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 also have navigated a labyrinthine tax code riddled with uncertainties. 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. However, family offices have long faced the risk of unintentionally subjecting themselves to Securities and Exchange Commission disclosures and compliance by violating the family office rule.
Under current law, family offices are generally exempt from SEC registration and compliance if they provide investment advice exclusively to family clients of a single family. 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. But ambiguities persist regarding when family members might lose their status as family clients and whether certain employees meet the criteria for 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 one family office takes a leadership or managerial role in this context, this leadership or management could be interpreted as providing investment advice to 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. By issuing additional guidance, the SEC could clarify the definition of “family clients” and affirm the permissibility of club investing under the family office rule. 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. Without such planning, these expenses are generally non-deductible under the Tax Cuts and Jobs Act of 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. As a favored strategy for the ultrawealthy, it allows family offices to house assets within a tax-free insurance wrapper, enabling investments—such as alternative assets—to benefit from tax-free compounding growth.
Sen. Ron Wyden (D-Ore.), the ranking member and former chair of the Senate Finance Committee, has criticized private placement life insurance and proposed legislation last month to limit its use. But these efforts have lacked congressional support. 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 to simultaneously implement an implicit, pro-wealthy agenda, while appeasing the populist wing of his party—which surely provided Trump with a decisive victory and second-term mandate. After all, Trump’s own vice president has sponsored legislation that would eliminate favorable tax provisions in the name of populism.
On the other hand, Trump has consistently shown himself to be “anti-fragile,” immune from criticism, giving him every reason to adopt administrative guidance and agendas that are friendly to the ultrawealthy with little care or worry of political blowback. Like all things, only time will tell.
(This article originally appeared in Bloomberg Law.)