As family offices grow in complexity, some reach an inflection point where they consider hiring a general counsel (GC) for their legal needs. This determination is strategic and incredibly nuanced and should be made with careful consideration of several factors. What follows is a discussion of a GC’s impact within a family office, from providing guidance on trust and estate issues to risk mitigation in direct investments and family governance. What becomes clear is the value of having a horizontal thinker who welds together the disparate functions of a family office by their mere presence.
A catalyst for alignment and informed decision-making
The role of the GC within family offices extends far beyond the conventional legal sphere to serve as a strategic linchpin that intertwines legal acumen, financial insights and governance expertise. As family offices grapple with an intricate web of investments, estate planning and overall wealth management, the GC emerges as a catalyst for informed decision-making and seamless coordination.
Broadly speaking, family offices choose to invest in a GC because they need to manage increasing complexity. This complexity involves various interconnected aspects such as ownership, enterprise governance, family dynamics, wealth structures and taxes. Additionally, fiduciary responsibilities, family activities across jurisdictions, investment strategies and family ventures contribute to the intricate landscape. This does not begin to take into account human resources and other employment law issues. In short, a decision in one part of the enterprise often ripples through and affects other parts of the family enterprise. A GC helps ensure that the family office and the family enterprise are better aligned, which results in better outcomes.
A unique vantage point
The GC occupies a unique vantage point at the intersection of various family office initiatives. Unlike external counsel, the in-house GC comprehensively understands how decisions in one domain, be it investments or estate planning, reverberate throughout the family enterprise. This insight into the broader picture empowers the GC to facilitate informed decision-making across the family enterprise, a task that can be challenging for external counsel operating outside of the family office and often from a professionally narrower focus. The family office GC has the ability to think horizontally, linking together various facts and issues from across the family enterprise. Understanding the web of complexity is necessary to provide practical advice.
Specifically, the family office GC often touches upon and provides thoughtful analysis across various areas of the family enterprise, which includes estate planning, income tax advisory, due diligence on investments and some human resources risk mitigation.
Estate planning
In the realm of estate planning and wealth transfer, the GC’s role becomes pivotal. No one else can seamlessly interpret legal documents while intricately weaving in tax implications and fiduciary duty concepts. By comprehending the entire family balance sheet, the GC guides wealth transfer strategies that not only preserve financial assets but also align with family business governance—a testament to their multifaceted role.
Income tax advisory
In addition to estate planning and wealth transfer, income tax advisory is part of the natural GC domain. Families often have a number of structures, including trusts and personal residences, as well as the family members themselves as beneficiaries and trustees that create a nexus with several jurisdictions and subject the family to various state income tax regimes. All family offices must navigate this patchwork of state income tax regimes. Moreover, families frequently sell publicly traded or privately held equity stakes in various companies. Pre-sale counseling to minimize tax implications is another critical area where the GC can provide significant value.
Investment due diligence
The GC’s value extends to the realm of investments, especially in direct investments in operating companies and start-ups. The GC’s ability to discern the nuanced deal terms, identify risks and understand the tax implications ensures that investment decisions are made with a full appreciation of their attendant risks. The GC’s role is integral when it comes to due diligence on any investment opportunity, including direct real estate investments.
Family business
Many family businesses do not have in-house counsel, and the family office GC can act as a legal advisor to the family business on an as-needed basis. That said, formal agreements between either the GC or family office and the family business should govern these engagements. Family businesses typically encounter legal issues in the contractual, employment and tax realms, to highlight a few.
Private foundations and philanthropic initiatives
Private foundations rely on robust governance structures overseen by the GC of the family office to ensure effective operation. This entails the GC facilitating regular board meetings and ensuring compliance with annual tax filing obligations. Moreover, the GC plays a crucial role in overseeing the various binding pledges and financial support provided to nonprofit organizations by family foundations. Their expertise in legal matters ensures meticulous oversight and compliance, safeguarding the foundation’s mission and objectives. By collaborating closely with the foundation’s board and stakeholders, the GC helps uphold the foundation’s reputation and maximizes its impact within the philanthropic community.
