Family Business Interests, Charitable Remainder Trusts and Life Insurance: Q & A with Capital Strategies Group

Family Business Interests, Charitable Remainder Trusts and Life Insurance: Q & A with Capital Strategies GroupBradley’s Family Owned Business team asked our friends at Capital Strategies Group, Inc. to share a case illustrating how high-net-worth families involved in family businesses are using life insurance in creative ways that go beyond the standard uses for term or whole life policies. Here’s a Q & A with Preston Sartelle, Director of Business Development at Capital Strategies Group, Inc., that shows how a large block of life insurance can enhance the results and yields of business succession and estate plans for families.

Capital Strategies: We recently had the pleasure of working with a family of first-generation wealth looking to exit their business in a way that met several goals. First, they wanted to pay as little income tax as possible, which was problematic due to the extremely low basis in their company stock. Second, they wanted to provide a significant benefit to charity, and third, they wanted to maximize wealth to the second generation. After considering various options, the family settled on a Charitable Remainder Trust (CRT) combined with a life insurance policy insuring a family member from the first generation.

Bradley: It is likely helpful to offer a basic explanation of the workings of a CRT in this situation. There are, of course, several types of CRTs, each with complicating nuances, but the basic steps are relatively simple:

  1. The owner (donor) transfers the business interest to a CRT that is structured to pay the donor a specified amount during life, or for a certain term of years, with the remainder going to one or more designated charities or to a private foundation.
  2. The donor will be entitled to an immediate income tax deduction for the present value of the remainder interest given to charity, subject to the standard limitations on charitable deductions.
  3. The CRT is a tax-exempt entity and can sell the business interest without incurring capital gains tax at the trust level, thereby allowing the sales proceeds to be reinvested by the trust undiminished by taxes.
  4. During the donor’s life (or for the term of years), the CRT will distribute to the donor either a set dollar amount or a set percentage of the trust’s value determined annually—an income stream that the donor would not otherwise have if the interest was held until death. Each distribution is reportable by the donor as taxable income to the extent of any income that would have otherwise been recognized by the trust. In other words, any capital gains triggered by the sale are deferred over the course of the distributions to the donor, providing a tremendous advantage to selling the interest outright with all gain reported in the year of the sale.
  5. At the donor’s death (or at the end of the term of years), the charity or private foundation receives all remaining assets held by the CRT.

Bradley: What are some of the non-tax benefits of combining the CRT with an insurance policy?

Capital Strategies: The CRT can provide a boon to the next generation where the donor allocates the CRT distributions to a life insurance contract on the life of the donor. Often the amount of death benefit purchased with the CRT distributions far exceeds what the donor’s heirs stand to inherit from the business net of estate taxes.

As a quick example, consider a 70-year-old donor who owns $5 million worth of zero basis stock in the family business—a roughly $1.2 million capital gains tax liability if sold today. If the stock is retained by the donor and transferred to children at death after growing at 5 percent for 15 years, the children would inherit roughly $6 million net of estate taxes assuming the donor’s estate tax exemption had been otherwise used.

Instead, the donor could transfer the stock to a CRT, providing an income tax deduction for the present value of the remainder interest. The CRT could then sell the stock and pay the donor a 5 percent annuity for life, all or a portion of which the donor could use to purchase a life insurance contract. So, let’s assume a roughly $190,000 annual distribution to the donor, net of capital gains and income taxes – the actual amount will of course depend on actual CRT earnings.

Bradley: What are some other factors to consider?

Capital Strategies: The amount of insurance that could be purchased with the CRT distributions will depend on several factors, not the least of which is the donor’s health. If the donor is a standard, non-smoker underwriting risk, a universal life policy to the age of 100 with a lifetime premium schedule of $190,000 would result in approximately $6.85 million of death benefit proceeds to the next generation net of income and estate taxes—the amount the heirs stood to receive previously plus a 14 percent bonus. And, of course, the charity receives the residue of the trust, the amount of which will depend on the trustee’s investment experience during the CRT term. Earning a return equal to the 5 percent annuity rate will leave the charity the original $5 million principal.


