Do I need a Single or Multi-family Office?

An increasing amount of high earning business owners and families who have sold their businesses are turning to family wealth management offices to support them, instead of standard wealth management services.

When families weigh up the question of whether to set up their own single-family office (SFO) or use the services of an existing multi-family office (MFO), they often overlook the matter of the jurisdiction in which that family office should be. This is actually an essential element that deserves serious thought.

There are quite a few questions that need answering before deciding on the jurisdiction for a family office:

In which jurisdiction does the family need support?
What are the family’s goals?
What should the legal form be?
Which of the family’s (corporate) entities need to be managed, and by whom?
Which assets need to be preserved and protected?

All these considerations apply when establishing an SFO or choosing an MFO. You also need to select a country that is politically, economically and financially stable, provides easy access to financial service providers, and offers a sound infrastructure, and where staff is highly qualified and experienced.

A common mistake families make is to choose or create a family office in the same jurisdiction as where they live. Although this can be very practical, for example from a communication point of view, this is often not the best choice when examined from a wealth-preservation perspective. Because one of the primary roles of a family office is to safeguard assets, and to be able to assist the family under all kinds of circumstances.

A family office for wealth preservation

This means that the family office needs to be able to protect the family’s assets and interests against geographical, political, religious, personal and economic risks, while remaining fully operational under any circumstances.

Therefore, it is only logical that the family office should be located in a secure jurisdiction. Because unstable and unsafe jurisdictions outnumber the stable and safe ones by far, the majority of family offices will need to be located outside the home jurisdiction of the families they serve. This does not necessarily mean that the entire staff or all services must be located in a foreign jurisdiction; roles such as local secretarial support, lifestyle management services and local real estate management can be (partially) based in the family’s original jurisdiction.

In addition to providing stability and security, the jurisdiction of the family office must also:

Be easily reachable
Be tax-efficient
Allow the office to manage the family’s entities efficiently (holding companies, trusts, foundations, etc.)

Finally, most family offices prefer to be located in a jurisdiction known for having a reputable financial centre. It considerably simplifies the activities of a family office when it is in the vicinity of stable private banks and financial specialists with solid reputations and lots of experience.

All the essential requirements highlighted above ultimately limit the number of best possible jurisdictions to only a few and that is exactly why you find so many SFOs and MFOs in Switzerland.

Switzerland, the traditional safe haven

Switzerland is politically, economically and financially stable. It has been a neutral country since 1815 and has not been involved in any war since 1848. As Switzerland’s political regime is a so-called direct democracy, it is one of the few countries in the world where the population can have direct influence on all (proposed) federal and local legislation.

Switzerland’s economy is extremely stable. Thanks to broad diversification and strong domestic demand the Swiss economy has been growing steadily and has not been particularly weighed down by the worldwide economic and financial crisis. Thanks to its constitutional debt brake, the Swiss government has been able to produce a budget surplus every single year since the start of the financial crisis in 2008 and as a result Switzerland nowadays has one of the world’s lowest government debt ratios and is one of the few countries left with a AAA rating.

Swiss financial infrastructure

As mentioned, close proximity to solid private banks is key, as one of the primary tasks of a family office is to manage your wealth. Swiss banks have been world leaders in the wealth management industry for a very long time and some of the best-capitalised banks in the world are located in Switzerland. A Swiss private bank stands apart from local private banks thanks to its expertise and experience in investments and investment classes from around the world.

A Swiss private bank is not only knowledgeable about the securities traded on your local stock exchange, it also advises you on the securities traded on all other international stock exchanges (contrary to, for example, US-based banks).

Switzerland also has a very attractive corporate income tax system. Rates are relatively low and Switzerland has signed agreements for the avoidance of double taxation with many countries. On top of that Switzerland is also a signatory to the Hague Trusts Convention thereby recognising the existence and validity of trusts. All this is backed up by Switzerland’s reputable, trustworthy and solid legal system and its topflight specialists such as tax advisors, law firms, wealth planning specialists, notaries, audit firms, etc.

Moreover, the infrastructure in Switzerland is world-class. Geneva and Zurich have highly developed airports with flight connections worldwide, many direct, and both city centres can be reached within twenty minutes from their respective airports.

