Introduction

With the explosion in the number of family offices around the world due to the proliferation of wealth concentrated among global ultra-high net worth families, TwinFocus remains keen on identifying secular trends that impact ultra-high net worth families, as they continue to adapt to domestic and macroeconomic, regulatory / financial, and technological developments.

As we head into the New Year, we have highlighted certain of these developments and resulting key risks related to family offices, including, without limitations, to:

1. multi-generational tax issues
2. legal and regulatory provisions
3. technological advances
4. macroeconomic forces ushered in by tectonic shifts in the global macroeconomic and geopolitical arena.

We provide brief descriptions of some of these developments, how they are impacting the family office ecosystem and how we are assisting family offices in minimizing, coping with, and capitalizing on these risks.

1.    Geopolitical & Macroeconomic Risks For Investment Advisers

As President-elect Trump is about to become the 47^th president of the U.S., the world is bracing  for tectonic changes that he is expected to institute at the start of his second term.  These domestic changes are concurrent with an everchanging global macroeconomic environment – i.e., an environment in transition from unipolarity (dominated by the U.S.) to a multi-polarity framework, dominated by the U.S., China and the Middle Powers.

We find ourselves in a geopolitical tug-of-war between one group of global democratic economies aligned with the U.S. and the other group, dominated by autocratic governments aligned with China and Russia.  Geo-economically, at TwinFocus we spend considerable time studying global trade and financial flows and how dollars move from big surplus countries to the U.S., financing the world’s largest deficit country, coincidentally the world’s reserve currency country, in this global recycling mechanism, once feeding China’s growth engine.  The deficit countries are dominated by autocratic rule while the surplus countries are largely democracies with more transparent and neoliberal policies.

Evaluating the political environment around the world, we see a world that is becoming increasingly sclerotic and disjointed, following a period of unprecedented globalization, facilitated by the entry of China into the World Trade Organization in 2001.  This hardening and growing tensions among the blocks became even more apparent after Russia’s invasion of Ukraine and China, Iran and North Korea’s willingness to provide economic, financial, diplomatic and miliary support to Russia as a result.

The race by democratic countries is thus on to de-risk financial, economic and trade dependencies with many countries, including the post-war axis powers, comprised of Russia, China, North Korea and Iran. However, are our policies back-firing?  Since Trump’s first term where he introduced some of the largest tariffs against China, the U.S trade surplus with China has exploded to the upside.

The end-result is that we find ourselves in a world where the U.S. and Europe are experiencing larger deficits financed by autocratic countries that are adopting increasingly opaque policies to hide, among other things, the extent of these politically unpopular trade flows.  In turn, the dependence on supply chains dominated by surplus countries is becoming increasingly untenable and politically unpopular back home by right-wing populist movements, as evidenced by the election of a U.S. President running on a platform of anti-immigration, anti-globalization and the most draconian trade policies and tariffs ever proposed.

From an investment management perspective, understanding the intricacies of these secular trends is mission-critical to identifying investment trends that can withstand volatility and even capitalize on it.  One can easily make the case for a world mired in geopolitical tensions, global economic slowdowns against persistent inflationary backdrops, driven by an indiscriminate multi-lateral tariffs, escalating trade wars, a weaker dollar, higher commodity prices, further disruptions to key supply chains and increased volatility and uncertainty – i.e., a very bearish market scenario.

However, on the flip side, a case can also be made where we may experience increased economic growth and global peace following the fall of the Russian-backed Assad, the possible resolution in Ukraine and the Middle East, as well as a coming to terms between the U.S. and China, where Trump strikes several trade and economic deals with Xi Jinping, living up to his reputation as our “Transaction President.”  Deregulation, lower taxes, and market and capital-friendly policy changes could be fuel for further economic growth in the U.S. with spill-over effects in Developed Markets and the Global South, so long as global cross-border tensions remain under control in the face of potential, anti-trade policies.  As such, we believe staying strategically invested across risk exposures is critical for every family office, at a time when inflation is the silent killer to every balance sheet.