CRTs can afford donors an efficient exit from an otherwise precarious tax position and make both the charity and the family better for it. Working with advisors such as Capital Strategies, Bradley’s team can recommend several ways life insurance, when structured intentionally and correctly, can elevate a client’s business or estate plan.

Family Office Series, Part IV: Family Office Trends

Family Office Series, Part IV: Family Office TrendsIn the previous posts in our Family Office Series, we have examined, among other topics, how family offices are structured and the pros and cons of forming a family office.

For the final installment of our Family Office Series, we are highlighting current trends in the world of family offices. Here are several family office trends to watch:

  • Instead of investing through private equity funds, family offices are making direct investments in deals (either alone or in combination with private equity funds or other family offices) with increasing frequency.
  • Family offices are teaming up with other family offices to buy entire companies with the intent to hold and operate them for the long term.
  • Family offices are engaging in impact investing—investments that are intended to make a profit and also have a positive social or environmental impact. A recent Financial Times survey indicated that family offices allocate on average 17 percent of their assets to impact investing.
  • Family offices are forming formal and informal networks with other family offices to share information about deal flow, pool cash for “club-deal” investments, and discuss investment strategies.
  • Investment banks, private equity funds and professional service firms are increasingly catering to family offices and forming dedicated teams to serve family offices.
  • Family offices are attracting talented executives from private equity funds, hedge funds and investment banks.
  • Some family offices are funding medical research and raising awareness for diseases and conditions which afflict one or more family members.

Our Family Business Advocates team is following these trends, and we plan to report on other family office topics in future blog posts.

Family Office Series, Part III: How Are Family Offices Structured?

Family Office Series, Part III: How Are Family Offices Structured?As we noted in a previous family office series blog post, “if you’ve seen one family office, you’ve seen one family office.” There is no standard legal structure for family offices. The types and number of legal entities used in a family office differs depending on each family’s vision and goals, the family’s investment strategy, and the scope of services to be provided by the family office. There are, however, several types of family offices commonly seen in practice.

In some cases, a family office (by design or default) may begin functioning inside of a family’s operating business. In this scenario, a non-family member CFO or other trusted executive may begin handling the founder’s personal investments and financial affairs, in addition to managing the day-to-day affairs of the business. Gradually, the personal services provided by the executive may expand to other family members. There are some pitfalls associated with this approach, but in our experience, family offices often develop in this manner. If the operating business is sold or if company resources available for managing the family’s business and personal affairs are stretched too thin, the family may establish a more formal family office structure outside of the business.

The single family office (or SFO) is a family office that provides one or more services (such as investing, estate planning, tax, and philanthropy) for one family. The family members served by the family office may consist of one immediate family or several generations and multiple branches of an extended family. To the extent that the family has a shared vision and common goals for its family office, the SFO necessarily operates in complete alignment with the family—its only client.

The multiple family office (or MFO) is a business that provides family office services to multiple unrelated families. Each family pays fees to the MFO. Pricing models may include a mixture of hourly fees, fixed fees and asset-based fees, or a flat annual fee, depending on the services provided and the MFO involved. While each family must share the MFO’s resources with other unrelated families, the fixed costs for operating the MFO are spread across multiple family clients, which may result in lower expenses compared to operating an SFO. In some cases, MFOs started as SFOs and over time began managing assets for other families. Examples of SFOs that transformed into MFOs include Bessemer Trust and Rockefeller & Co.

When it comes to family offices, no one size fits all. The structure of each family office is determined by the family’s wealth and objectives, the number of family members participating in the family office, and the scope of services provided by the family office.

In our next blog post, we will examine current trends in the world of family offices.

Family Office Series, Part II: The Pros and Cons of Forming a Family Office

Family Office Series, Part II: The Pros and Cons of Forming a Family OfficeA family with sufficient net worth, a shared vision for how to invest the family’s wealth, and the ability to communicate openly and resolve differences may be a good candidate to form a family office. There are a number of factors that a family should consider when deciding whether to form a family office. Here are a few of the pros and cons:


  • The family controls how the family office is structured and operated.
  • The family has flexibility and the ability to make quick decisions on investments.
  • The family office can be operated with discretion and confidentiality. Family offices are lightly regulated. Typically, family offices are not required to register with the SEC or disclose the amounts they manage and invest (as money managers with outside investors are often required to do).
  • Family members (including different branches of the family) can aggregate and leverage their wealth. This may result in more looks at better deals, the ability to attract better outside talent to help manage and invest the family’s assets, and, ultimately, higher returns.
  • The family has the ability to invest directly in deals, without investing through private equity funds and hedge funds.


