Understanding family offices
When day to day management of a family’s affairs is becoming a task which exceeds the capacity of a single individual family leader, it may be time to employ the services of a family office. Some prefer to set up their own or combine it with services from one that has a broader range of expertise and operating platform.
In this article, we discuss the many types and structures of a family office, the array of services rendered, what it invests in, who needs it and why, as well as implications of the Variable Capital Company framework in Singapore.
1. What is a family office?
Family offices are different from traditional wealth management firms in that they can offer a part of or a total outsourced solution to only ultra-high-net-worth (UHNW) families.
According to the Monetary Authority of Singapore (MAS), a ‘single family office’ (SFO) is an entity with a formal structure. This entity manages assets for or on behalf of a family. The assets are wholly owned or controlled by its members.
Members of family can include spouses, ex-spouses, children (natural, adopted, step) of these individuals and descendants of a single ancestor. If the family office has members from a few different UHNW families, it is called a multi-family office (MFO) in Singapore. Economies of scale allow MFOs for cost-sharing, so they are more prevalent than SFOs.
Types of family office
Not all family officesin Singapore offer the complete range of services. Some types offer a smaller scope depending on their capability and capacity.
1. Financial office
This type manages the family’s lifestyle needs, day to day financial affairs and may include functioning as the family’s accountant.
2. Family business office
It acts as the “eyes and ears” for the family’s directly owned businesses by making sure there is good corporate governance and the businesses do not cannibalize each other.
3. Administrative family office
This can be a team or department set up at a bank or fiduciary services firm. It is dedicated to managing clients with complex structures. Services encompass the family’s financial and personal affairs.
4. Family investment office
This type of business handles the wealth of a family that sits outside of personal properties. The office invests this wealth on behalf of the family to achieve the required return on investment. The focus of investment can be in listed equities, hedge funds or property.
5. Trusted adviser family office
These are involved in wealth and family office tax planning, liquidity forecasting, asset allocation and transmission of wealth between generations.
6. Personal assistant
It is akin to butler service to assist the family with any kind of daily activities, such as writing letters and arranging flights.
7. Concierge or lifestyle manager
The scope of services is more complex, such as household staff management and placing insurance on family assets.
8. Full-service family office
It provides the entire range of services offered by all the above types.
Services offered by a family office
Providing full services to UHNW families under a comprehensive wealth management plan requires a whole team of professionals from various backgrounds – legal, insurance, investment, estate, business, and tax disciplines.
Such a team is necessary to cater to the entire scale of planning, advice and resources for navigating the complex world of wealth management. As such, some family offices will offer certain services and not others.
Most family offices in Singapore combine asset management, lifestyle management, financial planning, cash management, risk management and other services.
Here is a list of top family office services with brief descriptions of the respective scopes.
Wealth Management and Planning
Following a diagnosis of an overall financial situation, professionals in a family office can help to outline investment objectives, provide global investment strategies as well as banking administration.
Reports on global bank accounts, family assets, investment performance and comparative analysis can be prepared.
Taxes / International Tax Planning
UHNW individuals often have cross-border interests which necessitate the need for family office tax planning, tax return preparations of different countries.
Trusts and foundations
The services for this purpose include legal advice and administration, governance and operational support.
Lifestyle and property management
Lifestyle refers to all the assets associated with leisure such as yachts and horses. Property can include art collections as well as residential and commercial real estate.
Services include advisory on mergers and acquisitions, private equity investments and many other business-related support.
Apart from bookkeeping for the family, services also include arrangements for tax compliance and payment, cash flow projection, cash management and so on.
Apart from the more mundane concierge tasks such as making travel arrangements, organising events, and other family-oriented matters, a family office can manage and organise family communications. This includes coordinating with trustees, directors, professional advisors and family members as well as mediating differences in views.
Legacy planning and management
Many have important legal structures in place such as a will, an estate plan, and trusts to transition the assets to their next generations. The next step is preparing the beneficiaries to receive these assets. Estate planning alone isn’t sufficient to ensure a successful wealth transition. Research shows that in 90% of cases, inheritance will be depleted by the third generation.
Charity & philanthropy services
A family office can formulate strategies, give ideas and advice, help to organise events as well as establish and manage foundations or trusts for this purpose.
International relocation services
These include support for re-domiciliation, obtaining residence permits, providing tax analysis and relocation to foreign schools.
How much money do you need to have a family office in Singapore?
The real answer depends on the services required by the UHNW family. Estimates for net worth can be as low as SGD30 million to at least SGD100 million. Because the cost of having the services of a family office can cost up to SGD1 million per year, some experts suggest that it makes more financial sense for families with at least SGD100 million in assets.
The minimum benchmark is also affected by a family’s status and intention. Those who wish to follow the Global Investor Programme (GIP) Family office route, i.e. to gain permanent residency in Singapore, will need to invest at least SGD2.5 million in a new SFO in Singapore.
Other conditions for the GIP route include having to park SGD50 million in a Singapore based bank while the other SGD200 million must be for investible assets to be managed by the family office. On top of that, the applicant must have at least 5 years of entrepreneurial, investment or management track record.
Family office structures in Singapore
There are a few family office structures for holding family assets.