Given this economic and investment environment, we are positioning client portfolios and balance sheets away from concentration to specific asset classes, sectors, climate-sensitive industries, countries (i.e. particularly those countries over-exposed to energy transition risks, such as Germany, et al.), geographies and strategies that are over-exposed to countries subject to increasing political backlash, energy dependence, and supply chains centered in the Global South and those countries that are core members of the Belt & Road Initiative. We will maintain this stance until we see greater clarity on the direction and nature of U.S. and China relations over the next couple of years under a Trump administration.  The direction of U.S. foreign relations has become the key driver determining how we deploy capital going forward.

Quite fortunately, family offices can focus on long-term sustainable and structural trends, avoiding short-term noise and false signals, which often result in short-term profits at the expense of longer-term losses and pain. Our clients are not constrained by short-term time horizons but have the benefits of maintaining a longer-term investment vision, quite often dynastic in nature, where family office structures span generations and decades.  Avoiding shorter term, tax inefficient trading allows family offices to position portfolios around key trends in the most tax efficient manner, utilizing the most appropriate investment vehicles, while solving for income and multi-generational objectives.

More importantly, because of the prevailing macro environment, family offices are emerging as likely alternative sources for capital as other institutional capital providers are becoming increasingly constrained by persistently high interest rates and credit market uncertainty, bowing out of many potentially profitable and sustainable investment opportunities.  As one example, family offices that can think creatively are now positioning themselves as primary sources of capital for attractive real estate investment opportunities in stressed and distressed situations, providing very favorable terms for both equity and credit.  If interest rates continue to climb in the face of higher inflation and macro uncertainty, these types of investment opportunities should only increase.

Every crisis gives birth to new investment opportunities – it requires creativity, ingenuity, and objectivity to identify them.  For family offices, we continue to advocate for diversification across asset classes, with a focus on domestic exposure to those parts of the market that are trading at attractive valuations vis-à-vis the larger cap, tech-oriented growth companies, in those sectors that are poised to do well in the face of geopolitical uncertainty.  Within fixed income, we tend to stay on the shorter end of the yield curve, favoring less credit sensitive exposures where spreads are trading at historic lows and often, not properly compensating for risk.  In the alternatives space, including private investments and real estate, our focus is on patient and creative thinking, being able to step in and structure terms that provide for handsome upside returns but with solid downside protection.  Lastly, we remain overweight gold and other commodities, given the geopolitical environment favoring a weaker dollar and greater political uncertainty and instability, particularly in commodity-producing countries.  As Trump’s second term progresses, we will have more insight into whether his “transactions” will be successful.

2.    Tax / Regulatory & Balance Sheet Management Risks

In addition to all the geopolitical, economic, and technological uncertainties noted above, several tax and regulatory developments, particularly in areas of tax compliance and reporting, are providing family offices with plenty to consider heading into 2025. These include tax changes that are impacting multi-generational programs, as well as income and cross-border changes, CTA filing requirements, federal and state updates on non-compete clauses, IRS audit threats around private equity, carried interest planning, as well as sports investing, aviation ownership and usage, just to name a few.

The IRS objective is to determine whether taxpayers in these groups are compliant with tax regulations in order to pay their fair share.  More importantly, while we do not know for sure the new administration’s position on these campaigns, we remain very focused on planning around these strategies, keeping a close eye on IRS developments, and continuing to serve our family office clients and avoid large taxes and penalties.

Below we provide an outline of some of these regulatory risks and how we are preparing to tackle each of them for clients.

• Global Wealth Structuring & Tax Regulatory Risks
  • Multi-Generational Tax Planning.  Although the lifetime estate, gift and GST tax exemptions will increase to $13.99 million in 2025, under current sunsetting provisions, that amount will be cut in half beginning in 2026. While President-elect Trump is likely to extend these exemptions, we are urging clients to continue transferring select appreciating assets to the next generation in well-designed and customized structures.
    • Ancillary risks pertaining to multi-generational planning, particularly in higher interest rate and inflationary environments, including conflicting and misaligned investment objectives across generations, governance conflicts (particularly with large, family-owned private businesses), well-designed succession plans and decision-making frameworks, particularly for those families whose wealth was created from a significant private family business.
• Domestic & Cross Border Risks.  Corporate and individual tax rates, under the Trump administration, are expected to either decrease or remain the same, in addition to several other tax changes more favorable to taxpayers, offset by lowering deductions, possibly maintaining state and local tax caps, and maintaining certain restrictive cross-border tax schemes, aimed at repatriating earnings back into the U.S. While a complete discussion of proposed tax changes in 2025/2026 is well beyond the scope of this paper, TwinFocus has authored a dedicated piece on the proposed tax law changes and their impacts on family offices. To emphasize, there are many opportunities that can be exploited for the right fact patterns.