  • Different family members (or branches of the family) sacrifice autonomy and independence in order to invest collectively.
  • Structuring and operating a family office can be a complicated, time consuming and expensive process.
  • There is potential for scope creep. The expectations of some family members for increasing returns and services rendered by the family office may grow over time.
  • As the family grows, there is more likelihood for disputes and imbalances of wealth between family members and different branches of the family.

While forming a family office is not the right approach for everyone, using a family office to manage and invest the family’s assets has proven to be good option for many wealthy families.

In our next blog post, we will look at how family offices are structured.

Family Office Series, Part I: What Is a Family Office?

Family Office Series, Part I: What Is a Family Office?

I have a home office in my basement that I refer to as the “Smith Family Office.” Fortunately, this blog post is not about my home office.

A family office is an entity (or multiple entities) established by a wealthy family to manage its wealth and, in some cases, to provide family members with services such as tax and estate planning services, legal services and various “concierge” services. Family offices may also include a philanthropic arm for supporting the family’s charitable, social and educational interests. Family offices have existed in the United States for more than a century to manage the investments and personal affairs of wealthy families. Some family offices are established while the family still owns and manages its operating business. In other cases, a family office is established after the family sells its operating business or experiences another liquidity event.

There is a saying that “if you’ve seen one family office, you’ve seen one family office.” The structures and scopes of family offices are as different as the families they serve. Few experts can agree on a single definition of a family office, and there is no cookie cutter structure. A family office may consist of a single legal entity that invests and manages the wealth of a small group of immediate family members. Another family office may consist of multiple legal entities and trusts that invest and manage assets, provide legal, tax and estate planning services, and make charitable contributions on behalf of multiple branches and generations of a wealthy family.

Experts also disagree on how much money it takes a family to establish a family office. Many estimates range from $100 million to $1 billion of investable assets. Similarly, there is no rule on the expenses associated with running a family office. Annual operating expenses may generally range from 1.5 to 2.5 percent of assets under management. However, in smaller family offices, expenses can be higher.

The amount of the family’s investable assets, and the family’s goals and objectives, will determine, among other things:

  • how the family office is structured;
  • what services the family office provides;
  • what services are performed “in-house” (and whether those services are performed by family members or by non-family member employees); and
  • what services are outsourced to third-party investment managers, accountants and attorneys.
  • Overall, a “family office” means different things to different families based on their business, financial, investment, charitable and personal circumstances and objectives.

In our next blog post, we will explore the pros and cons of forming a family office.

Introduction to Our Family Office Series

Many wealthy families form or consider forming a “family office” to manage their wealth and provide services to family members. Whether forming a family office is feasible and whether it will be successful depends on a number of factors, including:

  • the amount of the family’s net investable assets;
  • the family’s shared vision and objectives;
  • the family’s ability to establish and maintain effective governance and management policies and practices; and
  • the family’s ability to communicate frankly and constructively in order to resolve differences of opinion.

Introduction to Our Family Office SeriesFamily offices are proliferating and becoming increasingly influential. In an article published earlier this year titled “New Force on Wall Street: The Family Office,” the Wall Street Journal reported that there may be more than 10,000 family offices globally, about half of which have been formed in the last 15 years. Research indicates that family offices hold assets of more than $4 trillion, which approaches the cumulative assets held by private equity funds and hedge funds. There are an estimated 3,000 family offices in the U.S. with more than $1.2 trillion in assets.

In our four-part series, we will focus on the family office and address the following topics:

Part 1:  What Is a Family Office?

Part 2: The Pros and Cons of Forming a Family Office

Part 3: How Are Family Offices Structured?

Part 4: Family Office Trends

We hope that you will find our Family Office Series to be informative, and we welcome your feedback.

Diving into Family Philanthropy (Segment IV): Family Philanthropy – Where to Begin?