Family office staff

Last but not least, highly experienced, motivated, reliable and educated staff with financial experience can be recruited or found in Switzerland. But even more importantly, when you intend to establish a SFO, such staff currently located elsewhere in the world can also be persuaded to relocate to Switzerland as it is considered one of the best countries in the world to live in, due to its very high living standards.

One of the best locations for a family office

All these elements make Switzerland one of the best locations to use a multi-family office or to establish your own single one. Because a family office is not only there to manage your wealth, but also to safeguard and protect it when your home country turns out to be less stable than you had hoped or expected.

https://www.linkedin.com/in/jan-van-bueren-0a522111

These archived articles are written by authors no longer participating in the Family Matters On Line project. These articles may still be relevant however. If you want more information please do not hesitate to contact us and we will try to put you into contact with the original author or another expert in family matters.

Family governance: charities, philanthropy, education and family offices

Family Governance is how families make decisions together. If they create a good system, i.e. one that includes transparency, accountability and participation—they should be able to avoid the family fights that often occur in inheritance-related disputes. The process the family follows in creating a good governance system is easy to understand but requires the commitment of all family members. By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner. This article includes “how to” create a good family governance system.

Why do wealthy families have such public fights about inheritance issues? How can they avoid them? How can creating a good family governance system help?

Charities, philanthropy, education, family offices and good Family Governance

Family Charities and Philanthropy. Many families are involved in charities that are important to the family. Sometimes these are areas of concern that pull the family together; sometimes these are actual operating family charities. These can also be included in a Family Constitution. Some examples include:
- Agreeing on annual grants from the family charity to direct needs
- Creating and supporting an orphanage, a business school, a mosque, etc.
- Working through “RFP”s (request for proposals) to ask direct charities what they would do if they received a grant of a specific amount.
- Creating a “younger generation” group that would be authorized to agree on and distribute a certain amount each year.
- Include an investment committee that would provide oversight to ensure that the investment funds being held for charity would include restrictions on the permitted investments that would be aligned with the family’s values.
Family Education Oversight. In looking ahead to the future many families decide that the quality of education of all of the young family members will be a critical factor in the long-term success of the family. Those families have included in the Family Constitution an obligation to oversee the education of all family members. Some create specific education modules that are designed to make the younger family members future owners with a strong knowledge base in the areas of concern to the family (this could be only investment skills or could include an understanding of the family business.)
Creation and Operation of one or more Offshore Trusts. Many families decide that they want to separate out some “safety” amount of the family wealth to set aside for any unforeseen needs of the family. A trust is often the ideal arrangement to use, and to diversify any economic or political risks, these trusts are usually set up in an off-shore jurisdiction. The terms of the trust can usually be written to cover any of the specific needs the family wants to provide for. For example, many families are concerned about potential uninsured catastrophic health care costs. Sometimes the trust is to be available for starting a business or buying a home.
Creation of a Private Trust Company. Whenever a family has a substantial number of trusts the issue of selecting the right trustee (or trustees) is often difficult. Several states in the United States have passed very friendly laws for families to create their own trust companies. Those trust companies can then serve as trustee of the family trusts (and the family owns the trust company.) In some cases the family trust company will partner with a large institution to provide the back office administrative and regulatory services. Several off-shore jurisdictions also have laws that welcome private trust companies.
Establishing and Operating a Private Family Office. When a family decides it has needs that justify hiring dedicated staff employees to serve those needs, it often decides to create its own “family office.” The provisions about the family office would be very much tailored to the needs of the individual family. They might include:
- Individual budget reviews
- Payment of all bills
- Hiring and supervising household staff
- Maintaining additional homes, yachts, aircraft, etc.
- Curating any special collections
- Obtaining appropriate risk coverage
- Putting in place emergency provisions (including kidnap protocols)
- Coordinating trusts and wills
- Overseeing the operation of any family charities
- Ensuring that appropriate tax planning is always in place
- Overseeing the investment of liquid portfolios (in some cases this is the only function of the family office, in which case they are more accurately referred to as private investment firms.)
Family Venture Funds Most families received the family wealth historically from an entrepreneurial business venture. With a concerned eye on the negative “shirtsleeves to shirtsleeves in three generations” proverb, many families are working proactively to instill and encourage that original entrepreneurial spirit. One way to do that is to create a Family Venture Fund, which might include the following:
- A fund from the family wealth is set aside to be used for new entrepreneurial projects.
- A family member would present a proposal, with a complete business plan, to the committee in charge of approving proposals.
- The approval committee could include a non-family member with experience in the particular field involved in a proposal.
- The committee could require a pay-back schedule.
- The funding could be as an ownership investment, a loan, or a gift.
- If it is funded as an ownership interest, the family will have one more common asset to tie them together.
- On-going monitoring is usually included (part of “accountability”).
Annual Family Gatherings. Finally, for the family to stay strong and connected to each other, they need to be with each other. Most families who work on family governance include a provision for annual gatherings. The annual gatherings can include:
- Celebrations of family milestones (anniversaries, graduations, public recognition, etc.)
- Fun team-building activities (river rafting, mountain climbing, camping, group cooking, fishing, etc.)
- Educational programs, about the family business or investment topics or professional skills building
- Reports on the operation of the family business, family investments and any family charities.
- Family stories and family history presentations
- Creation of a family history book
- Talent shows by family members