• Other Regulatory Task Risks.   IRS is continuing to audit and pay closer scrutiny to the following types of conduct:
  • Private Equity & Carried Interest.   Because of the increased social focus on wealth/income inequality, private equity professionals have become the central target for pursuing tax loopholes for the ultra-high net worth taxpayers, one of which remains the favorable tax treatment of carried interests. Although the 2018 Tax Cuts & Jobs Act did take steps to reduce this specific benefit, planning opportunities still exist, particularly in the multi-generational planning with carried interests where private equity general partners are able to transfer strategic private equity assets to multi-generational vehicles in a very tax advantageous manner, resulting in vast amounts of wealth transferring dynastically to the next generation.  This includes general partner carried interests and management company interests where layering on additional income tax planning initiatives can also result in significant federal and state income tax savings, currently.  While we believe the Trump administration will be able to pass significant tax legislation, we remain confident this opportunity will survive largely intact.
• Sports Team Ownership.   With the proliferation of large amounts of wealth, family offices have become increasingly involved in ownership of major franchises across the world, both for fundamental as well as tax reasons. Because of such strong interests, dedicated private equity funds and co-investment vehicles have been created to cater to these increasing opportunities generated for family offices.  However, the IRS has taken notice and is now going after those partnerships within the sports industry that are generating large tax losses to determine whether income and losses, particularly passive losses, are being reported in accordance with proper tax regulations – i.e., is the ownership of these sports teams active or passive activity for family office owners.
  • In these situations, if we take the position that a family office is in fact actively managing the sports team to allow for current enjoyment of large tax losses, we take significant steps in documenting the activities surrounding such ownership to make sure they could withstand passive activity scrutiny and audits by the IRS.
• Aviation Usage & Proper Ownership Structuring.   The IRS has formed a business aircraft campaign to address compliance concerns regarding business aircraft ownership and usage by companies and high net worth taxpayers. At TwinFocus, we have formed internal teams focused on servicing clients’ aviation activities, including proper ownership structures, compliance, reporting and ongoing best practices.

