Incorporating Your Life: The Family Management Company (FMC)
Incorporating Your Life: The Family Management Company (FMC)
Stop paying investment expenses with after-tax dollars. How to restructure your family office into a legitimate business (C-Corp/LLC) to deduct salaries, tech, and travel.
Executive Summary
- The TCJA Problem: Before 2017, individuals could deduct investment expenses (Section 212) on their tax returns. The Tax Cuts and Jobs Act eliminated this. Now, if you pay $100k for financial data or advice, it is considered a personal expense—0% deductible.
- The FMC Solution: You establish a **Family Management Company** (usually a C-Corp or LLC). This entity provides “management services” to your family’s trusts and investment entities.
- The Mechanism:
1. Family Trusts pay a **Management Fee** to the FMC.
2. The FMC uses this revenue to pay for **Staff (Salaries), Office Rent, IT/Software, and Health Insurance**.
3. Because the FMC is a “Trade or Business” (Section 162), these expenses are **fully deductible** against its revenue.
The “Lender” Case Precedent
Legal Guardrail: The US Tax Court case Lender Management, LLC v. Commissioner established that a family office CAN be a business, but only if it operates for **profit**.
👉 Rule: Your FMC cannot just break even or run at a loss forever. It must charge a market-rate fee (e.g., 0.5% of AUM) and aim to show a net profit to prove it is a genuine commercial enterprise.
Mechanic: Converting “Life” into “Business”
Simulation: $500k Annual Overhead (Individual vs. FMC Structure)
| Expense Category | Individual Investor (Section 212) | Family Mgmt Co (Section 162) |
|---|---|---|
| Investment Advice | Non-Deductible | Fully Deductible |
| Staff Salaries | Personal Expense (Nanny tax) | Business Payroll Expense |
| Health Insurance | Post-Tax (mostly) | Pre-Tax Benefit |
| Tech/Data (Bloomberg) | Non-Deductible | Fully Deductible |
“Wealthy individuals have hobbies; wealthy families have businesses. The FMC transforms the necessary friction of managing wealth—staff, rent, software—from a personal drain into a tax-efficient business operation.”