By Frazer Rice
Once a family has decided that a family office is the right solution, the next question is how to build it. And for most families, the answer to that question has significant tax consequences.
The costs of running a properly staffed family office are real: professional salaries, technology, legal and compliance expenses, and investment management costs. Families naturally want those expenses to be deductible. Whether they are depends almost entirely on how the family office tax structure is designed from the outset.
For years, many investment-related expenses for wealthy families were deductible as miscellaneous itemized deductions under Section 212 of the tax code. That changed permanently with the "One Big Beautiful Bill Act" (OBBBA) passed in 2025, which eliminated those deductions entirely.
The only path to deductibility now runs through Section 162, which covers ordinary and necessary expenses of a trade or business. To use it, the family office can't simply manage the family's own wealth. It has to be operating as a genuine investment-management business. That distinction, which once carried moderate tax significance, now carries substantial weight.
The tax code doesn't define "trade or business" with any precision, so courts have filled the gap over decades of litigation. The framework that emerges from those cases has two central requirements: the activity must be conducted with continuity and regularity, and it must be carried out primarily to generate income or profit through the provision of services and not just through passive investment returns.
That last point is the critical one. The Supreme Court has been clear, in cases like Higgins and Whipple, that managing your own investments, regardless of scale or sophistication, does not constitute a trade or business. Size and complexity don't change the analysis. What matters is whether the office is providing genuine services to others and being compensated for those services, rather than simply watching over the family's own portfolio.
The most instructive precedent for family offices is Lender Management, in which the Tax Court found that a multigenerational family office was operating a legitimate investment-management business and could deduct its expenses under Section 162.
Several features of that structure drove the outcome. The office served multiple branches of one extended family, each with distinct goals, risk tolerances, and cash-flow needs. It provided individualized investment research, asset allocation, and financial planning—services that looked, in practice, like those of an outside investment adviser managing a roster of clients. It employed multiple full-time professionals. And critically, the management company was compensated through a profits interest tied to performance, not simply through the same passive returns received by investors.
That combination—individualized service, professional infrastructure, and compensation that reflected genuine entrepreneurial risk—led the court to view the office as a real business rather than a sophisticated vehicle for managing the family's own money. Many family offices now treat this structure as the template for defensible Section 162 treatment.
Not every family office structure holds up to scrutiny. A court order in the Hellmann case, though it never produced a final opinion, illustrates how the same general concept can fail.
In that structure, four family members owned both the management company and the underlying investment entities in identical proportions. They lived in the same city, operated as a single economic unit, and made decisions collectively. Because the ownership stakes were perfectly mirrored across manager and investor, the court questioned whether any real services were being provided to separate clients for separate compensation—or whether the structure was simply a formal arrangement among people whose interests were entirely aligned.
The lesson is straightforward: when the management company and the investment entities are owned by the same people in the same ratios, it undermines the argument that the office is running a genuine service business. Economic separation between manager and investor isn't just a structural preference; it's a substantive requirement.
To support a Section 162 position, the management company and the investment entities it manages should be economically and operationally distinct.
In practice, that means most investors should not hold ownership stakes in the management company. The person or entity running the office should have a clearly separate ownership interest from the underlying investors. And investors should be able to act independently—with individual investment accounts, withdrawal rights, and the ability to make decisions without being treated as a single unified group.
In the Lender Management structure, many family members invested independently, had different objectives, could withdraw capital if dissatisfied, and held no ownership interest in the management company. That autonomy was part of what made the manager appear to be serving clients rather than simply administering its own affairs.
Compensation is the other side of the equation. For the family office to look like a real investment-management business, the way it gets paid must reflect that.
Helpful features include a management fee for services rendered, a performance-based profits interest that functions like carried interest, and a clear separation between service income and ordinary investor returns. In the Lender Management structure, the management company held special interests that paid only if investment performance was strong, and those interests were clearly distinguishable from the returns flowing to investors. That structure reinforced the argument that compensation was being earned through services, not simply received as a passive owner.
In the Hellmann-style structure, by contrast, compensation looked indistinguishable from the passive returns all owners received, which weakened the business argument considerably.
