
Do not let the name “registered investment advisor” fool you: The registered investment advisor license and registration is the same license that covers all financial planners. You may be deemed by regulators to be practicing investment advice and financial planning to the extent that you get involved in matters such as shaping goals and objectives and providing advice that is more than incidental to the practice of accounting for the family wealth.
Registration as an investment advisor will also subject you to the same rules about compensation, marketing and audit as other financial services firms registered as RIAs, requiring a compliance professional or consultant. To the extent that you can move client money, have logins to financial accounts or have check-signing authority, your registration level will need to be upgraded to that of a custodian.
Some multifamily offices do oversee or manage assets for their family office clients. Offering these services is easier if you are already a larger investment advisory firm with experienced asset managers on staff. This often is not the profile of the typical CPA financial planning shop, and these are not the types of clients where you should be cutting your teeth in the investment advisory business. A model that makes sense here is to use your intelligence to oversee other managers and critically evaluate their offerings in terms of the criteria that you are looking to fill.
Whether your CPA firm has a vibrant wealth management division or not is irrelevant when it comes to offering family office services. The family office role for a CPA firm is just like outsourced CFO work, except for a family rather than an entity. Call it CAS for the wealthy family entity. As that outsourced CFO, you will also rely on other outside subject matter experts and coordinate their efforts so that nothing falls through the cracks.
Should you choose to work with another firm that calls itself a multifamily office, be careful. In my experience, I have seen many financial advisors — from the largest well-known name firms down to small shops who want to move upmarket — simply call themselves a family office without the experience, desire or services to warrant that title.
Final regulations now identify certain partnership related-party “basis shifting” transactions as “transactions of interest” subject to the rules for reportable transactions.
The final regs apply to related partners and partnerships that participated in the identified transactions through distributions of partnership property or the transfer of an interest in the partnership by a related partner to a related transferee. Affected taxpayers and their material advisors are subject to the disclosure requirements for reportable transactions.
During the proposal process, the Treasury and the Internal Revenue Service received comments that the
- Increased dollar threshold for basis increase in a TOI. The threshold amount for a basis increase in a TOI has been increased from $5 million to $25 million for tax years before 2025 and $10 million for tax years after.
- Limited retroactive reporting for open tax years. Reporting has been limited for open tax years to those that fall within a six-year lookback window. The six-year lookback is the 72-month period before the first month of a taxpayer’s most recent tax year that began before the publication of the final regulations (
slated for Jan. 14 in the Federal Register). Also, the threshold amount for a basis increase in a TOI during the six-year lookback is $25 million. - Additional time for reporting. Taxpayers have an additional 90 days from the final regulation’s publication to file disclosure statements for TOIs in open tax years for which a return has already been filed and that fall within the six-year lookback. Material advisors have an additional 90 days to file their disclosure statements for tax statements made before the final regulations.
- Publicly traded partnerships. Because PTPs are typically owned by a large number of unrelated owners, the final regulations exclude many owners of PTPs from the disclosure rules.
The identified transactions generally result from either a tax-free distribution of partnership property to a partner that is related to one or more partners of the partnership, or the tax-free transfer of a partnership interest by a related partner to a related transferee.
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The tax-free distribution or transfer generates an increase to the basis of the distributed property or partnership property of $10 million or more ($25 million or more in the case of a TOI undertaken in a tax year before 2025) under the rules of IRC Sections 732(b) or (d), 734(b) or 743(b), but for which no corresponding tax is paid.
The basis increase to the distributed or partnership property allows the related parties to decrease taxable income through increased cost recovery allowances or decrease taxable gain (or increase taxable loss) on the disposition of the property.
The Treasury Department and the Internal Revenue Service proposed new rules for the tax credit for qualified commercial clean vehicles, along with guidance on claiming tax credits for clean fuel under the Inflation Reduction Act.
The
The credit is the lesser amount of either 30% of the vehicle’s basis (15% for plug-in hybrid EVs) or the vehicle’s incremental cost in excess of a vehicle comparable in size or use powered solely by gasoline or diesel. A credit up to $7,500 can be claimed for a single qualified commercial clean vehicle for cars and light-duty trucks (with a Gross Vehicle Weight Rating of less than 14,000 pounds), or otherwise $40,000 for vehicles like electric buses and semi-trucks (with a GVWR equal to or greater than 14,000 pounds).
“The release of Treasury’s proposed rules for the commercial clean vehicle credit marks an important step forward in the Biden-Harris Administration’s work to lower transportation costs and strengthen U.S. energy security,” said U.S. Deputy Secretary of the Treasury Wally Adeyemo in a statement Friday. “Today’s guidance will provide the clarity and certainty needed to grow investment in clean vehicle manufacturing.”
The NPRM issued today proposes rules to implement the 45W credit, including proposing various pathways for taxpayers to determine the incremental cost of a qualifying commercial clean vehicle for purposes of calculating the amount of 45W credit. For example, the NPRM proposes that taxpayers can continue to use the incremental cost safe harbors such as those set out in Notice 2023-9 and Notice 2024-5, may rely on a manufacturer’s written cost determination to determine the incremental cost of a qualifying commercial clean vehicle, or may calculate the incremental cost of a qualifying clean vehicle versus an internal combustion engine (ICE) vehicle based on the differing costs of the vehicle powertrains.