Diving into Family Philanthropy (Segment IV): Family Philanthropy – Where to Begin?In our previous posts on family philanthropy, we addressed the benefits of family philanthropy, choosing the right giving vehicle, and investing for impact. In this final post in our four-part series, we discuss how to get started with your family philanthropy. While there is no right or wrong way to “do” family philanthropy, we find it helps to begin with a clear idea of your goals and objectives. We’ve designed the questions below to help you start thinking about what you might like to accomplish for your community and your family through your philanthropy.

1. What do you want to achieve with your family’s philanthropy?

  • Is there a particular cause or issue area that ignites your passion to give?
  • Do you want to be able to deploy your charitable dollars wherever the need is greatest as needs change over time?
  • Are you seeking a mechanism to make annual giving to the charities you already support easier?

2. What value do you place on philanthropy?

  • Does philanthropy play an important role in your life now?
  • How much time would you like to spend engaging in philanthropic pursuits?
  • Do you anticipate that your charitable giving will increase, decrease or stay the same over time?

3. How do you want to involve your family?  

  • How much control do you want other family members to have over where money is donated?
  • Are you interested in using your philanthropy as a way to teach future generations about stewardship and leadership?
  • Which family members do you want to include?

4. How much control do you want to retain?

  • Do you want to have the final say on where funds are distributed?
  • Do you want future generations to have the flexibility to change the way the funds are used?
  • Do you want to ensure that your wishes are carried out in perpetuity?

5. What amount of administrative responsibility do you wish to maintain?

  • Do you like the idea of handling the details associated with regulatory compliance, due diligence and grantmaking?
  • Do you anticipate hiring staff or others to help with administration?
  • Would you be willing to give up some control in order to decrease the number of administrative tasks you are responsible for handling?

6. How will you fund your philanthropy?

  • Are you planning to use an ownership interest in your family-owned business?
  • Are you anticipating a liquidity event?
  • Will you use an asset that you ultimately want to leave to your children?
  • Will the assets used to fund your philanthropy change from year to year?

These are just a few of the common questions we explore with our clients. In our experience, each family’s path to meaningful family philanthropy is different. If you want to brainstorm ways to take your family’s giving to new heights, we are available to discuss these and other topics related to charitable giving at your convenience.

Diving into Family Philanthropy (Segment III): Making your family foundation’s assets work as hard as its grants.

Investment CycleFamily foundations that distribute grants to worthy charitable organizations to accomplish their philanthropic goals are a familiar part of the charitable landscape. While grant making is an important part of the work of family foundations, it is not the only tool in a family’s philanthropic tool kit. A family foundation may also invest its assets to accomplish its charitable goals using a range of investment vehicles that are often referred to as “impact investments.”

The term “impact investments” means different things to different people, and people use it to refer to a variety of investment vehicles. In general, impact investments are different from more traditional investments because they take into consideration (to varying degrees) the social or environmental risk or impact of a given investment. Compare this to a more traditional investment model that looks to generate competitive returns based on profit maximization, without taking into consideration social or environmental concerns. In a traditional model, a family foundation focused on saving the “Crumple-Horned Snorkack” would not take into consideration whether its investment portfolio invests in companies that might contribute to the endangerment of the Snorkack. The foundation would invest to generate competitive returns and to maximize profit, and use that profit to further its charitable work.

The traditional investment model described above has certainly stood the test of time. However, some family foundations have sought out different investment models that seek to generate both financial and social/environmental returns, outcomes or impact. Generally, such family foundations are motivated by a desire to deploy part or all of the principal assets of the foundation, in addition to its grant making dollars, in furtherance of the family’s charitable mission. When engaging in impact investing, the governing body of the family foundation must determine those investment policies that are most sensible for that foundation in light of its mission, its tolerance for risk, and applicable state and federal law.

Impact investment models may involve the use of negative screens, where investments with high environmental, social or governance risks (or other risks of particular concern to the family) are screened out. Using the example above, the family foundation focused on saving the Snorkack would take into consideration the impact the companies it chooses to invest in have on the Snorkack habitat. Another strategy used, perhaps in tandem with the negative screens discussed above, is positive screening, where investments are specifically selected because the companies involved have integrated social and environmental concerns into their business models. Again, the exemplar foundation discussed above would use positive screens to make investments in companies with practices that demonstrate a positive impact on the protection or preservation of Snorkack habitat.