• Philanthropy – Inter Vivos & Testamentary Tools for Family Offices.   Critical to every family office environment is its philanthropic program, with the exact magnitude and nature of the vehicles utilized varying from family to family. The philanthropic program combines three core competencies of any family office in terms of: a) type, nature, timing and magnitude of the balance sheet assets utilized to effectuate and fund charitable contributions; b) the investment program for each charitable vehicle’s endowment, including mission-related, ESG mandates, that comprise the risk/return profile and strategic asset allocation of every charitable pool of investment assets, and c) the types of charitable grants, from direct grants to recoverable grants through for-profit and overseas charitable organizations, dependent on each family’s specific objectives.
  • While it is difficult to gauge the Trump administration’s appetite for introducing legislation that impacts the philanthropic program, President Trump, during his first term, introduced regulations less favorable to certain types of charities and their activities, while President Biden did introduce sweeping legislation that would have had far reaching impacts if they were ever promulgated. Nonetheless, we maintain a close eye of any proposed legislation, given the important functions that philanthropy plays, while the matriarch and patriarch are alive, and particularly for their testamentary architecture for those multi-generational plans that are very comprehensive in nature.
• Legal/Structural Risks.   Family offices may additionally be impacted by a number of non-tax, legal regulations, including:
  • Corporate Transparency Act (CTA).   Despite an earnest attempt to void the legislation in federal court, the CTA filing requirements remain mandatory for all legal entities, most of which are basic staples of fulyl-integrated and comprehensive family office architectures. These requirements include initial filings, as well as mandatory filings as a result of any entity amendments that trigger filing requirements.
    • While we cannot know for sure the fate of the CTA legislation under a Trump second term, we believe every family office, as part of its legal best practices, should adopt CTA-friendly monitoring and filing systems to avoid potential penalties.
  • Federal/State Noncompete Restriction Risks.   In 2024, the federal government approved a final ruling, banning non-compete clauses for most employees, which was subsequently struck down by a Texas federal judge, delaying its potential applicability. However, in anticipation of this ruling, many states adopted state-specific rulings on non-competes even for contracts that are out of state boundaries. While the current Supreme Court weakened federal agencies from promulgating such sweeping legislation, family offices should be very cognizant of any state specific ordnances and/or the stance that President Trump may take during his second term.
    • The denial of utilizing non-competes can influence and negatively impact family offices’ ability to a) attract and keep talented employees, but more importantly b) to protect proprietary family information. Reviewing, revising, and navigating around these types of clauses in contracts and agreements for family office becomes all the more critical.
  • Anti-Money Laundering (AML).   In recent years, AML compliance has become increasingly challenging and complex, and many countries have introduced legal regulations making AML compliance and information requests very restrictive, time-consuming and burdensome. Similarly, financial institutions have adopted internal requirements, as part of their efforts to comply with AML cross-border rules, that make it almost impossible for US tax residents and citizens to open financial offshore accounts, and vice versa.  These AML requirements are countervailing with family offices’ desire to maintain anonymity and confidentiality due to heightened cybercrimes and data breaches.  These regulatory trends are expected to only get worse, particularly for investment advisers of family offices, as the federal government introduces legislation, expanding AML reporting requirements to investment advisers.
    • We are expecting regulations surrounding AML only to potentially worsen with a Trump second administration, particularly if we enter trade wars with countries like China, with the federal government’s desire to protect certain technologies in the name of national security. This can impact a family office’s a) ability to open accounts in key offshore countries for various tax and non-tax reasons, b) ability to invest in offshore private funds and direct operating companies, and c) ability of private companies (owned by family offices) from doing business and transacting in certain countries, including entering  into potential M&A transactions.
  • Immigration & Impacts on Family Office Operations.   Immigration policy has been near and dear to President Trump, running on a wide-spread anti-immigration platform. While a full discussion of the merits of a well-designed immigration policy is beyond the scope of this article, we would only state that immigration policy can impact a family office’s ability to retain talent for a wide cross-section of functions important to ultra-high net worth families.
    • A restrictive immigration policy can have heightened effects on wages of certain job functions, which can have further deleterious effects on inflation, spilling over to credit and capital markets, as well as investment management decisions.
  • Tariffs/Trade Wars & Impacts on Contracts & Legal Agreements.   Perhaps the most important aspect of President Trump’s platform has been and remains the use of tariffs and trade wars as a weapon in his foreign policy toolbox. The use of tariffs can potentially become widespread and multilateral, effecting every country that choses to do business with the U.S. and even trade neutral countries, through spillover effects on supply chains, etc.
    • While tariffs can have negative impacts on inflation and interest, as we have discussed throughout this article, our concerns extend to important family office agreements. In our review and negotiations with third parties on behalf of family office clients, we have to be very cognizant of price-adjustment clause, force majeure clauses, and liquidated damages clause, particularly as they apply to direct investments in development real estate and other applications.  For example, should price increases and potential supply chain delays as a result of unforeseen trade wars and tariffs become detriments to a family office’s negotiating position in a contract for goods and services?  When reviewing client agreements, paying close attention to these types of clauses and negotiating around them will become increasingly more important.         

3.    Operational, Cyber & Data Security

Family offices are embracing technological developments in artificial intelligence by adopting and leveraging machine learning and LLMs to allow for sifting through large amounts of data, uploading important legal, tax, investment and due diligence documents to a) extrapolate, organize and identify key issues, discrepancies, and deficiencies, b) summarize information on their platforms and c) make final recommendations, predictions and conclusions.  These exercises benefit not only family offices, but also large family businesses and other activities where the analysis of large amounts of data plays a significant role.

