This article examines the use of investment vehicles called limited liability corporations and how they can be used by family offices.

The following article comes from Everett Alexander, director at Wingspan Legacy Partners in the US. It focuses on why and when multigenerational family offices should consider creating Series LLCs and tailored policy statements that reflect the differing needs and goals of multiple generations. The editors are pleased to share these ideas and insights; the usual disclaimers apply to views from outside contributors. To respond, email tom.burroughes@wealthbriefing.com  Remember that we value debate and conversation, so get involved!

For family offices, an investment policy statement (IPS) is the cornerstone document that defines the objectives of the family’s investment process. It outlines the family’s investment goals, risk tolerance, and return expectations. It also serves as a guideline for decision-making by providing a framework with which investment decisions are made; this helps maintain discipline in the investment process, avoiding impulsive decisions based on market fluctuations and/or emotions. 

By specifying acceptable risk levels and investment strategies, an IPS sets the investment parameters for diversification and asset allocation and specifies the types of investments that are considered acceptable or off limits. The document establishes benchmarks for performance evaluation, making it easier to assess the effectiveness of the investment strategy and performance. 

Typically, a single-family office creates one investment policy statement to govern the investment goals for the entire family. Investments (i.e., fixed income, equities, alternatives) are generally co-mingled into one investment vehicle, typically a Limited Liability Corporation (LLC), with family member beneficiaries sharing a pro-rata member interest in the LLC based upon their share of the assets, which begs the following questions.

Why should a multi-generational family co-mingle investments into one LLC and one investment policy, if the investment time horizons for family members are not the same? Growth-oriented investments may be more suitable for a G3 Rising Gen trust beneficiary, who has a longer-term time horizon, while an income-oriented strategy may be more befitting for their G2 parents who may be approaching an age where they expect to receive trust distributions and are interested in capital preservation. G3 Rising Gens may also wish to have exposure to socially responsible investments while the G1 wealth creator may not have any interest at all. So, how does a family remain unified and engaged in the family office, without creating investment conflicts between G1, G2 and G3 who have differing investment goals? 

One solution is to create a Series LLC. A Series LLC, or Series Limited Liability Company, is a unique form of a limited liability company that allows for the creation of multiple “series” or “cells” within a single LLC framework. Each series can have its own members (owners), assets and liabilities, and conduct business independently of the other series within the same LLC. The structure is designed to protect the assets of one series from the liabilities of another, offering a way to compartmentalize and isolate risks. 

Since the early 20th century, investment firms have practiced dividing asset classes into distinct funds, initially employing statutory trust series for this purpose. These trusts were created with a purpose of distributing risk, with more speculative assets placed in one trust and less risky ones in another. Investors were issued transferable ownership interests in these trusts. However, each statutory trust in a series was treated as an independent entity, resulting in investment firms incurring costly SEC registrations because each trust had to be registered independently. (1)   
The landscape shifted with the Investment Company Act of 1940, which acknowledged statutory trusts legally, allowing mutual fund companies to manage multiple funds under one umbrella. Then, in 1996, the Delaware General Assembly introduced the Series LLC, where assets in one series are insulated from the risks in other series within the same LLC. (2)   

Family offices which segregate asset classes under a Series LLC allow for LLC members (i.e., trust beneficiaries) to have different asset allocations to asset classes within the series. For example, an LLC within the series can be created to house socially responsible investments for G3 trust beneficiaries who can then allocate a larger proportion to that series compared with the allocation for G2. Another LLC can be created to house fixed income-oriented investments such as private and public credit, of which G2 beneficiaries may have a greater proportion allocated than that of G3. 

How does a Series LLC affect the IPS? Instead of one IPS that governs the investments for the family as a unit, multiple IPSs would be created. One way to do so is to create an IPS for each generation that is separate and apart from the other generation, thereby incorporating the respective time horizons of each generation and their corresponding investment objectives and goals. Series LLCs allow for greater investment transparency for the chief investment officer and the family because investments are allocated by asset classes independently within each series. This way, it is easier to ascertain how each asset class within the series is performing relative to its respective benchmark.

Despite its benefits, the Series LLC is a creation of state law and can only be formed in a state that authorizes the formation. Not all states allow for the formation of Series LLCs. In some cases, states that do not allow for the formation will, in fact, recognize Series LLCs formed in another state. 

When it comes to a multigenerational family office, a one-size-fits all policy may not be optimal. That’s why families should analyze their specific situations, strategies and goals over the long term and decide whether Series LLCs and tailored policy statements are right for them. 

Footnotes:

1, 2,   â€śHow Series LLCs Benefit Investment Companies,” August 10, 2022, SeriesLLC.com