The NPRM also proposes rules regarding the types of vehicles that qualify for the credit and aligns certain definitional concepts with those applicable to the 30D and 25E credits. In addition, the NPRM proposes that vehicles are only eligible if they are used 100% for trade or business, excepting de minimis personal use, and that the 45W credit is disallowed for qualified commercial clean vehicles that were previously allowed a clean vehicle credit under 30D or 45W.
The notice asks for comments over the next 60 days on the proposed regulations such as issues related to off-road mobile machinery, including approaches that might be adopted in applying the definition of mobile machinery to off-road vehicles and whether to create a product identification number system for such machinery in order to comply with statutory requirements. A public hearing is scheduled for April 28, 2025.
Clean Fuels Production Credit
The Treasury the IRS also released guidance Friday on the Clean Fuels Production Credit under Section 45Z of the Tax Code.
Section 45Z provides a tax credit for the production of transportation fuels with lifecycle greenhouse gas emissions below certain levels. The credit is in effect in 2025 and is for sustainable aviation fuel and non-SAF transportation fuels.
The guidance includes both a
“This guidance will help put America on the cutting-edge of future innovation in aviation and renewable fuel while also lowering transportation costs for consumers,” said Adeyemo in a statement. “Decarbonizing transportation and lowering costs is a win-win for America.”
Section 45Z provides a per-gallon (or gallon-equivalent) tax credit for producers of clean transportation fuels based on the carbon intensity of production. It consolidates and replaces pre-Inflation Reduction Act credits for biodiesel, renewable diesel, and alternative fuels, and an IRA credit for sustainable aviation fuel. Like several other IRA credits, Section 45Z requires the Treasury to establish rules for measuring carbon intensity of production, based on the Clean Air Act’s definition of “lifecycle greenhouse gas emissions.”
The guidance offers more clarity on various issues, including which entities and fuels are eligible for the credit, and how taxpayers determine lifecycle emissions. Specifically, the guidance outlines the Treasury and the IRS’s intent to define key concepts and provide certain rules in a future rulemaking, including clarifying who is eligible for a credit.
The Treasury and the IRS intend to provide that the producer of the eligible clean fuel is eligible to claim the 45Z credit. In keeping with the statute, compressors and blenders of fuel would not be eligible.
Under Section 45Z, a fuel must be “suitable for use” as a transportation fuel. The Treasury and the IRS intend to propose that 45Z-creditable transportation fuel must itself (or when blended into a fuel mixture) have either practical or commercial fitness for use as a fuel in a highway vehicle or aircraft. The guidance clarifies that marine fuels that are otherwise suitable for use in highway vehicles or aircraft, such as marine diesel and methanol, are also 45Z eligible.
Specifically, this would mean that neat SAF that is blended into a fuel mixture that has practical or commercial fitness for use as a fuel would be creditable. Additionally, natural gas alternatives such as renewable natural gas would be suitable for use if produced in a manner such that if it were further compressed it could be used as a transportation fuel.
Today’s guidance publishes the annual emissions rate table that directs taxpayers to the appropriate methodologies for calculating carbon intensities for types and categories of 45Z-eligible fuels.
The table directs taxpayers to use the 45ZCF-GREET model to determine the emissions rate of non-SAF transportation fuel, and either the 45ZCF-GREET model or methodologies from the International Civil Aviation Organization (“CORSIA Default” or “CORSIA Actual”) for SAF.
Taxpayers can use the Provisional Emissions Rate process to obtain an emissions rate for fuel pathway and feedstock combinations not specified in the emissions rate table when guidance is published for the PER process. Guidance for the PER process is expected at a later date.
Outlining climate smart agriculture practices
The guidance released Friday states that the Treasury intends to propose rules for incorporating the emissions benefits from climate-smart agriculture (CSA) practices for cultivating domestic corn, soybeans, and sorghum as feedstocks for SAF and non-SAF transportation fuels. These options would be available to taxpayers after Treasury and the IRS propose regulations for the section 45Z credit, including rules for CSA, and the 45ZCF-GREET model is updated to enable calculation of the lifecycle greenhouse gas emissions rates for CSA crops, taking into account one or more CSA practices.
CSA practices have multiple benefits, including lower overall GHG emissions associated with biofuels production and increased adoption of farming practices that are associated with other environmental benefits, such as improved water quality and soil health. Agencies across the Federal government have taken important steps to advance the adoption of CSA. In April, Treasury established a first-of-its-kind pilot program to encourage CSA practices within guidance on the section 40B SAF tax credit. Treasury has received and continues to consider substantial feedback from stakeholders on that pilot program. The U.S. Department of Agriculture invested more than $3 billion in 135 Partnerships for Climate-Smart Commodities projects. Combined with the historic investment of $19.5 billion in CSA from the Inflation Reduction Act, the department is estimated to support CSA implementation on over 225 million acres in the next 5 years as well as measurement, monitoring, reporting, and verification to better understand the climate impacts of these practices.
In addition, in June, the U.S. Department of Agriculture published a Request for Information requesting public input on procedures for reporting and verification of CSA practices and measurement of related emissions benefits, and received substantial input from a wide array of stakeholders. The USDA is currently developing voluntary technical guidelines for CSA reporting and verification. The Treasury and the IRS expect to consider those guidelines in proposing rules recognizing the benefits of CSA for purposes of the Section 45Z credit.
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