That being said, cybersecurity, data protection and confidentiality remain top concerns, particularly within the family office setting. For example, family offices are less regulated than traditional financial services firms, such as registered investment advisers, but more importantly, family offices may find themselves without formal institutional processes and procedures for data and cybersecurity, including maintaining dedicated staff who are trained in data and cybersecurity.

Because of the significant wealth amassed by family offices over the past couple of decades, coupled with the fact they have less formal protection systems in place, family offices are prime targets for data breaches, ransomware, phishing, and cyber fraud.

For our family office clients, we are focused on a number or work streams surrounding data and cybersecurity:

• Generative AI.   Being very early adopters of the explosive power of AI and LLMs, we continue to implement cutting edge tools and systems to protect client data and confidentiality while availing our clients of the multiple benefits of AI, FinTech, and LegalTech software in particular. It is always important to fully understand and investigate the risks inherent with any emerging technologies without understating and underestimating their implications, both good and bad.
• Third Party Service Providers.   As one example, data protection and security does not stop within the family office ecosystem. Making sure all service providers retained by family offices use family office information, data, and documents with the utmost care, protection and confidentiality.  To illustrate, for every third party provider, such as attorneys and accountants, we request reassurances that those providers a) maintain cutting edge protections for data and document security and b) for attorneys who also use generative AI and LLMs, uploading our clients’ documents with sensitive information to a large LLM must only be effectuated within a closed system, specific to that law firm, so that those documents are not placed in databases that are fully exposed to the public domain.
• Technological & Regulatory Developments.   It is critical that family officers and their family businesses constantly remain fully updated on the changing technology and legal landscapes and work with expert service providers and consultants to assure compliance and protection.
• Digital Assets.   On a similar note, for those family offices that are early adoptors and investors in digital assets, it is important to fully understand the inherent risks, volatility, regulatory framework, security issues, particularly with cryptocurrencies, as well as tax and reporting implications and compliance and scrutiny with such assets.

To emphasize, while the benefits of new and emerging technologies, including generative AI, for family offices, and for their family owned businesses can be explosive, not taking necessary precautions can lead to unexpected and unfortunate results.  Because of the wealth amassed by ultra-high net worth families around the world, they are easy targets for sophisticated forms of fraud and theft because of weak cybersecurity protections and loose policies around data and document protections.

The use of large language models, text-to-speech models, and LegalTech software to name a few will become standard practice for both small and large family offices, their family-run businesses, charitable organizations, and other financial activities.  However, we also want to create a safe environment for the use of all these technologies against cybercriminals and this requires a pro-active and ongoing approach, as well as adoption of processes that are constantly updated and revised to fit each unique family office – one cybersecurity size does not fit all.

Concluding Remarks

Given the expected potential uncertainty surrounding legal and regulatory environment, both domestic and global, expected to be ushered in by newly elected leaders around the world, family offices must expand their traditional ways of doing business, particularly their investment programs in terms of geography, asset class coverage, risk management, and tax/legal profiles.  It may become necessary to question and review every investment in terms of how and where it is owned within a balance sheet, how the investment vehicle is structured, and how it is sized and rebalanced.

For reasons described above, it has become of tantamount importance that the truly global, ultra-high net worth family office constantly maintain a solid understanding and strategy, including both a current and dynastic/multi-generational vision, in dealing with unprecedented levels of developments within the legal/regulatory environment as well as within the geopolitical and geo-economic macro landscape where the U.S.’ unipolar positioning is a concept now only found in history books, ushering in new opportunities to invest in new asset classes with highly differing risk/return and tax profiles.

Concomitantly, having a premier UHNW family office architecture, which is highly adaptable, flexible, and scalable, governed by a keen, ongoing monitoring of the domestic and global macro environment, will be the distinguishing factor of identifying the leaders from those family offices less fortunate. It has never been truer that crisis and uncertainty will foreshadow new opportunities for those family offices paying close attention and willing to change.