How can family a succeed?

• By creating a tailored family governance system.
• Family governance can take many forms—go ahead and be creative.
• The key is to include and respect all family members in creating a system for family decisions.
• With “transparency”, “accountability” and “participation” a family’s governance system should result in multi-generational success and continuation. (end of 4th article?) https://www.brhauser.com/

Should we have a Family Constitution and what should it cover?

By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner.

What is a Family Constitution?

A Family Constitution is like a constitution for a country (or the By-laws for a listed company). The benefits of having a Family Constitution are:

Decision-making is clear. In a Family Constitution the rules are set out for exactly how decisions will be made.
Which kinds of decisions are made? The Family Constitution will explain which kinds of decisions will made by the Family Council; which are areas of personal decisions, for the family member to decide (such as the Bill of Rights in the United States), and which are the major decisions that need to be referred back to the larger family group for approval. (For a listed company this is like the business areas that can be addressed, and which decisions can be made by the Board itself and which are the larger decisions that need to be referred back to the shareholders/owners for approval (such as a sale or major acquisition)).

What is usually included in a Family Constitution? Each Family Constitution is very much tailored to the particular family. Some families like to begin with a simple, short Family Constitution and add to it in future Family Council meetings. Other families like to address and include every issue they have in their minds.

Preamble is very important. The best Family Constitutions begin with a Preamble of why the family is making the Family Constitution. This allows a family to tell its story about why it cares, what the history is, and what the long-term goals are.
Flexibility is very important. The Family Constitution is intended to apply to future family members and in future circumstances. It is very important to include a provision on how the Family Constitution can be amended. It must be a flexible document or it will not survive.
Creation and Operation of a Family Council. The Family Constitution will include the basic structure of the family decision-making process. This includes the formation and operation of the Family Council.
Rules for Shared Assets. If the family has shared assets, these often cause friction within the family because of the lack of clear rules about how and when they are to be shared (and who is responsible for what). These include vacation homes, family compounds, private aircraft, yachts, etc. This is a common area that comes out of the initial individual interviews. The Family Council can propose rules for use, for approval by the larger family, and these rules can be included in the Family Constitution.
Conditions for Employment in the Family Business. If there is a family business, another area that often causes family conflict is whether or not there are any agreed-upon rules for entering the family business. Families who decide to have clear rules often want to include them in the Family Constitution. The exact rules will depend on the particular family. Sample rules include:
- Educational Requirements. Are there any agreed upon educational requirements? These might include having a particular type of degree, in a particular field of study, from a particular type of institution, with a particular set of successful grades, etc.
- Outside work experience. Another common type of requirement is to be employed outside the family business prior to entering the family business. These requirements often include the number of years to be employed outside, the type of outside business, and the success/promotions displayed during that time.
- Defined Progress System. After joining a family business, it may be helpful to spell out how important it will be for the family member to report to someone outside the family, who can monitor the progress by evaluations and also to provide mentoring.
- Provision of Executive Coach. Another provision that can be helpful to a family member who joins the business is to provide support in the form of offering an executive coach.
- Termination of a Family Member. This is not usually addressed, but is a very sensitive subject that could be addressed ahead of time, instead of at a time of crisis. Most families agree that it is important to the business, to the other employees, and to the family members, that the family member who works in the business be accountable for his or her performance in the same way that non-family employees are accountable. In the Family Constitution it may be sufficient to simply state that principle.
Family Members Serving on the Board of Directors. If there is an operating business, one area of great value for the future is to provide that one or more family members will be expected to serve on the Board of Directors. This area could include provisions for:
- The number of family members expected to serve on the Board.
- Their required experience (if any)