- Trusts established according to Singaporean law
- Private trust companies or private investment funds
- Private limited partnership
- Private limited company
Most SFOs are established as the fourth type of structure. A private limited company is subject to standard corporate tax rates in Singapore. It does not hold assets itself but acts as a coordinator for them, and sometimes acts as the investment manager or advisor for the family.
What do family offices invest in?
Investments done through family offices generally fall under these categories:
- Private equity
- Hedge funds
- Mutual Funds
- Real estate
- Venture capital or direct investments
Many family offices turn to hedge funds for alignment of interest based on risk and return assessment goals.
Why do you need a family office?
Not every ultra-wealthy individual needs a family office. However, those who do have mentioned the following benefits.
1. Makes life less stressful
Most UHNW people lead very busy or active lives. Some spend a bulk of their time travelling for business or for pleasure and have little time to run or even oversee the multitude of tasks related to home or work. There are also some who have retired from their high-profile corporate roles, so they no longer have a personal assistant at their beck and call.
Having a family office can be especially helpful for heads of family who handle complicated and time-consuming financial structures. The burdens of managing the household and all the assets can be greatly alleviated with the assistance of professionals in a Family office.
It also comes in handy during unexpected emergencies, such as losing a wallet in a foreign country. A family office can come to the rescue by contacting all the banks and replacing the lost essential documents, and address whatever needs to be done.
A family office can provide services in a consolidated manner, which greatly reduces the possibility of oversight that can come with the immense complexity of very large assets. The management of these assets can also be done in a more objective manner as compared with being managed by individual members of a family.
3. Sustains family wealth
There is little point in creating and handing on wealth if it does not help those who inherit it. As such, part of the reason for a family office is to integrate a plan for the management and administration of wealth with a plan for family succession. This may also help to reconcile differences and minimise the potential for dispute.
4. Benefit from expert advice
The professional expertise expected for the proper running of a Full-Service Family office, or even a partial one, come from an array of backgrounds and industries. Law, finance, accounting and business development are just a few of them. All these experts are trained to help UHNW families mitigate risk, maximise returns and live anywhere in the world with peace of mind.
Tax exemptions for SFOs in Singapore
In Singapore, funds under an SFO get tax exemptions on their income.
Sections 13CA, 13R, and 13X of Income Tax Act 5 provide that Singapore based fund management companies get tax exemptions under a broad range of income.
However, there are specific requirements to be eligible for these exemptions which are mentioned under these Sections.
Exemptions through Section 13R and 13X are subject to approval from MAS.
Under Section 13R, a minimum annual balance spending is required for availing tax exemptions. Section 13X requires minimum Assets Under Management (AUM) and investment professional headcount requirements.
Singapore is one of the best countries in the world when it comes to legal and tax environments for setting up an SFO. However, following are certain important aspects to take note of:
Individual Tax Residency: As per domestic tax law, a resident is considered as an individual who has stayed or worked in the country for 183 days or more within a year. If the person has tax residency in multiple countries, “tie-breaker” rules are applied by tax authorities to determine the status of the individual.
Tax residency of the fund company: A company is considered a resident of Singapore if its management and control are exercised within the country. Singapore tax resident entities can avail benefits under more than 80 tax treaties in Singapore.
Tax compliance obligations: It is important for both Individuals and companies earning in Singapore to submit relevant tax returns to IRAS.
Reporting obligations: Under CRS (Common Reporting Standard), it is required to obtain all information from participating jurisdictions (for their financial institutions) and exchange it with other jurisdictions annually. All family offices need to comply with these CRS obligations.
Transfer pricing rules: It is mandatory for taxpayers to prepare up to date transfer pricing documentation.
VCC perks for family offices in Singapore
The Singapore Variable Capital Company (VCC) legislation offers UHNW families a structure to consolidate different assets under one overarching structure. For instance, all the real estate assets, private equity investments and other assets can be consolidated under one VCC.
How does this benefit the family offices in Singapore? The VCC has features not available to companies regulated under the Singapore Companies Law. A Variable Capital Company has its own act of law which offers:
- Segregation of assets and liabilities
- No solvency test to make redemptions
- Privacy for shareholders
- Tax incentives for all assets and funds
- Economies of scale
- Flexibility and simplicity
- Cost savings
- Fast re-domiciliation of offshore funds
As a result, an increasing number of international family offices are setting up VCCs in Singapore.
In just three years, from 2017 to 2019, Singapore has seen a 5-fold increase in the number of family offices. According to Senior Minister Tharman Shanmugaratnam, there are about 200 single family offices in Singapore managing estimated US$20B assets in total. This astounding growth reflects the rising numbers of UHNW families that are consolidating their wealth in Singapore through formal structures. The attraction to this city-state is indicative of the high level of professionalism and skills of firms which cater to this industry.
Co-Founder, Chief Executive Officer
Haruhito was the Executive Director of Marcuard Heritage Singapore Pte Ltd, a Swiss multi family office. He was instrumental in building up their European and Asian clientele base which comprised of a global network of asset managers, distribution partners, and legal & tax specialists. Prior to that, he held various positions for 10 years in Deutsche Bank where he gained extensive experience in various Asian markets.
Haruhito has been accredited as a Trust and Estate Practitioner (TEP) by STEP, and as a Financial Industry Certified Professional (FICP) by Singapore’s Institute of Banking and Finance. His vision for Salzworth is to steer it to establish multi-asset class portfolios and funds that seek to achieve steady returns for investors.