by Chris McGraw, Senior Wealth Strategist

Introduction
When families experience significant financial success, whether from the sale of a business or years of disciplined investing, they often begin considering how to best manage that wealth for both the current and future generations. An option that frequently arises is the creation of a “family office,” an entity designed to oversee a family’s assets, investments and long-term planning.

Family Offices (FOs) generally take one of two forms: Multi-Family Offices (MFOs), which serve multiple unrelated families; and Single-Family Offices (SFOs), which are typically dedicated exclusively to one family.

Multi-Family Offices
Joining an MFO means pooling resources with other families. The MFO provides professional management, shares costs across its client base and operates independently. For most families, expenses incurred through an MFO are treated as investment expenses. Under the current income tax rules such investment expenses may not be fully deductible. Even so, MFOs remain attractive for their convenience, efficiency and access to experienced professionals.

Single-Family Offices
A SFO, by contrast, is built by a single family to meet its own needs. The family hires its own staff and establishes its own infrastructure to manage investments, taxes, legal matters and even lifestyle services. Unlike an MFO, a properly structured and professionally operated SFO may unlock income tax advantages. If a SFO functions as a true advisory business, rather than as a passive investment vehicle, certain expenses, including fees paid to professional investment managers, may qualify as fully deductible trade or business expenses.

Achieving this enhanced tax treatment is neither simple nor guaranteed. To qualify, the SFO must operate like an independent business. This often requires hiring skilled professionals (such as a Chief Investment Officer), forming multiple entities to manage different investment activities and maintain robust governance. The financial commitment can be substantial, with annual costs reaching hundreds of thousands of dollars for staffing, office space and compliance.

These potential tax benefits may attract  increased IRS scrutiny. Families considering an SFO should be prepared for extensive documentation, rigorous reporting and the possibility of audits. In the 2017 Tax Court case Lender Management LLC v. Commissioner,the court found that the facts supported treating SFO expenses as trade or business expenses, illustrating both the opportunity and the complexity of pursuing this path.

Lessons From the Lender Case
The Tax Court found that the SFO Lender Management LLC operated “far beyond” the scope of a passive investor because of its organizational design and day-to-day activity. Several factors were central to the court’s finding:

• Separate Entity: Lender Management was legally and operationally distinct from the investment LLCs, and it held only minority ownership interests.
• Diversified Portfolio Structure: Investments were spread across multiple LLCs, each with a defined purpose:
  • M&M Investments LLC: Private equity and alternative assets.Lenco Investments LLC: Hedge funds.
  • Lotis Equity LLC: Public company stocks.
• Ownership Model: Lender Management owned less than 10 percent of each investment LLC, while family members, trusts and family-controlled entities held the majority interests.
• Professional Staffing: A family member with an MBA served as CIO, dedicating roughly 50 hours per week to evaluating proposals and managing investments. The office also employed a non-family CFO and additional non-family staff to handle operations and execute transactions.
• Compensation: The SFO earned profits interests and advisory fees—compensation more consistent with an independent investment advisory business than with a passive investor.

Taken together, these characteristics demonstrated that Lender Management functioned as a genuine, independent business rather than a passive investment vehicle.

Hypothetical Case Study: When a Family Considers a Single-Family Office
Consider a family that has recently sold its operating business for $100 million. With substantial liquidity, they must decide how to manage investments, governance and long-term planning.

• In a Multi-Family Office (MFO): The family benefits from shared infrastructure, professional management and broad subject-matter expertise. Their share of expenses, including fees paid to independent Registered Investment Advisors (RIAs) for managing public company stocks, is generally treated as investment expenses under IRC Section 212, which are limited or disallowed under current rules. While this restricts deductibility, the MFO model remains cost-efficient, requires minimal staffing and reduces administrative burden.
• In a Single-Family Office (SFO): By establishing a dedicated office, forming separate investment LLCs for different asset classes and ensuring the SFO itself holds only minority ownership interests (e.g., less than 10%), the family may qualify for IRC Section 162 treatment, allowing expenses to be fully deductible as trade or business expenses. However, this potential benefit comes with meaningful trade-offs:
  • Expense Burden: Salaries for a CIO, CFO and support staff – plus office space, technology and vendor contracts – can easily reach hundreds of thousands of dollars annually. MFOs spread these costs across multiple families.
  • Structural Complexity: Multiple LLCs must be formed and maintained, with ownership carefully allocated to demonstrate independence.Family Oversight: Regular meetings, reporting and governance are required to substantiate active management.Expertise
  • Requirement: A family member with a professional background (as in Lender) may need to dedicate considerable time to investment oversight.
  • IRS Scrutiny: SFOs face heightened review regarding whether they truly operate as a business, and documentation must be robust enough to withstand examination.

Questions for a Family Office to Ask: When Does an SFO Make Sense?

• Scale of Assets: Do our assets and investment activity justify the cost and infrastructure of a dedicated office?
• Expense Treatment: Would restructuring into an SFO allow our expenses (including RIA fees for managing public company stocks) to qualify as trade or business expenses under IRC Section 162, rather than being limited under IRC Section 212?
• Independence: Can we demonstrate independence through minority ownership in investment LLCs, professional staffing and active management (the factors emphasized in Lender)?
• Family Expertise: Do we have family members with professional backgrounds and willingness to take on roles such as the CIO role in Lender?
• IRS Scrutiny: Are we prepared for the increased reporting, documentation and audit risk that accompany SFO status?
• Long-Term Goals: Does our vision for wealth management, succession and tax efficiency align more closely with an MFO?

Conclusion
An SFO can potentially unlock full deductibility of expenses including payments to RIAs but is not a “free win.” Families must weigh the potential tax benefits against the significant expense burden, governance requirements, expertise demands and heightened IRS scrutiny. For many, an MFO remains the more efficient and practical choice unless scale, control and long-term strategy clearly support the move. Your Oxford team is well positioned to help you evaluate the right structure for your family.

Oxford Financial Group, Ltd. (“Oxford”) is a Registered Investment Advisor (“RIA”) with the U.S. Securities and Exchange Commission (“SEC”) and is headquartered in Carmel, Indiana. Registration with the SEC does not imply a certain level of skill or training. Additional information about Oxford, including our Form ADV and Privacy Policy, is available upon request by calling 800.722.2289 or emailing info@ofgltd.com. The content of this presentation is intended for educational and illustrative purposes only. It should not be construed as investment, tax, or legal advice, nor as a recommendation or offer to buy or sell any security or investment product. Tax and legal counsel should be engaged before taking any action. This material has been prepared using original sources believed to be reliable, but no representation is made as to its accuracy or completeness. The views expressed are those of Oxford as of the date of the presentation and are subject to change based on market, regulatory or economic conditions, which may not occur as anticipated. For full disclosures and disclaimers, please visit https://ofgltd.com/home/disclaimers. OFG-2603-36