Leverage The Power of a Family Office Author: Isaiah Payne, MBA Series 79, 7, 65, 63 & SIE

Preamble

This document was curated after an interaction I had with a family office at one of Richard Wilson’s Family Office Club Super Summit conferences in Fort Lauderdale, Florida in December of 2023. As a licensed and registered investment banker and placement agent, I attended with the intent of cultivating relationships with private-capital-market providers (ie family offices) to assist with providing quality deal-flow of private “direct” and “blind pool” investments. While networking with families, my business partner Walter Jackson and I repeatedly made an inquiry of the following “what is your investment mandate?” and intriguingly we were met with mixed responses; the most perplexing of which was “what’s that?”

It is out of this experience that this curated document was spawn; to assist families who have recently come into wealth due to a huge liquidity event, who don’t fully grasp the nature of what a family office is and how to maximize leveraging its value.

A family office is a generational wealth management mechanism utilized to protect, preserve, and pass down assets multi-generationally. The family office strategy leverages trusts to shelter assets from legal, tax, and creditor-like liabilities, while fiduciarily growing the family’s assets to preserve the family’s wealth multi-generationally. It may also be leveraged as a concierge service and tool to safeguard the values and wisdom of the founding members; however, this reading will focus on a few core business, investment, and management aspects of running a family office.

Summary – Overview of this White Paper (The Abstract)

Main ideas:

The benefits of creating a family office: This reading aims to help families who have recently acquired wealth to create and manage a family office, which is a generational wealth management mechanism. It covers the benefits and elements of trusts, the roles and advantages of private investment bankers and private equity, and the use of life insurance as an estate planning and asset protection tool.

Trust accounts as the foundation of a family office: A trust account is a legal arrangement that allows a person (trustor) to transfer property to another person (trustee) who manages it for the benefit of a third person (beneficiary). Trusts can be used to avoid probate, minimize estate taxes, and protect assets from creditors and lawsuits. Trusts can be classified as irrevocable or revocable, simple or complex, and bypass or not. Trusts require the trustor’s intention, the trustee’s fiduciary duty, and the trust res or corpus (pledged assets).

Private investment bankers as general partners for a family office: A private investment banker is a licensed and registered professional who can provide valuable services to a family office, such as drafting an investment mandate, sourcing and evaluating proprietary deal-flow, finding co-investors, and accessing the private and primary public securities marketplace. A private investment banker can work in-house or in a limited partnership arrangement, where they manage the program and receive a management fee and a carried interest on the profits, while the family office acts as a limited partner and enjoys favorable tax treatment, limited liability, and diversification. Because investment bankers typically work on multiple mandates at one time, carving out a role in-house would create space for a private investment banker to work on mandates exclusively for you.

Private equity life cycle and the roles of general partners: The private equity life cycle consists of four phases: fundraising, investment period, holding period, and divestment period. During these phases, the general partners are responsible for raising capital, deploying capital, monitoring and adding value to the investments, exiting the investments, and returning capital to the limited partners. The general partners also report to the limited partners regularly and may hire external advisors and experts to assist them.

The advantages of life insurance as a tool for estate planning and asset protection: Life insurance is a contract that pays a death benefit to a beneficiary upon the death of the insured. Life insurance creates an immediate estate and can serve as collateral for a loan, include a tax-free investment component, offer a tax-free death benefit that serves as estate insurance, allow policy changes without tax consequences, and shield liquid assets from creditors. Life insurance policies can be either term or permanent, depending on the duration and features of the coverage.

Introduction

When a client dies, his investment assets are held in an estate account, however Estate accounts can be created prior to the death of a client which provides as a legal defense from taxes and creditors. An estate represents the total assets and liabilities of an individual, including all types of real and personal property, both tangible and intangible. In most cases, the assets are distributed to whom the decedent designated. The person who is identified in the decedent’s will to oversee administering the estate, paying all the applicable taxes, and distributing the assets to the decedent’s heirs is known as the executor or administrator. If the individual dies without a will (intestate), the courts appoint the executor/administrator.

Executors/administrators are considered fiduciaries and are required to safeguard the property for the benefit of the estate’s heirs.

How Assets Are Passed Down

Per Stirpes in Latin, means “by branch” or “by roots.” In the estate planning context, this means that the living member in the class of beneficiaries who are closest in relationship to the person making the distribution will receive an equal share. However, if a member in the class of beneficiaries who are closest in relationship to the person making the distribution is deceased and survived by any descendants, then the deceased person’s descendants will take “by representation” what their deceased parent would have taken.

