Notes
1 Custodians are often referred to as “master custodians” because, in order for them to hold and report on the many types of financial assets investors own, a custodial institution will typically require the services of several (or many) subcustodians. For example, it is not practical—and is sometimes not possible, due to local laws and regulations—for a U.S. banking institution to have a custody operation in every country in the world. Instead, the master custodian will enter into agreements with local institutions to act as subcustodians for the master.
2 Unlikely, but hardly unheard-of. Most of the large banks in Houston, Texas collapsed in the 1980s, for example, as did Continental Illinois in Chicago and numerous other banks that proved not to be “too big to fail.” Think Lehman Brothers, National City, Countrywide Financial, and so on.
3 Note that in the event of an IRS audit, the books of the custodian are considered to be the official “book of record” for tax data.
4 The SSAE16 is a thorough report on the internal controls at a custody bank and, effective in mid-2011, replaced the SAS70.
5 To make matters even more complex, there are firms that specialize in investing securities lending proceeds. In other words, these firms take the modest interest we receive for lending our securities and invest it to produce slightly more interest. A very large scandal involved one of these firms, First Capital Strategies, in the mid-1990s.
6 For example, the gigantic public and corporate pension funds.
7 This portion of the chapter is adapted from Greycourt White Paper No. 10: Establishing a Family Office (2006), available at www.Greycourt.com.
8 I believe that the first true family office in America was established by Judge Thomas Mellon in Pittsburgh in 1868. John D. Rockefeller set up an office for the Rockefeller family shortly thereafter.
9 That is, one handling, in-house, the full array of investment, accounting, legal, intergenerational, educational, and concierge services required by a complex family
10 Activities that are typically carried on in-house include direct investing, bookkeeping, accounting and reporting, philanthropy, education of younger generations, concierge services, and oversight of a family business. Activities typically outsourced include investment management (the chief investment officer function), asset custody, tax accounting, estate and trust planning, and such “soft” issues as intergenerational conflict, where an objective viewpoint is useful.
11 Note that if costs are to be allocated to a private foundation, a private letter ruling from the IRS should be obtained approving the allocation methods.
12 CCC Alliance LLC, 10 Liberty Square, 3rd Floor, Boston, MA 02109, 617-457-8368.
13 Family Office Exchange, Inc., 100 S. Wacker Drive, Suite 900, Chicago, IL 60606, 312-327-1200.
14 Family Wealth Alliance, 240 E. Willow Avenue, Suite 102, Wheaton, IL 60187, 630-260-1010.
15 Institute for Private Investors, 17 State Street, 5th Floor, New York, NY 10004, 212-693-1300.
16 The notion is that because the family members now own much of their wealth in an illiquid partnership, the IRS should accept a lower (discounted) value on those assets for estate tax purposes—in effect, a discount for lack of liquidity. This notion, by the way, drives the IRS crazy, and it tends to attack family partnerships on sight. The courts have, to date, issued decisions on family limited partnerships that are difficult to reconcile.
17 Internal Revenue Service statistics show that foundations routinely pay out far more than 5 percent of their assets. For the tax year ended 2008 (the most recent data available), smaller foundations on average had grant payout rates of 6.9 percent. See Cynthia Belmonte, “Domestic Private Foundations and Excise Taxes, Tax Year 2008,” SOI Bulletin 31, no. 3, Available at http://www.irs.gov/pub/irs-soi/12pfwinbulexcise08.pdf.