Taken together, the cases point toward a fairly clear profile for a family office that can withstand Section 162 scrutiny.
The office should provide genuine, front-end investment advisory and financial planning services tailored to the specific needs and risk profiles of individual family members. It should employ full-time professionals with real responsibilities, paid through service-based salaries or guaranteed payments. Ultimate decision-making authority should sit in-house, even where outside experts are engaged. Where the family owns and operates businesses, active management of those entities further strengthens the case.
Documentation matters throughout. The office should be able to demonstrate that profits, interests, and management fees are paid for actual investment-management work and not as a function of family relationships or ownership structure.
The elimination of Section 212 miscellaneous itemized deductions under the OBBBA has made family office tax structure a more consequential decision than it has ever been. Expenses that were once broadly deductible are now recoverable only if the office qualifies as a genuine trade or business under Section 162—a standard that requires real services, real infrastructure, and compensation structures that reflect genuine entrepreneurial risk.
The families best positioned to meet that standard are those that build their offices to look and function like professional investment managers: serving individuals with distinct needs, employing skilled professionals, and separating the economics of managing from the economics of investing.
Getting the structure right at the outset is significantly easier than trying to retrofit it later.
Next Vantage works with families navigating the full arc of this process—from the initial decision through to tax-efficient structure and ongoing coordination. To start the conversation, contact us at (212) 433-1108 or frice@nextcapitalmgmt.com.
The OBBBA, passed in 2025, permanently eliminated miscellaneous itemized deductions under Section 212, which had previously allowed many investment-related expenses to be deducted. Those expenses are now only deductible if the family office qualifies as a trade or business under Section 162. That shift makes the way a family office is structured (legally, operationally, and economically) a direct determinant of whether its costs are tax-deductible.
Courts have established that a trade or business requires continuity, regularity, and a genuine profit-oriented service activity. For a family office, that means providing investment-management services to others for compensation and not simply managing the family’s own wealth. Scale and complexity alone don’t satisfy the standard. What matters is whether the office looks and functions like a professional investment manager serving clients.
Lender Management is the most important precedent for family offices seeking Section 162 treatment. The Tax Court found that a multigenerational family office operating with professional staff, individualized client services, and performance-based compensation was running a genuine investment-management business. The case is widely used as a structural template by families seeking defensible deductibility of their office’s expenses.
The management company and the investment entities it manages should be economically distinct. Most investors should not hold ownership stakes in the management company, and investors should be able to act independently—with individual accounts, withdrawal rights, and separate decision-making. Structures where the same people own both the management company and the investment entities in identical proportions are particularly vulnerable to challenge.
Compensation should reflect genuine service income rather than passive investment returns. A management fee for services, combined with a performance-based profits interest that functions like carried interest, is the model most consistent with what courts have accepted. The key is that service-based compensation should be clearly distinguishable from ordinary investor returns both in structure and in documentation.
Frazer Rice is Director of Family Office Services and a Partner at Next Vantage, the Family Office Services group of Next Capital Management in New York City. With more than two decades of experience advising ultra-high-net-worth families, Frazer helps clients bring structure, clarity, and coordination to complex wealth. He specializes in intergenerational planning, fiduciary strategy, and family governance, helping clients manage both the financial and human sides of wealth. Known for his sharp, strategic thinking, Frazer provides a board of directors-level perspective, helping families identify risks, organize priorities, and align advisors around long-term goals.
Before joining Next Capital, he served as Regional Director at Pendleton Square Trust and spent 16 years at Wilmington Trust, where he rose to Managing Director in the New York office. He is the author of Wealth, Actually: Intelligent Decision-Making for the 1% and host of the Wealth Actually podcast, exploring the modern wealth ecosystem.
Frazer earned his BA in Political Science and History from Duke University and his JD from Emory University School of Law. He serves as President of the New York City Estate Planning Council and is a frequent speaker on wealth management and family dynamics. A Manhattan resident, his interests include golf, yoga, media production, politics, horror movies, and 1980s pop culture. To learn more about Frazer, connect with him on LinkedIn.