Per Capita in contrast to per stirpes, means taking “by total headcount” or “by a total number of individuals.” In the estate planning context, this means that if the beneficiaries are to share in a distribution per capita, then all the living members of an identified group. (e.g., only children, only direct descendants, or any relative) will receive an equal share. Per capita distributions are often set up to ensure each member of one generation (e.g., children, grandchildren) will receive an equal share. However, if a member of the group is deceased, then a share will not be created for the deceased member and all the shares of the other members will be increased accordingly.

Tax Considerations

Estate tax is levied on an heir’s inherited portion of an estate if the value of the estate exceeds an exclusion limit that’s set by federal law ($12,060,000 for death year 2022). Estate Tax can be quite high. The estate tax is typically imposed on assets that are left to heirs but doesn’t apply to the transfer of assets to a surviving spouse. The right of spouses to leave any amount to one another is known as the unlimited marital deduction.

The spouse who dies first may also leave an unlimited amount to the survivor without incurring estate taxes.

Real Estate

Transfer on Death Deed a simple matter to hold the title in a way that lets the survivor inherit it without probate. However, if the real estate is in the person’s name alone, his two main options are to establish a living trust or a transfer-on-death deed. A transfer-on-death (TOD) deed, also referred to as a beneficiary deed, appears just like a regular deed that’s used to transfer real estate. However, a crucial difference is that it will not take effect until the person’s death. The person must record (file) the deed with the local land records office before his death, but he’s able to change his mind and revoke/alter the deed at any time during his lifetime.

Section 1: Trust Accounts (The Foundation of a Family Office)

Trust accounts will always have several elements. The first is a person (a trustee) who’s placed in charge of managing property for the benefit of another person (a beneficiary). The person who creates the trust may be referred to as the trustor, grantor, maker, donor, or settlor. Another required element of a trust is the settlor’s intention to create the trust. Finally, all trusts must have a subject matter, often referred to as the trust res or corpus. The trustee has legal control of the trust property (corpus) but must manage it in the interests of the beneficiary. Therefore, legal, and beneficial control of the property is separated. In many cases, the person serving as the trustee must present documentation verifying his appointment.

The court-issued document is referred to as a Certificate of Incumbency.

In accordance with the Uniform Prudent Investor Act (UPIA), a trustee has a duty to invest the trust’s assets prudently. This duty includes diversifying the trust’s assets to limit risk. Out of a trust’s assets, trustees are responsible for paying the expenses incurred in administering the trust including trustee’s fees, accounting fees, tax preparation fees, and investment advice. A Trust must File form 1041 for Tax purposes.

Recap: Required Elements of a Trust

You need a person who creates the trust as the trustor, grantor, maker, donor, or settlor.
A person (a trustee) who’s placed in charge of managing property. This could be an LLC, as corporations are legal “person(s)” according to Black’s Law Dictionary.
A person (a beneficiary) who is set to receive beneficial interest from the trust.
The donor’s intention to create the trust.
A subject matter, often referred to as the trust res or corpus. The trust property (corpus).

A trust may be created for any purpose that’s not illegal or against public policy. Trusts are often used as an estate-planning tool—a way of passing property from one person to another—while avoiding probate and minimizing estate taxes.

Types of Beneficiaries

A trustee cannot favor the interests of one beneficiary over another when managing and investing the trust’s assets. All beneficiaries are equal unless otherwise stated in the trust.

Trust accounts can have different types of beneficiaries:

1. An income beneficiary is one who only has claims on the income, but not the property (corpus) in the trust.

2. A remainder beneficiary has the right to receive property if a trust is being dissolved.

3. Typically, a primary beneficiary has the first claim to assets if a trust is broken up.

4. A contingent beneficiary is given property only after the primary beneficiary cannot accept the assets (e.g., the primary beneficiary has passed away).