- Their term of office (best practices would treat them the same as all other board members)
- The possibility of creating a “Junior Board” for members of the next generation to gain experience of a Board.
- Encouragement of at least one family member to serve on the investment committee of the Board.
- If there are multiple businesses, to adopt a procedure of family rotation among the various Boards.
Dividend (and distribution) Policies. If there is a family business one issue that is always of great interest is the amount of a dividend distribution. This is an especially sensitive issue if one or more family members work in the business (and receive a salary income) and one or more family members do not work in the business (and would receive only dividend income). It is critically important that the employed family members are paid salaries that are considered fair by all family members. (The communication about the salaries is part of the “transparency” value.) It is also important that the whole family agrees that the dividend policy is a fair one.
Salaries for Family Members. Usually family members agree that a family member who is employed should be paid the same amount that a non-family member would be paid for the same position. That can vary by family, however. Some families agree that the employed family member, especially at the Chairman level, is expected to spend more as part of the related social obligations in that culture, and so should be paid more to cover those expenses.
Exit Provisions. If there is a family business, and especially if some family members are not satisfied with the amount of the dividend distributions, it may be wise to include in the Family Constitution a method for the dissatisfied family member to “exit” from his or her ownership position. In other words, the family member could sell his or her stock and receive the cash instead. In fact, some multi-generational family businesses claim that this “escape valve” has been the key to the lasting success of the business. https://www.brhauser.com

The benefits of mediation in family disputes

Can mediation solve family disputes? And if so what are the benefits of mediation in family disputes? Families are complex systems with several players. The way in which they function involves a combination of rational and emotional elements. It is only natural that people with their own individual talents, interests and perspectives do not always get along harmoniously. Spouses, children (clash of generations) and other members of the family system can all experience conflicts.

Can mediation solve family disputes?

Isolated and limited measures often fail to achieve any sustainable and positive effects. Legal action and other forms of enforcement of unilateral interests can certainly lead to results, but also to hurt and long-harboured resentment. The latter situation is particularly undesirable if children are involved.

Mediation is not magic but a practical craft. It is based on an acceptance that conflict exists and that it can be addressed. However, the result is not a foregone conclusion. In some cases the conflicts can be completely resolved. In other cases this is not possible, but it at least results in the consensual resolution of the consequences of a conflict. In this way the original conflict is contained and prevented from further escalating.

This in itself can be a considerable advantage if one thinks of the financial and psychological consequences of litigation that could stretch over many years. In mediation the parties have the opportunity of settling their issue by mutual agreement. The alternative to this is often a legal judgment, which can sometimes be difficult to predict in advance.

The process

The process is led by a neutral mediator (or by two co-mediators), whose core role is to help the parties work out a solution. The process can vary, but the common principle is that the participants clearly define where they are coming from and identify the interests underlying their personal perspective. What a person explicitly says and what their actual concerns are can sometimes be two quite different things. It is only once this groundwork has been carried out that fruitful and creative solutions can be found. These must be recorded in writing at the end of the process.

Sessions can be held in a choice or combination of different settings:

The traditional set-up consists of individual meetings over several weeks.
In the case of one-day sessions the participants begin in the morning and work in an open-ended fashion; and it finishes in the evening, whether or not a solution has been reached.
In shuttle sessions the participants are in separate rooms, at least for some of the time, and the mediator moves between them.
The participants can always have their lawyers or advisors with them during the sessions.
Hotel sessions, which are mainly one-day sessions, take place in a peaceful hotel.

Mediation is thus an option for working on family disputes in an effective and solution-oriented manner. https://allemann-recht.ch/
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Example of a Family Covenant – Part 2 of 2

Part 2 of Example of a Family Covenant

Suggested format of a family covenant with different clauses, as may be relevant, part 2 of 2, clausues 8-16.

