By Abby Schultz

The uber-rich tend to manage their money -- and much of the rest of their lives -- through single-family offices. Some are counting on President Donald Trump's administration to clarify policies that will make it easier for them to operate and remove the threat of stricter oversight.

The potential for single-family offices to come under scrutiny is growing as these vehicles become more numerous and bigger in size. The number of single-family offices globally increased nearly 31% to an estimated 8,030 last year from 6,130 in 2019, while assets under management rose by 63% to $3.1 trillion, according to Deloitte Private.

Though essentially serving only one family, these organizations extend into numerous areas, from investing and wealth management to budgeting, tax planning, insurance, and philanthropy. They also handle concierge services, such as managing yachts, private planes, and travel.

"Family offices, whether it be from a Securities and Exchange Commission perspective, or from a tax perspective, are operating in a very opaque regulatory environment," says Joshua Becker, a corporate and tax partner at Pillsbury Winthrop Shaw Pittman.

The Dodd-Frank legislation that emerged out of the 2008 financial crisis to strengthen control over Wall Street, and protect consumers, exempted single-family offices from registering as investment advisors through the so-called family office rule. The rule consists of a limited number of guidelines, such as defining which office employees are allowed to invest alongside the family.

As family offices have grown, they risk unintentionally violating guidelines in the rule that could subject them to more disclosure and compliance by the SEC, Becker says.

For instance, they could run afoul of it when they pool capital with other families to invest in privately held companies or in an asset, such as commercial real estate -- a practice that has become increasingly common. Often one family takes the lead with these investments. The SEC could view that family's role as providing investment guidance, triggering SEC registration requirements.

One way William Kambas, a partner in the U.S. private client and tax team at law firm Withers, solves this problem for his clients is by dividing the responsibilities of these deals so each family office is only responsible for its family's participation. If necessary, Kambas says he will "reluctantly" create a deal-specific special vehicle to register with the SEC.

The lack of guidance "hasn't stopped a deal for me yet," but has required "careful or nuanced structuring," he says. Yet, the ambiguity around these deals is an issue that he expects will be addressed. "Trump wants to reduce regulation and encourage private market activity, entrepreneurial activity," Kambas says.

The Republican-led Congress, and the Trump administration, are also expected to make changes to tax policy that will favor family offices, although the wealthiest Americans are unlikely to be fully off the hook.

One area that concerns Becker is the tax treatment of private placement life insurance, which ultrawealthy individuals and families use as an insurance wrapper for investing in long-term alternative assets, such as hedge funds. The practice has come under scrutiny by Sen. Ron Wyden, a Democrat from Oregon, who has proposed limitations.

The Trump administration could shore up the use of this investment tool through guidance issued by the IRS or Treasury, Becker says.

He is also looking for the administration to provide guidance that would standardize and solidify the tax treatment of family office structures as trades or businesses -- a qualification that, unambiguously, would allow them to deduct business expenses that can easily stretch into millions of dollars for activities related to investment management. These include salaries for CIOs, a general counsel and other investment employees, in addition to third-party resources, including legal and accounting fees, he says.

Kambas believes sufficient case law exists to draw a clear line between family offices that operate in a professional profit-oriented manner and individuals managing their own brokerage or retirement accounts -- who wouldn't qualify.

Instead, Kambas is more concerned about which provisions of the 2017 Tax Cut and Jobs Act Congress will be allowed to expire as it aims to reduce the U.S. budget deficit. These provisions will be front-and-center in Congress once a budget is approved, which could be as early as this week.

A Jan. 10 study by the U.S. Treasury's Office of Tax Analysis on "the cost and distribution" of extending the expiring provisions of the tax law concluded that a full extension would create a deficit of $4.2 trillion between 2026 and 2035.

Under a partial extension scenario, the 2017 individual income-tax rates for those with incomes below $400,000 would be extended, while the rates for those above that threshold would be allowed to expire. That would restore the top income-tax rate to 39.6% from 37%, and would reduce the cost of the tax bill to $1.8 trillion, the Treasury report said.

The partial extension scenario would also phase out a 20% tax deduction on qualified business expenses for so-called pass-through entities -- businesses that pass income straight to their owners. These can include family offices as well as businesses set up by families.

But the 199A deduction, as this provision is known, benefits family offices. "When a family office is operated in a professional businesslike manner, there shouldn't be limits on the deductibility of its expenses if they are bona fide business expenses."

How this will all play out as Congress balances the popularity of the tax cuts against its desire to cut the budget deficit remains to be seen. "There's going to be a lot of horse trading," Kambas says.

Write to Abby Schultz @ abby.schultz@barrons.com

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February 25, 2025 17:06 ET (22:06 GMT)

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