Types of Trusts

Irrevocable Trusts may not be modified or terminated without the permission of the beneficiary. Once assets are transferred to the trust, all rights of ownership are removed from the grantor. Assets held in an irrevocable trust avoid probate and are not included in the grantor’s estate. Since all rights of ownership to the assets are transferred to the trustee, this provides creditor protection to the grantor, who can also designate himself as the trusts primary and/or sole beneficiary. An irrevocable trust is simply a trust that cannot be changed after the agreement has been signed. The typical revocable trust will become irrevocable when the person who created the trust dies. At this point, the trust can be designed to break into a separate irrevocable trust for the benefit of a surviving spouse or into multiple irrevocable lifetime trusts for the benefit of children or other beneficiaries. Irrevocable trusts are commonly used to remove the value of property from a person’s estate so that the property cannot be taxed when the person dies. In other words, the person who transfers assets into an irrevocable trust is giving over those assets to the trustee and beneficiaries of the trust so that the person no longer owns the assets.

Bypass Trusts are a type of irrevocable trust that’s most used to pass assets from parents to children at the time of the second parent’s death. The trust is structured so that the children will not be required to pay estate taxes on assets that are more than the current estate tax exemption.

Revocable Trusts as opposed to the irrevocable trust, provides the grantor with the ability to alter or cancel (terminate) the trust and reclaim the assets. Income earned during the life of the trust is distributed to the grantor. Like irrevocable trusts, the assets placed in a revocable trust avoid probate, but will be included in the value of a deceased’s estate. Revocable trusts, also referred to as living trusts or inter vivos trusts, can be changed at any time. In other words, if a person has second thoughts about a provision in the trust or changes her mind about who should be a beneficiary or trustee of the trust, then she can modify (amend) the terms of the trust agreement. Additionally, if a person decides that she doesn’t like any of the features of the trust, then she can either revoke the entire agreement or change/amend its contents. The downside of a revocable trust is that assets funded into the trust are still considered the person’s personal assets for creditor and estate tax purposes.

Simple Trusts require the trustee to distribute all the income generated by the trust to the beneficiaries in the year in which the income is received. The corpus (principal) of the trust must be left intact; therefore, the trustee is not allowed to make distributions of principal to the beneficiaries. (Interest and dividend payments are normally considered income, while capital gains are considered part of the trust’s principal.)

Complex Trusts can perform certain activities that a simple trust cannot, such as making tax-deductible contributions to charities and retaining income that’s generated by the trust. The trustee may also distribute the principal to the beneficiaries in accordance with the terms of the trust.

“Given the flexibility and liable defense provided by trust accounts, one can pick and choose any combination of arrangements to suit a grantor’s needs, while still maintaining control of one’s assets. In essence one can structure a trust to own nothing, yet control everything.”

Section 2: Managing The Assets in your Trust (Running your Family Office Like a Lucrative Business)

Now, let’s pull all of this together;

“A trust may be created for any purpose that’s not illegal or against public policy. Trusts are often used as an estate-planning tool—a way of passing property from one person to another—while avoiding probate and minimizing estate taxes.

A person (a trustee) is placed in charge of managing property. This could be an LLC, as corporations are legal “person(s)” according to Black’s Law Dictionary.

Since all rights of ownership to the assets are transferred to the trustee, this provides creditor protection to the grantor, who can also designate himself as the trusts primary and/or sole beneficiary.

Given the flexibility and liable defense provided by trust accounts, one can pick and choose any combination of arrangements to suit a grantor’s needs, while still maintaining control of one’s assets. In essence one can structure a trust to own nothing, yet control everything.”

Thus, if you are a high-net worth individual or family, then it would be prudent to hire professional help to assist in the strategic advisement and management of your assets. My professional advice is to put together a proper team to provide the highest standard of professional service to help manage your assets. In practice this would be in the form of hiring a general partner to help with Fund and Trust Administration tasks like accounting, valuation, and reporting related activities. It also expands to leveraging their network and creating access to both private and primary public market investment opportunities.

Private Equity, Investment Banking and Direct Participation Programs (Key Talent: Finding the Right Partner)

In Richard Wilson’s book “The Single Family Office: Creating, Operating & Managing Investments of a Single Family Office,” Richard quotes:

“Many family offices are pitched by investment bankers on deals, such as buying a $20M retail business or a $10M piece of real estate. What is less common is for a single family office to have an investment banker working on mandates exclusively for them. It can be very advantageous if you can identify an investment banker that is experienced, well-connected, and available to work on sourcing very specific types of acquisition opportunities. My family, for example, hired someone earlier this year full-time, and he investigates acquisition targets and potential new business launches for Wilson Holding Company. We have this role in- house, but it might be less expensive for you to partner with someone outside of the core team” (105).