Human resources
Having professional staff in the family office and domestic staff working across various locations exposes the family and the family office to various employment law-related risks. The GC often spearheads the HR function for a family office to mitigate potential risks associated with hiring, managing and terminating employees.
Family enterprise governance
Family governance, an often-overlooked aspect for some families, receives a boost from the GC’s process-oriented approach. From facilitating governance body meetings to incorporating effective processes, the GC plays a central role in designing and operationalizing governance mechanisms. This includes investment committees, family office councils and family business boards.
Advising on fiduciary duties
Counseling multigenerational families becomes vital, since they usually have several if not dozens or more trusts and have family members serving as trustees and in director positions. As families get larger, family relationships can naturally become more attenuated. This dynamic can heighten the risk to family trustees and directors. While the risk of fiduciary litigation can seem remote, it is often prudent to have legal counsel to ensure actions are harmonized with family members’ fiduciary duties.
Personal matters
UHNW families have a range of personal matters requiring some level of legal expertise. These matters can vary from helping family members navigate pre-marital agreements to assisting with divorce and separation agreements or purchasing a private residence in foreign jurisdictions. The family office GC can add value to all of these personal situations.
Beyond the legal function
While the GC provides value in the typical scenarios above, it is crucial to recognize that the GC’s role surpasses traditional legal functions. As an integral executive team member, the GC collaborates with family principals, other family office staff and external third parties, such as accounting and law firms. This cross-functional collaboration is just one example of the value that a GC can provide, which is often not readily apparent. There are other examples of tangible savings, but much of the GC’s value stems from reducing risk and better aligning the family enterprise.
Sourcing and managing external counsel
Hiring a family office GC does not eliminate the need for external legal counsel. It would be unwise to assume otherwise, given that the legal profession, much like the medical field, consists of specialists in specific areas. Different issues require the expertise of different attorneys.
The GC plays a crucial role in selecting appropriate external counsel. This involves engaging more cost-effective legal representation for routine matters and upgrading to specialized firms when necessary. The GC is tasked with sourcing suitable legal counsel, often across multiple states and jurisdictions, and ensuring the effectiveness and efficiency of external legal teams. The GC can enhance efficiency by providing the entire fact pattern to external counsel and reducing the time external counsel spends getting to the heart of the matter.
Cost considerations vs. added value
Despite benefits discussed, the crux of the matter often revolves around quantifying the investment made by hiring a GC. Family offices commonly begin by assessing their external legal spend to gauge potential savings that can be achieved by hiring an in-house attorney. While this approach is useful, it is often inadequate as numerous hidden factors aren’t taken into consideration. For instance, invoices do not account for “hidden” tasks that should involve the guidance of legal counsel but are currently handled by non-attorneys within the family office. This situation poses significant risks that will not be apparent by reviewing law firm invoices. As noted, family office personnel often handle tasks that fall within the purview of the GC. By reallocating their time, these staff members can refocus on their core competencies.
Conclusion
In a multigenerational family office, the decision to enlist a GC arises from the need to navigate complexity. Serving as both a legal expert and strategic advisor, the GC harmonizes external expertise with internal dynamics, seamlessly blending legal, strategic and familial considerations. Their multifaceted role goes beyond traditional legal functions, extending to governance facilitation and risk mitigation. The ideal family office GC possesses a skill set that transcends legal expertise, encompassing horizontal thinking and a nuanced understanding of complex cross-disciplinary issues.
Ultimately, the GC becomes the linchpin, ensuring unity and strategic alignment within the family office. In fact, the family office GC is often viewed as a successor in waiting to the head of the family office, as the GC understands the web of complexity and can process the disparate issues necessary to help families make fully informed decisions.
