Setting Up A Family Investment Fund: A Guide

Setting up a family investment fund can be a great way to simplify complex financial arrangements and consolidate family wealth, while also satisfying the individual needs of each family member. This can be achieved through a family investment partnership (FIP), which allows families to strengthen financial connections across multiple generations, and provides access to top-tier investments and advice. Before forming a FIP, it is important to understand the key considerations of structuring and maintaining one or more FIPs for the family. This includes deciding on the structure of the fund, which will depend on the chosen asset classes, the level of desired investment flexibility, and the liquidity of underlying investment assets. It is also crucial to communicate with various stakeholders, such as attorneys, accountants, and tax professionals, to ensure efficient management of the fund.

Understand the benefits of a family investment partnership

Family Investment Partnerships (FIPs) are a great way to strengthen financial connections across multiple generations while accessing the best investments and advice. They offer a range of benefits, including:

Centralized Management and Investment Decision-Making

FIPs allow for centralized management and investment decision-making, making it easier to align with the financial goals and risk tolerance of the entire family. This ensures that investments are managed efficiently and in line with the interests of all family members.

Efficient Management of Diversified Holdings

Through FIPs, families can effectively manage diversified holdings across multiple asset classes. This enables them to access a wide range of investments, such as marketable securities, hedge funds, private equity, real estate, and venture capital.

Economies of Scale and Reduced Costs

By pooling their resources, families can benefit from economies of scale. This means they can access favourable investments and investment managers at reduced costs. FIPs provide the scale and negotiating power needed to attract top investment opportunities.

Flexibility and Customization

FIPs offer flexibility, allowing individual family members to customize their portfolios to meet their specific investment goals. This ensures that each family member's unique circumstances and needs are considered while still benefiting from the advantages of collective investing.

Tax Efficiency

FIPs can provide tax benefits, such as the ability to offset Capital Gains Tax (CGT) and Capital Acquisitions Tax (CAT) when a property's value increases. Additionally, FIPs can help avoid double taxation when assets are sold and cash is distributed to family members.

Long-Term Wealth Preservation

FIPs facilitate long-term wealth preservation and generational wealth transfer. They allow for tax-free transfers of assets, real estate, and other forms of wealth within the family. This helps in building and maintaining family wealth across generations.

Learn how to structure your fund

When structuring a family investment fund, there are several key considerations to keep in mind. Firstly, it is important to involve professionals such as attorneys, accountants, investment advisors, and tax professionals. These experts can provide valuable insights and ensure compliance with legal and regulatory requirements.

The structure of the fund will depend on factors such as the chosen asset classes, the desired level of investment flexibility, and the liquidity of the underlying investment assets. Families can choose from a variety of structures, including family investment partnerships (FIPs), family investment companies (FICs), or simply consolidating assets into a family fund.

FIPs are a popular structure that allows families to invest in marketable securities, hedge funds, private equity, real estate, and other alternative investments. They offer the advantage of centralized management and decision-making, efficient diversification, and access to favourable investments at reduced costs.

FICs, on the other hand, are a tax-efficient way to retain control over assets and pass them on to the next generation. FICs are structured as companies limited by shares, with different classes of shares ("A" and "B") providing varying levels of control and entitlement to dividends or capital returns.

Additionally, when setting up a family fund, it is crucial to consider the regulatory environment, the jurisdiction and domicile of the fund, management and corporate governance, investor preferences, costs, and tax efficiency. Compartmentalising the fund and appointing independent administrators, investment managers, and auditors can also help safeguard assets and tailor income to individual family members' needs.

Furthermore, it is essential to have clear and well-structured repayment terms and conditions. These should be documented in writing, preferably with the help of a lawyer, to protect both the business and the investors.

Research tax and structuring considerations

When setting up a family investment fund, there are several tax and structuring considerations to keep in mind.

Firstly, it is important to understand the different types of entities available for family investment funds, as the tax implications can vary significantly. Common structures include sole proprietorships, single-member limited liability companies (LLCs), partnerships, multi-member LLCs, S corporations, and C corporations. Each structure has its own advantages and disadvantages in terms of tax treatment, ownership, governance, and succession planning.

For example, sole proprietorships and single-member LLCs are simple structures for smaller family offices, but they may not provide effective succession planning. On the other hand, flow-through entities like partnerships and multi-member LLCs offer more flexibility in tax treatment and special allocations but increase income tax complexity. C corporations, while providing a clear distinction between ordinary income and capital gains, may be subject to double taxation.

Secondly, the location of family members and their investments can impact the tax obligations of the fund. Families with members and investments in multiple jurisdictions will need to consider foreign and state income tax filing requirements, withholding taxes, foreign tax credits, and reporting requirements for foreign bank accounts and assets.

Thirdly, the fund's investment strategy and focus will influence its tax considerations. For instance, investments in private equity, hedge funds, real estate, or other illiquid alternative investments may have different tax implications than more traditional marketable securities.

Additionally, the management and staffing of the fund can impact its tax treatment. The Lender and Hellmann family office cases, which served as precedent, highlighted that structuring the office like a professional advisory firm with qualified staff and separate ownership entities can support its qualification as a trade or business for tax deduction purposes.