It is upon this point that I would like to expand as a plethora of family offices are pitched by investment bankers on deals; however, what is less understood, considered, and exercised is for a family office to have a personal private investment banker working on investment mandates exclusively for them. It can be very advantageous if you can identify an investment banker that is very knowledgeable, has a broad network, is interested in partnering with a family office on a bespoke solution, and is willing to work on sourcing very specific types of deal opportunities with the ability to access that particular security type’s marketplace. Since investment bankers typically work with multiple deal sponsors across multiple mandates, creating room for a role in-house or intimately partnering with a boutique investment bank outside of the core team creates enormous value since it creates space for them to work on mandates exclusively for you.

Whether you operate a fund or not within your family office, I recommend enlisting a private, bespoke, boutique investment bank as a general partner to aid in managing your assets from drafting an investment mandate, to originating proprietary high-quality deal-flow that matches your investment mandate, to prudently evaluating your deals, to finding co-investors to partner with you on deals.

The Financial Industry Regulatory Authority licenses and registers investment banking registered representatives through Broker-Dealers which are known as Member Firms. Therefore, not only would you have an actively licensed Mergers & Acquisitions advisor’s expertise and guidance, but you would also have direct access to a broker-dealer network with access to its private securities offerings, which could plug you into a capital market ecosystem that is aligned with your investment interests. This provides a strategic advantage for both acquiring assets and selling them.

Limited Partnership Arrangements

To establish a limited partnership, the partnership files a Certificate of Limited Partnership with the state. A limited partnership requires a minimum of two partners—one general partner and at least one limited partner. The general partner (GP) is responsible for managing the program and must contribute at least 1% of the program’s capital. The limited partner (LP) is a passive investor who has no control over managerial decisions. Instead, limited partners are typically the investors who contribute a large amount of the program’s capital.

General Partners

General partners have unlimited liability and are responsible for all management affairs of the partnership. GPs also assemble investors’ capital, collect fees for overseeing the partnership’s operations, keep the partnership books, and direct the investment of the partnership’s funds. General partners have a fiduciary relationship to the limited partners in these programs.

Limited Partners

In the simplest terms, limited partners are passive investors that make no day-to-day management decisions. In fact, if limited partners take on an active role in the management of the programs, they may be considered general partners and will have unlimited liability.

Advantages of Limited Partnerships

Private equity fund returns have historically regularly outperformed the returns of equivalent listed securities.
Favorable Tax Treatment Subchapter C Corporations are taxed twice. Corporations are required to pay taxes on their income and then their shareholders pay taxes on any dividends that the corporations distribute. Unlike corporations, partnerships are not taxable entities. Instead, the partnership’s income (or loss) is allocated directly to the partners for tax treatment on their personal income tax returns (i.e., it has pass-through treatment and is reported as passive). Any passive income that’s distributed is taxed as ordinary income. Since the business doesn’t pay tax, limited partners may receive more income from a profitable DPP than from a profitable corporation since a corporation’s dividends are paid as after- tax distributions.
Cash Dividends This form of investment income is taxable in the year in which it’s paid to the shareholder. Individuals are taxed on the full amount of all cash dividends they receive, even if those dividends are reinvested with the issuer.

Qualified cash dividends receive special tax treatment. A dividend is considered qualified if the dividend is (a) paid by an American corporation, including mutual funds, and certain qualifying foreign corporations whose stock is traded in the U.S. and (b) the investor meets the holding period requirement—60 days for common stock and 90 days for preferred stock)
Qualified cash dividends are taxed at a maximum rate of 20%, however, an investor’s income will determine the rate at which they’re taxed. In other words, if an investor’s ordinary income is low, she may not be required to pay any taxes on qualified dividends.

Capital gains are generated when an investment is sold at a greater value than its cost basis. If an investment has been held for one year or less at the time of the sale, the gain is considered short-term and will be taxed as ordinary income rates. However, if the asset is held for more than one year, the gain is considered long-term and is taxed at a maximum rate of 20%.
Capital losses are generated when an investment is sold at a lower value than its cost basis. As with capital gains, if an investment has been held for one year or less at the time of the sale, the loss is considered short-term. If the asset is held for more than one year, the loss is considered long-term. Capital losses are not taxable. Instead, the IRS allows capital losses to be netted against capital gains. Investors are permitted to net (offset) capital losses against capital gains without a maximum dollar limitation. The result will be a net capital gain or a net capital loss.
Limited Liability In return for a share in a project’s income and deductions, limited partners assume financial risk only to the extent of their investment. In other words, limited partners cannot lose more than the amount that they have at risk.
Diversification Many limited partnerships invest in assets that have little or no correlation to the stock and bond markets. These programs may provide an investor with a level of diversification that may not be available from traditional mutual fund offerings.
Passive Activities are investments in which an owner of a business doesn’t materially participate in its operations throughout the year. Investments in direct participation programs and rental activities are considered passive activities.
Losses that are generated by passive activities may only be deducted against income from passive activities now and in the future. If passive losses exceed passive income, the excess passive losses may be carried forward indefinitely to offset passive income in future years.
As an added benefit, when the ownership interest in a passive activity is sold, the investor can deduct all passive losses that are carried forward against any form of income—passive or non-passive.