Family foundations might also make direct investments in for-profit or nonprofit organizations to accomplish their philanthropic goals through program-related investments (PRIs). PRIs are specifically defined in the federal tax code – and have been since 1969. Many foundations have been using PRIs to further their charitable purposes for a long time. To qualify as a PRI, the primary purpose of the investment must be to accomplish the foundation’s charitable purpose; the production of income may not be a significant purpose. For example, a foundation might make an interest-free loan directly to an economically disadvantaged individual to attend college. Or, a foundation focused on revitalizing a severely blighted urban area might provide an incentivizing loan to a for-profit business to establish a new plant in that area. Family foundations might also make direct investments related to their missions that do not qualify as PRIs (e.g., if the profit motives behind the investment are significant or if the charitable purposes are less than primary). These mission-related investments (MRIs) may be made primarily for charitable purposes or for dual purposes – both financial and charitable. Specific rules apply to determine whether an investment qualifies as PRI or whether an MRI could jeopardize a foundation’s ability to carry out its charitable purposes. When considering whether impact investing is right for your family foundation, we recommend that you consult with legal counsel to help ensure that the foundation complies with applicable state and federal law.

As a final note, some foundations are trying to maximize the impact of their charitable dollars by spending down their assets during the founders’ lifetimes. Generally, a private foundation must spend annually a minimum percentage of its money or property in furtherance of its charitable purposes. However, a foundation may choose to spend more than the minimum distribution amount each year. The governing body of the foundation should set an appropriate spending policy (and related investment policies) that aligns with its mission. For example, a foundation that has set an ambitious goal of eradicating a particular blight on society may choose to spend down its corpus to maximize the impact the foundation has in a short period of time. However, for other goals, it might be preferable to maximize the time period during which distributions are available or to stabilize a stream of funding over time.

This article is not intended to express an opinion about what investment model might be right for a specific family foundation. Rather, the purpose of this article is to shine a light on some of the ways in which your family foundation might seek to accomplish its charitable goals. Please contact us if you would like to discuss these or any other methods to achieve your philanthropic objectives.

Diving Into Family Philanthropy (Segment II): What giving vehicle is right for your family?

Donation CheckWe recommend waiting to choose a giving vehicle (or vehicles) until you have a clear sense of your family’s philanthropic objectives. Once identified, those philanthropic goals, in addition to tax and operational considerations, will inform the selection of the right vehicle for your family. This segment will provide an overview of a few of the most common charitable giving vehicles and how you can decide which one may be right for your family.

There is no one-size-fits-all approach to charitable planning, and often pragmatic concerns regarding administration, oversight, compliance and control come into play. Expect your advisor to be interested in your thoughts regarding the following questions:

  1. How much control do you want to retain over the way your charitable funds are used?
  2. What amount of administrative responsibility do you wish to maintain?
  3. Would you be willing to give up some control in order to decrease the number of administrative tasks you are responsible for handling?
  4. Do you want future generations to have the flexibility to change the way the funds are used?
  5. What types of assets do you think you will use to fund your giving?

There are three common giving vehicles to consider: private foundations, donor-advised funds and giving circles.

Private Foundations

  • A private foundation is a separate legally entity, and is typically funded by a single donor or a small group of donors.
  • The governing body of a private foundation, often comprised of members of the donor’s family, decides how the foundation’s funds are used to accomplish its charitable purposes.
  • As a separate legal entity, a private foundation incurs some costs that are generally not incurred by the donor of a donor-advised fund or giving circle. These include the costs of forming the private foundation, applying for recognition of tax-exempt status from the Internal Revenue Service and maintaining that exemption by complying with annual recordkeeping and filing requirements. If you are considering the creation of a private foundation, consider whether the amount you wish to set aside for charitable purposes can easily absorb start-up and ongoing administrative costs.
  • The creation of a private foundation and recognition of its tax-exempt status from the IRS may take up to several months to complete.
  • In addition, private foundations are subject to several tax rules not currently applicable to donor-advised funds or giving circles, which include: the charitable income tax deduction for a donation to a private foundation is limited to a 20-30 percent of a donor’s gross income; the value of a gift of closely held stock or real estate is limited to a donor’s cost basis for most private foundations; private foundations are subject to a 1-2 percent excise tax on all investment income; and private foundations must distribute five percent of the fair market value of their investment assets each year.
  • A private foundation may last in perpetuity, and successive generations of family members can easily be incorporated into the governance of the foundation.