9. Ownership and transfer of Company shares

Review (and amend if necessary) ownership structure with regards to various share types:

Decide whether the family members that hold a management share can appoint themselves and/or anyone on their behalf to the board of directors

Set the value of shares held by the founders, in the event of their death or incapacity.
Formulate the terms and procedures to be applied in the event that a shareholder wishes to sell his shares.
Refer to cases in which: shares are inherited (e.g. living spouse receives same compensation as the deceased but loses management and/or decision taking right).
transfer of shares following divorce.
transfer of shares to a family member.

10. Employment of family members

(Define who may take part in the management and control of the business and who may not, and under what conditions a family member who does not have ownership or managerial positions, can be employed by the company).

The parties to this covenant wish to qualify their children to work in the company and/or in its subsidiaries.
Every family member is allowed to work in the company for a certain period and (define period and salary).
(Define procedure for the acceptance of a family member for full time employment by the company, e.g., confirmation of the board of directors).
The salary of a family member must be confirmed by the board of directors following the recommendation of the direct superior of the said family member. The salary has to be in line with the average working wage, and will subject to the recommendation of the direct superior of the said family member.
Insofar as the Company shall need to employ service providers that are not in the main field of business of the Company (lawyers, accountants, computer persons etc.) preference shall be afforded to the employment of service providers from within the family, subject of course to their suitability to the position and the required service. Without derogating from that set out above, it is hereby agreed that every person from the family that shall desire to provide services to any of the Companies shall be required to present his candidacy for the provision of said services before the board of directors of the Company during the process for the selection of a service provider in which process other persons that are not members of the family are entitled to participate.

11. Company expenses

As a rule, the CEO of the Company shall ensure that all of the managers of the Company shall not impose expenses that are not incurred for purposes of the business on the Company resources.
Matters which cannot be agreed, or that constitute an inherited conflict of interest will be decided by the board of directors.

Consider adding a general policy as to ownership of vehicles, business trips, studies and education and vacation to the Family Covenant.

12. Withdrawals from Company / subsidiaries

The company will keep a register of the withdrawals of each family member.
A shareholder that withdraws funds from the Company must report on such withdrawal to the Company bookkeeper by the end of the month in which the withdrawal took place.
Settlement of all withdrawals will take place once annually. (Decide whether such settlement shall include all withdrawals, withdrawals and purchases made out of Company/ies account/s and also whether such settlement includes all expenses or if living expenses, for example, are excluded).
The salary of each shareholder and the maximum sum of withdrawals will be decided by the board of directors annually, at the beginning of each year. (The said amounts will be decided while taking into consideration the family desires to live at a high standard of living as well as the financial situation of the Company, based on its performance in the previous year.).
(Set a date for an initial settlement of accounts, in which all the assets of each shareholder will be evaluated, including past withdrawals and the value of real estate and financial assets; decide when and how a shareholder can withdraw and access funds following the said settlement).

13. Incorporation of holding companies

Consider replacing direct ownership with holding companies, one for each family; set out ownership structure and terms for transfer of ownership.

14. Family council

Consider the constitution of a family council, include details about:

Council Composition.
Topics to be discussed at the council and/or under the council responsibility, e.g., philanthropy, family inheritance, irregular finance of a family member, family-community relations.
Frequency of meetings.
Membership in council.
Quorum required for decision taking
Representation of an absent council member.
Presence of non-family members in council meetings.

15. Incorporation of family investment company/ies

Consider incorporating one investment company that will hold all family investments that are not part of the core business and that are not private assets of any of the family members:

Define the ownership structure and management of the investment company.
Decide how investments are reviewed, accepted and executed.

Amendment and updating the Covenant:

Define a certain time in which the covenant cannot be amended or changed.
Define the quorum required for accepting a proposed amendment.
This covenant may be amended upon the initiative of any party to the covenant, provided such change was discussed in the presence of all parties.

In witness for the acceptance of the principles described above, we convened in * and signed this Family Covenant on this * day of *(month), 201*. https://rosak-law.com/

____________________

Signature

Click here for part 1 of this article

Avi Abramovich

Rosak Law

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