Limited Partnership Fee Structures (A Win-Win for Everyone)

The fee structure is designed to align interest between general partners, limited partners, and the management teams of the direct investments. Most general partners are compensated in carried interest as well as a management fee. The management fee is typically 2% annually on committed capital, with a 20% carry on profits over a certain hurdle rate, often an 8% IRR. The management fee is based on the funds raised or assets under management. The management fee is used to cover salaries and operating costs. When the funds increase in size (Assets Under Management), so does the management fee.

Carried interest is calculated on a deal-by-deal basis or after all committed capital has been returned to the LPs. There is a waterfall method, where profits are first received by investors until they recoup their initial contributions and agreed minimum profits, followed by a catch up for the GP, and finally an even 80/20 split on the remaining proceeds. Finally, management teams of portfolio companies also receive a share of profits through equity schemes known as management incentive programs.

Another Word on Fees

Creating a role in-house for a private boutique investment bank establishes a genuine partnership that can adapt to the unique needs of a family office. This collaboration should be perceived as a business partnership dedicated to building a successful and sustainable wealth management strategy.

To ensure alignment and avoid potential conflicts, it is crucial to establish clear agreements on handling salaries, bonuses, distributions, and reinvestment capital. This structured approach ensures that all parties benefit equitably, enjoying payouts during divestment periods while maintaining consistent cash flows throughout the investment lifecycle.

Organization and Governance

Most limited partnerships have lean HR structures with 3-6 levels of seniority. Principles, Vice Presidents, Associates, and Analysts. Advisory Committees can be formed to help with governance and steering. There is also a CFO and financial controller, which is typically outsourced for small AUMs under $150M and they help with fund or trust administration and investor reporting. LP reporting standards are agreed upon within the LP agreement.

Roles and Responsibilities of General Partners

Creating an investment mandate – A mandate is a document that leverages selected criteria designed to direct the allocation of investment dollars often supported by an investment thesis often in the form of a pitch deck and or business plan.
Limited Partnership Reporting.
Deal Origination,
Deal Evaluation,
Deploying Capital on Select Activities,
Adding Value to the Investment,
Exiting the Investment,
and Returning Capital to Limited Partners.

Why Investment Bankers are a valuable asset to the GP

First, you must understand what Investment Banking is

In layman’s terms, the core product of investment banking is Mergers and Acquisitions (M&A). Investment bankers can work on either the buy-side or the sell-side of these transactions. M&A is when a business owner decides to sell his business to an investor or acquiring company, or when an investor or acquiring company decides to acquire or invest in a business, or an asset or division of a business.

M&A can be a powerful tool for business growth allowing companies to gain new capabilities, enter new markets, acquire new technologies, acquire key talent, increase revenues, reduce costs and increase enterprise value. However, they are also complex and risky. This is where investment banks come in (Watch a brief video of investment banker Isaiah Payne, MBA advise on 8 key considerations you should account for when determining how much you should be paying during an acquisition).

Investment banks are regulated entities that can guide businesses through the entire M&A process. Investment bankers must pass the Financial Industry Regulatory Authority’s (FINRA’s) Securities Industry Essentials exam and Series 79 Investment Banking Registered Representative exam to practice Mergers and Acquisitions, Tender Offers and Financial Restructuring Transactions. From identifying potential acquisition targets or interested buyers and acquirers, to conducting due diligence, valuing the company, negotiating the deal, and navigating regulatory requirements; an investment bank’s expertise can be invaluable.

Businesses also run into the need of using outside money to grow, and investment bankers raise capital for these businesses often in the form of private placements. Investment bankers can privately place debt and equity into these businesses on negotiated terms that are beneficial to both the investor and the investee. These placements can be less costly and quicker than public offerings and offer flexible terms that better match the needs of the company and the investors.