Donor-Advised Funds

  • A donor-advised fund, or DAF, is a separate fund sponsored by an existing public charity.
  • One or more individuals identified as the advisors to the donor-advised fund, typically the donor and perhaps additional members of the donor’s family, may recommend how the assets of the fund should be distributed over time to any IRS-qualified public charity. Under the federal tax rules applicable to DAFs, the ultimate decision regarding how the DAFs are used must be made by the public charity and not by the donor.
  • The sponsoring public charity manages any administrative responsibilities of the DAF and evaluates qualified organizations. In addition, many sponsoring entities have geographic or subject matter expertise to assist in identifying worthwhile charities working in your areas of interest.
  • Since a DAF is housed in an existing public charity, there are few start-up costs.
  • Depending on the sponsoring public charity, a DAF may have limits on how long it may remain in existence, or may have a limit on the number of successive generations of family members that may make recommendations for how the funds are distributed.

Giving Circles

  • Giving circles come in many shapes and sizes. Generally, a giving circle is a group of individuals who pool funds, then decide as a group where to donate those funds.
  • Giving may be very informal. For example, members of a giving circle may choose to meet casually to select organizations they wish to fund. If the members of an informal giving circle wish to maintain the ability to take a charitable income tax deduction, each member should write a separate check directly to the charitable organization (or organizations) the group has chosen to fund.
  • A giving circle may be housed within a community foundation or other sponsoring entity. For example, members of a giving circle may choose to pool their resources in a fund at a community foundation, and then make recommendations about how such funds should be distributed in the community.
  • A giving circle may be a useful tool to start talking about philanthropy with your family. Children of all ages can be encouraged to contribute what they are able to the pool of funds, which can help them begin to understand the impact and rewards of charitable giving.
  • Since a giving circle may be very informal, there are few if any start-up or ongoing administrative costs.

These are by no means the only options available to you, and there are many creative options available to help you to maximize your charitable impact.

In addition to the decision you make about charitable giving, the decisions that you make about how to manage your business, invest your personal assets, volunteer your time and engage civically can all work together to help you achieve your philanthropic goals. In our experience, family businesses often already have strong practices that drive the bottom line while improving the local community. As a family business owner or advocate, you bring a unique set of skills to the world of philanthropy. We encourage you to think about the ways in which you can incorporate your valuable experience from the private sector into your charitable planning.

We are ready to help you and your advisors think through these and other issues as you start tackling your philanthropic goals.

Benefits of Family Philanthropy: A Real World Example

In our current series of blog posts, Diving Into Family Philanthropy, we are exploring the choices available to families that wish to engage in family philanthropy. In our most recent post, we discussed the benefits of family philanthropy, including:

  • teaching financial values to the next generation,
  • sharing and discussing investment philosophies,
  • establishing a training ground for future family board members, and
  • creating meaningful family experiences.

A recent New York Times article, “Giving Like a Rockefeller, Even if You’re Not Super-Rich,” about the philanthropic legacy of David Rockefeller, who died last month at the age of 101, shows a real-world example of the benefits of family philanthropy.

Multi generation meetingThrough interviews with several of Rockefeller’s children and grandchildren, the article explains how he used charitable gifts to teach younger generations of his family the values of gratitude, humility, responsibility and engagement. Younger family members were allowed to have varying degrees of involvement with the family’s philanthropic pursuits to best fit their own personal circumstances. Rockefeller also encouraged younger generations to follow their own charitable passions, which has been a key to keeping younger family members engaged. If you are interested in family philanthropy, we highly recommend reading the New York Times article.

In our next post, we will continue our series on family philanthropy by describing the different vehicles available for charitable giving, including family foundations, donor advised funds, and giving circles.