Gravel2Gavel Construction & Real Estate Law blog — February 10, 2025
The possibility of a second Trump administration heralding significant regulatory and tax policy changes for the ultrawealthy and their family offices is, to put it mildly, substantial.
For decades, family offices have operated within an opaque legal framework marked by limited guidance, oversight, or public disclosure. They have also navigated a tax code that is riddled with uncertainty. Trump 2.0 could fundamentally alter this landscape, even if Congress takes little to no legislative action.
SEC Registration
Family offices are the captive investment managers of the ultrawealthy. Family offices have faced the risk for years of being subjected to Securities and Exchange Commission disclosures and complying with the family office rule. Although this rule appears straightforward, the details–particularly the definitions–create complexities.
For instance, the definition of family clients includes family members of the patriarch or matriarch, plus key employees. There are still ambiguities about when family members lose their status as clients and if certain employees meet the criteria of key employees. This uncertainty is problematic, given the significant implications of SEC registration.
Beyond these definitional issues, questions remain on whether certain investment practices violate the family office rule. One example is club investing, where ultra-high-net-worth individuals and family offices collaborate to invest in an asset or business venture.
Family office networking events often aim to facilitate the sharing of deal flow. If a family office takes on a managerial or leadership role in this context, it could be interpreted that they are providing investment advice to the other participants. The potential for such arrangements to inadvertently classify participants as unregistered advisers raises significant concerns, especially as direct investments alongside private equity funds grow increasingly popular.
President Donald Trump’s second administration could resolve much of this uncertainty. The SEC can clarify the definition of a “family client” and confirm the permissibility for club investing in accordance with the family office rule by issuing additional guidance. Such clarifications could be achieved entirely through administrative and regulatory actions, bypassing Congress–even in a post-Chevron era.
Tax Guidance
As with SEC regulations, tax policy affecting the ultrawealthy could see substantial revisions under Trump, likely favoring family offices.
Family offices currently can be structured as trades or businesses, allowing them to deduct significant expenses related to investment management activities. These expenses are not generally deductible under the Tax Cuts and Jobs Act 2017. While the trade-or-business classification depends on a facts-and-circumstances test under existing law, the Trump administration could issue guidance to standardize and solidify the tax treatment of most family office structures.
The tax treatment of private placement life insurance is another area ripe for administrative guidance. It is a preferred strategy for ultra-wealthy families, as it allows them to house assets in a tax-free wrapper. This allows investments, such as alternative assets, to benefit from tax-free growth. Ron Wyden (D.-Ore.), former chair and ranking member of the Senate Finance Committee has criticized private life insurance. He proposed legislation last month that would limit its use. The efforts to limit the use of private placement life insurance have not been supported by Congress. Again, a Trump administration could issue guidance through the IRS or the Treasury, bolstering the private placement life insurance industry and family offices’ ability to leverage this planning strategy.
Administrative Dilemma
The Trump administration will need to decide whether to act by acquiescence or issue explicit guidance on the areas above, and many others.
Politically, it may be prudent to pursue an acquiescence strategy and to refrain from issuing explicit guidance. This would allow Trump simultaneously to implement an implicit pro-wealthy policy, while appeasing his populist wing–which is what gave him a decisive win and a second-term mandate. Trump’s vice president, after all, has sponsored legislation to eliminate favorable tax provisions for the sake of populism. As with all things, time will tell. )