Finally, since investment bankers are uniquely positioned at the intersection of private money providers and issuers of companies selling private stock in their company either in whole or in part, business owners often approach investment bankers directly in need of equity and debt financing or a combination of both, which provides a tailwind for investment bankers to generate proprietary deal-flow.

Second, let’s define the private equity marketplace

In layman’s terms private equity is private capital provided by accredited investors and qualified institutional buyers used to finance private securities. Asset classes within the private marketplace are broad, but can encompass real estate, debt, commodities, and businesses.

Most general partners within private equity specialize within a specific subdivision. The four main categories are:

Venture Capital (investing in Pre-seed to Series D early-stage companies)
Growth Equity (investing a minority or non-controlling stake in growth-stage companies)
Leveraged Buyouts (acquiring mature companies)
Distressed Turnarounds (scratch n dent or value investing)

Next, let’s look at the Private Equity Life Cycle

Fundraising – Lasts 12-18 months, and typically a placement agent is hired to assist with marketing material and investor introductions.
Investment Period – The period that the fund will deploy capital defined in the legal documents of the fund. Typically set over a 5-year horizon. After the investment period, the fund cannot make any additional investments into new businesses. Exceptions are typically made for already invested businesses such as add-on acquisitions, which are not considered new investments, as the use of proceeds is used to help with inorganic growth of a current portfolio company. All committed capital is not called day 1 and often not all invested capital is called throughout the investment period. Uninvested capital is called “dry powder.”
Holding Period – This is the period in which portfolio company is held by the fund. GPs will work closely with the management team of the portfolio company to try and create value through various strategic initiatives. The GPs monitor the performance of the investment via dashboard reports updated on a minimal monthly basis, typically prepared by the CFO of the portfolio company. The dashboard will contain important KPIs that monitor business drivers. The GPs will become intimately familiar with ongoings of the portfolio company and the industry. The GPs will share this information with the LPs as part of regular quarterly and annual reporting. LP reporting includes high level financial information, any material developments since the last report. Reports include: M&A activities, new strategic initiatives, major industry changes, or reasons for poor performance. Annual reports are more comprehensive and include full financial information with explanations, key milestones achieved, and an updated valuation analysis.
Divestment Period – This is the period where the Fund exits its investment. Proceeds are distributed and returned to LPs and GPs based on a waterfall distribution.

Now, let’s look at the three roles of the GPs Post Acquisition

Monitor investment and report to LPs reporting regularly on company developments, milestones accomplished, and valuation changes (quarterly + annual reports).
Help management create value interacting frequently with the management team of the portfolio company.
1. Board of directors: the GPs will sit alongside the CEO, CFO & outside independent members the PE firm picks. This forum will act as a sparring partner with management to oversee and influence management, strategy, and provide checks and balances to the investment to ensure the investment is meeting and exceeding plans.
2. Direct Intervention: The GPs roll up their sleeves and contribute and or bring in external advisors and resources through the GPs network to add value to the investment. This is normally in parallel with the board. GPs will employ investment banks, consultants, and other experts where necessary. Examples would be around: business planning, strategy implementation and execution.
Prepare for exit: GPs ensure value creation milestones are being met by management, opportunistic value creation is being grabbed, and the investment is being upkept, attractive, and on the map for future buyers.

Finally, let’s tie it altogether

During the fundraising process an investment banker would add a licensed placement agent and securities marketer to the GP that could be leveraged to tackle marketing material, introduce co-investors, and raise follow-on private capital for your investments.
During the investment period the investment banker would provide an anchor for originating proprietary deal flow in accordance to your investment mandate. The leads generated allows for cherry picking of select opportunities as well as an opportunity to originate sell side non-select opportunities for fees.
During the investment period through post-acquisition, you would have a licensed M&A advisor helping evaluate and diligence deals for you. As most wise investors are aware, you make your money when you buy, not when you sell. (Watch a brief video of investment banker Isaiah Payne, MBA explaining how to plan to increase your Internal Rate of Return and create additional enterprise value before, during, and post acquisition).
Finally, during the investment through divestment period, you have an investment banker supporting you in deal structuring and negotiations. If you’ve taken the time to watch the previous two videos that I’ve supplied thus far in this reading, then you understand a small piece of the kind of value that this brings to a transaction.