Finally, the fund's fee structure will have tax implications. While investment management fees were previously deductible, the 2017 Tax Act eliminated this deduction. However, deductions for trade and business activities are still available, and funds should carefully consider their fee structures in relation to these deductions.

In conclusion, when setting up a family investment fund, it is crucial to carefully evaluate the tax and structuring considerations outlined above. This includes understanding the different entity types, considering the location of family members and investments, tailoring the investment strategy, thoughtfully structuring management and staffing, and designing an appropriate fee structure.

Explore the process of setting up a private family fund

Setting up a private family fund is a complex process that requires careful planning and consideration of various factors. Here is a step-by-step guide to help you navigate the process:

Define the Purpose and Structure

Begin by defining the purpose of the fund. Is it primarily for consolidating and preserving family wealth, making joint investment decisions, or providing access to best-in-class investments and advice? This will help determine the appropriate structure for the fund, such as a family investment partnership (FIP) or a private family fund.

Identify Key Stakeholders

Identify the family members who will be involved in the fund and determine their roles and responsibilities. It is important to involve various stakeholders, including attorneys, accountants, investment advisors, and tax professionals, to ensure compliance with legal and regulatory requirements.

Develop a Comprehensive Plan

Create a detailed plan that outlines the fund's investment strategy, including the types of assets and investment vehicles that will be utilized. This plan should also address risk management, compliance, and succession planning. Consider engaging professionals to assist with the development of the plan and to ensure that it aligns with the family's financial goals and risk tolerance.

Establish the Fund's Legal Structure

The fund's legal structure will depend on the jurisdiction in which it is established. In the United States, for example, a fund typically assumes the structure of a limited partnership or a limited liability firm. Seek legal advice to understand the specific requirements and implications of each structure.

Determine the Fee Structure

Work with your legal and financial advisors to establish a fee structure for the fund, including management fees, carried interest, and hurdle rates for performance. Ensure that the fee structure is competitive and aligns with the fund's investment strategy and the level of service provided.

Implement the Fund

Once the planning and legal steps are complete, you can begin implementing the fund. This includes setting up the necessary administrative and operational processes, such as accounting, reporting, and compliance procedures. It is also essential to establish clear communication channels and decision-making processes among the family members and other stakeholders.

Monitor and Evaluate

Even after the fund is established, it requires ongoing monitoring and evaluation to ensure it remains aligned with the family's financial goals and risk tolerance. Regularly review the fund's performance, assess the impact of market conditions, and make adjustments as necessary to optimize returns and manage risk.

Setting up a private family fund is a complex process that requires careful planning, legal advice, and ongoing monitoring. By following these steps and engaging the appropriate professionals, you can establish a robust framework for managing your family's wealth and achieving your financial objectives.

Learn how to start an investment club

Setting up a family investment fund can be a great way to strengthen financial connections across multiple generations and gain access to the best investments and advice. Here are some detailed steps to help you start an investment club for your family:

Find Potential Members

The first step is to find like-minded family members who share your interest in investing and are committed to actively participating in the club. Aim for a group of around 10 to 15 members, but anything from six to 20 people can work. It's important that everyone is committed to contributing financially and participating regularly in meetings and investment decisions.

Hold a Preliminary Meeting

Once you've gathered interested family members, hold an initial meeting to discuss the formation of the club. Define the goals of the club and ensure everyone is on the same page regarding their investment philosophy and approach. Determine how much each member can contribute financially and set minimum monthly contributions. Discuss the possibility of a joining fee to cover administrative costs.

Iron Out the Details

Hold an organizational meeting to finalize the details of the club. Decide on a name, when and where to meet, and how often. Define and appoint roles within the club, such as president, secretary, treasurer, and investor, and outline their responsibilities. Discuss how the club will manage payouts, divestment, and what will happen when a member wants to leave.

File the Necessary Paperwork

To pool your money and invest together, you'll need to incorporate your investment club as a general partnership. Write out the rules and have each member sign an agreement. You'll also need to apply for an Employer Identification Number (EIN) from the IRS and file a "Certificate of Conducting Business as Partners" form with your local jurisdiction.

Open Accounts

Open both a checking account and a brokerage account. Choose a broker that suits your needs, whether it's a full-service, discount, or online broker. Many investment clubs choose a discount or online broker to keep costs low.

Establish Club Operating and Accounting Procedures

Develop procedures for the day-to-day operations of the club, including how you will track transactions and calculate each member's share. Decide on an accounting method and consider using accounting software to make the process easier.

Develop an Educational Agenda

Since not all family members may have the same level of knowledge about investing, create an educational agenda to bring everyone up to speed. Ask each member about their questions and topics of interest, and choose group education sessions led by members or outside experts. Provide a list of reputable sources for research.

Research and Make Investments

Once contributions have been made, start researching potential investments such as stocks, mutual funds, or investment properties. Have each member research and present their ideas, then vote as a group on which investments to make and how much to allocate to each. Remember to keep some funds uninvested for future opportunities.

Celebrate Victories and Learn from Losses

Investing can be emotional, so it's important to celebrate your victories and learn from your losses together. This will help keep everyone motivated and engaged in the group. Remember that investing involves risk, and not all investments will be profitable.

Frequently asked questions