5 Steps to Set up Your “Mini Family Office”

Whether you’re juggling a few hundred dollars or managing millions, the reality is we are all in the business of managing our mini-family office.

The words ‘Family Office’ are usually thrown around for the very high net worth.

In reality, every household has to make these decisions on a smaller scale.

So treat it like a real business with a plan on where you are going.

It’s better to take control and start early, regardless of the investment amount.

Setting Up Your “Mini Family Office” Structure:

Start with defining your family values and goals.

Articulate your shared financial goals. This could be financial independence, building wealth for future generations, or supporting charitable causes.

Then write a family constitution. This document outlines the family's principles, roles, and decision-making for the "mini family office."

You need open communication about money, whether with a spouse, kids, parents, grandparents, or friends.

This way, everyone is aligned with the overall strategy.

Use people's skill sets to delegate tasks based on expertise. Then outsource the rest to professionals and consultants as needed.

Develop an investment policy statement. This document outlines your investment strategy, including risk tolerance, asset allocation preferences, and rebalancing procedures.

Building Your Investment Strategy

Depending on your age determine the length of time you have to hit your family's goals.

This may be a combination of short-term term 1-5 years, medium-term 5-10 years, and long-term 10+ years.

This decision will allow you to narrow down certain assets that make sense to invest in.

Next, document your risk tolerance, whether conservative, moderate, or aggressive.

You may have different timeframes that have different risk tolerance.

If you have shorter timeframes, you prioritize liquidity and stable assets like bonds and cash.

When you have a long time horizon, you can tolerate higher risk with growth-oriented assets like stocks and real estate.

Then decide how you will diversify your portfolio. Put only some of your eggs in the basket.

Decide how much to allocate to assets like stocks, bonds, real estate, crypto, and private equity.

These decisions should be made based on your family's expertise and those of your outside consultants or friends.

Choosing Insurance

Insurance is cheap, and therefore everyone should carry a policy.

Most conversations are between a term life insurance or a whole life insurance policy. Depends on each situation.

If you are young, term insurance is a great place to start.

Most don't consider income replacement, funeral costs, family debts, kids, nonliquid assets, and taxes.

Some policies start with a term policy and can convert to a whole life later, but you lock in a certain premium price while you are young.

You can continue your whole life to borrow against your policy and use it to invest.

Many of the top 1% use these policies to handle estate taxes after they pass.

Choosing a Trust

You must decide between a revocable living trust or an irrevocable trust.

A revocable trust is the most common and easiest to implement.

This trust allows you to retain complete control over the trust assets, allowing you to modify or revoke the trust at any time.

It allows you to manage assets during your lifetime and avoids probate for assets placed in the trust.

This can streamline the transfer of assets upon your passing.

You will name a successor trustee who will manage affairs if you become incapacitated.

Assets within this trust remain part of your taxable estate, so no tax benefits exist.

Since you retain complete control, this trust offers far less asset protection.

If you choose the irrevocable trust, you can't easily access or modify the assets once they are in trust.

Creating an irrevocable trust involves complex legal and tax implications.

Depending on the trust, there may be tax benefits by removing assets from your taxable estate.

An irrevocable trust has superior asset protection; why? You don't own the assets.

This trust can distribute wealth to beneficiaries according to specific conditions, and last for more than one generation.

You cannot easily access or modify the assets once placed in the trust.

Taxes and Considerations

Deciding between investment types can dictate the amount of taxes you pay.

Start with understanding the tax treatment of each investment and the time horizon.

You will have short-term capital gains, long-term capital gains, net investment income tax (NIIT), and ordinary income.

Use tax-advantaged accounts like IRAs and 401(k)s to enjoy tax deductions on contributions.

Use potential tax-free growth or tax-deferred withdrawals, depending on the account type.

Depending on your income, try to reach a lower tax bracket.

Trim capital losses when possible to minimize gains for the year.

Consider your state and the benefits of being in a zero-income tax state.

If you have a regular CPA doing annual returns every year or two, get an outside opinion.

They can find mistakes and ways to save that will be greater than the cost.

Conclusion

Just because the uber-rich use a family office doesn't mean you shouldn't follow similar practices.

It is just as important to plan for your future and be in control of your destiny.

These skills can be passed down to generations that will carry the torch and the wealth you leave behind.

Remember to have passwords and important documents in a fireproof location only heirs can access.