Concluding remarks on the matter

The Uniform Prudent Investor Act (UPIA) requires a trustee to invest the trust’s assets wisely. This includes spreading the trust’s assets across different types of investments to limit risk. Out of a trust’s assets, trustees must cover the costs of running the trust, such as trustee’s fees, accounting fees, tax preparation fees, and investment advice.

Therefore, if you are a wealthy individual or family, you should consider hiring professional help to help you plan and manage your assets. My professional advice is to assemble a qualified team that can provide the best level of professional service to help you manage your assets. In practice, this would mean hiring a general partner to help with Fund and Trust Administration tasks, such as accounting, valuation, and reporting activities. It also means using their network and creating access to both private and primary public market investment opportunities.

Whether or not you have a fund within your family office, I suggest hiring a private, customized, boutique investment bank as a general partner to help you manage your assets, from creating an investment mandate, to finding original high-quality proprietary deals that match your investment mandate, to carefully evaluating your deals, to finding co-investors to join you on deals.

Since there are many different types of assets traded in the private equity market, if you are a family office that wants to invest directly in a specific type of asset with a specific investment strategy, you should think about having a personal private investment banker as one of your main general partners or working closely with a boutique investment bank to work on mandates exclusively for you, as investment bankers can add value to every stage of the private equity life cycle.

It can be very beneficial if you can find an investment banker who is very knowledgeable, has a wide network, is interested in working with a family office on a tailored solution, and is willing to work on finding very specific kinds of deal opportunities with the ability to access that type of security’s marketplace. You would not only have the expertise and guidance of a licensed Mergers & Acquisitions advisor, but you would also have direct access to a broker-dealer network with access to its private securities offerings, which could connect you to a capital market ecosystem that matches your investment interests. This gives you a strategic advantage for both buying and selling assets.

Section 3: Life Insurance (Insurance for your Estate)

Creates an Immediate Estate

A person can create an estate through earnings, savings, and investments, but all these actions require significant action and a significant period. The purchase of life insurance creates an immediate estate. When an insured purchases a life insurance policy, they will have an estate of at least that amount the moment the first premium is paid. There is no other legal method by which an immediate estate can be created at such a small cost. Life insurance is, therefore, an asset on the personal balance sheet, which can be used as insurance for your estate and guarantee a face amount of assets will be passed down tax free.

Can Be Used as Leverage for a Loan

A life insurance policy can be used as collateral for a business loan or mortgage. The borrower must be the owner of the policy and the policy must remain current for the life of the loan with the owner of the policy continuing to make all necessary premium payments for the insurance. This is done through a process known as collateral assignment (lender becomes the assignee, not the beneficiary of the policy), provided the insurance company allows for assignment of the policy. There are instances where term life insurance is used to collateralize debt, whereas lenders will extend credit if the face amount of the term policy is equivalent to the credit balance and length of the loan. Other lenders may extend credit to borrowers who have a cash value component to a permanent policy.

May Include a Tax-Free Investment Component with Guaranteed Accrued Interest

Unlike term insurance, an advantage to whole life and many other permanent life insurance policies is its potential to accumulate cash value. While the policy owner is still alive, he may surrender (cancel) the policy and receive this money (also referred to as the cash surrender value).

To create cash value, the insurance company subtracts the cost of the insurance and other expenses from the premium payments, with the remainder invested in the company’s general account and allowed to grow on a tax-deferred basis. The company will normally guarantee a minimum return on this money. The longer the policy is in force and the longer the premium payments are made, the greater the potential cash surrender value.

The policyowner may also borrow against his policy’s cash value without tax consequences; however, the owner will be charged interest on the loan by the insurance company. If the loan is not repaid, interest charges will accumulate and increase the size of the outstanding balance. Ultimately, if the insured dies with outstanding loans, the company will deduct the loan from the death benefit.

Unlike other life insurance policies Variable Life insurance like all variable products are considered securities and must be registered with the SEC. However, an investor may create a separate and sub-accounts within this investment vehicle that invests in stocks, bonds, and money market securities tax deferred, while taking advantage of the loan policy which allows withdraws on the capital gains without tax consequence.

Equity-indexed insurance policies are NOT considered securities. Instead, they’re hybrid products that combine elements of both fixed and variable insurance. The returns are linked to the performance of an underlying stock index.

The company that issues the equity-indexed insurance policy guarantees a minimum rate of return (as in a whole life policy), but the policies ultimate return will vary depending on the performance of the index to which it’s linked. The investor’s risk is somewhat limited, but so too are her potential returns. Many equity-indexed policies are linked to the S&P 500, but some use other indexes, such as the Dow Jones Industrial Average, the Nasdaq 100, or another index that’s selected by the investor.

Term Life Insurance

Term life insurance is best suited for people who only want life insurance protection and are not interested in using their life insurance policy for investment purposes. Buy term and invest the rest is a widely used adage for any person buying term insurance. Adhering to this concept requires an individual to be disciplined in setting aside money to invest in higher performing assets. Often, people who purchase term insurance only want the coverage to last until a specific financial obligation is met (e.g., paying off a mortgage or paying their child’s college tuition).

Tax-Free Death Benefit

The death benefit from a life insurance policy passes tax-free to its beneficiary. However, if the deceased owned the policy, the death benefit will be included in his estate for the purpose of calculating estate taxes. To avoid this problem, many tax advisers recommend that the insurance policy be placed in the name of the beneficiary or in an irrevocable life insurance trust.

Change Policies as Needed Without Tax Consequence

Section 1035 of the IRS Code allows investors to exchange the following insurance products without incurring a tax liability:

A non-qualified annuity for a non-qualified annuity
A life insurance policy for a non-qualified annuity
A life insurance policy for a life insurance policy

Protection From Creditors

Life insurance and the cash value therein is judgement-proof depending on which states it is sold. Like trusts, insurance policies can be a staple to protect liquid assets as creditors may find it impossible to reach.

Conclusion

The combined benefits of leveraging a trust account, a private investment banker, and life insurance are substantial for asset protection and investment management. A trust account offers the foundation for secure, multigenerational wealth management, protecting assets from taxes and creditors while facilitating the orderly transfer of wealth. Incorporating a private investment banker into the family office team provides tailored investment strategies, access to exclusive deal flows, access to additional liquidity through the private capital markets, and expert guidance through complex financial transactions. Life insurance not only serves as insurance for one’s estate but also serves as a flexible financial tool, providing collateral for loans, accumulating tax-advantaged cash value, and offering protection from creditors.

Bringing a private investment banker in-house establishes a genuine partnership that can adapt to the unique needs of a family office. This collaboration should be perceived as a business partnership dedicated to building a successful and sustainable wealth management strategy. To ensure alignment and avoid potential conflicts, it is crucial to establish clear agreements on handling salaries, bonuses, distributions, and reinvestment capital. This structured approach ensures that all parties benefit equitably, enjoying payouts during divestment periods while maintaining consistent cash flows throughout the investment lifecycle.

By fostering a cooperative environment with clearly defined roles and expectations, all members of the family office, including the private investment banker, can contribute effectively to the shared goal of preserving and growing family wealth for generations to come.

About the Author

Mr. Payne is an investment banker and placement agent, affiliate partner of the broker-dealer Stonehaven LLC with Wall Street investment banking experience within a Telecom, Media, and Technology coverage group underwriting credit in multi-billion-dollar public M&A deals, syndicated loan structures, and notes utilizing several sophisticated financial instruments, including investment-grade and non-investment-grade debt. He worked on a small team of three, managing a $2 Billion Portfolio of the bank’s assets under management (AUM) utilizing valuation, financial, and risk analysis.

He has also previously worked as a graduate assistant in the Finance Department at the University of South Carolina, as a Stock Selection Analyst managing a long-equity portfolio for the Business Partnership Foundation, and as a Private Equity Analyst for a Distressed Mortgage Fund. He graduated high school as one of sixty-four $150,000 Frederick C. Branch Marine Corps Naval Reserves Officer Training Corps national scholarship recipients and led platoons of future sailors and marine officers during training and active duty orders as a Midshipman First Class in his battalion.

Mr. Payne holds a Bachelor’s Degree in Political Science with a minor in Military Science from Howard University, a Post-Baccalaureate Certificate in Business Analytics, a Master’s Degree in Business Administration from the University of South Carolina, an Investment Banker Micro-Degree CPD and a Venture Capital Associate Micro-Degree CPD offered by the Financial Edge Institute, compiling +20 skill certificates in financial modeling, valuation methodologies, financial statement analysis, and M&A analysis.

Mr. Payne currently holds his Series 7, 79, 63, 65, and SIE registrations with FINRA, and his Life, Property & Casualty Insurance licenses with NAIC.

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