Geopolitical uncertainty and jurisdictional risks are driving an increasing number of family offices to diversify geographically. However, that creates new complexities and challenges, such as for US-based FOs handling worldwide US tax laws, for example. This article examines the details.

The following article is from Mohsen Ghazi (pictured(, partner at law firm McDermott Will & Emery. It delves into the growing importance of cross-border private markets for family offices and ultra-high net worth individuals. It discusses what they need for tax-efficient structures and strategies.

Mohsen Ghazi

With significant wealth mobility and rising investments in private equity, credit, and real estate, family offices must navigate complex US tax laws, estate planning rules, and global regulatory challenges. 

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The rapid growth of family offices and ultra-high-net-worth individuals has transformed the alternative investment landscape. As fund managers strive to accommodate this estimated $100 trillion market segment, understanding the unique cross-border tax and estate planning needs of UHNWIs and the dynamics of family systems has become a strategic imperative.

With the increased mobility of wealth, cross-border family offices and UHNW individuals are drawn to US private markets for enhanced returns and diversification. In fact, according to a recent McKinsey report, family offices in the Asia-Pacific region alone are expected to oversee more than $5.8 trillion in intergenerational wealth transfers by 2030, a substantial portion of which is or will be invested in US private markets. This surge in cross-border investments into private equity, private credit, and real estate presents both opportunity and complexity - particularly when it comes to optimizing tax efficiency and regulatory compliance across jurisdictions.

Geographic diversification
Geopolitical uncertainty and jurisdictional risks are driving an increasing number of family offices to diversify geographically. Regions like Singapore, the United Arab Emirates, and Hong Kong have become prime destinations for family offices seeking stable environments, favorable tax regimes, and access to global investment opportunities. By expanding their footprints into multiple jurisdictions, family offices can hedge against regional risks - whether they be political instability, regulatory shifts, or currency volatility. Moreover, these jurisdictions offer robust legal frameworks, tax treaties, and investment infrastructure, enabling family offices to effectively deploy capital across global markets.

Through careful planning, family offices can structure investments to benefit from diversification while achieving tax efficiency, ensuring wealth preservation for future generations.

Accessing alternatives and tax optimization
Private credit has emerged as a highly attractive asset class for family offices, offering potential yields well above traditional fixed-income products. However, non-US investors face significant tax hurdles that can erode returns, particularly the 30 per cent withholding tax imposed on US interest payments to foreign investors.

Under US tax law, fixed, determinable, annual, or periodical (FDAP) income - which includes most forms of passive investment income such as interest, dividends, royalties, and rent - is subject to a 30 per cent withholding tax for non-US investors. This withholding applies unless reduced by treaty or eliminated through strategies like the portfolio interest exemption, which allows qualifying interest payments to escape withholding tax. In addition, investments in entities that are transparent for tax purposes - such as most private funds - can generate effectively connected income (ECI), which subjects foreign investors to US tax filing obligations and US income tax at graduated rates.

To mitigate ECI exposure, family offices can use “blocker” corporations, which shield foreign investors from direct US tax liability and filing obligations. While traditional blockers are subject to a 21 per cent US corporate tax rate, newer structures, such as Business Development Companies (BDCs) and Closed-End Funds (CEFs), provide similar benefits without incurring US corporate tax leakage under certain conditions. Thus, when combined with the portfolio interest exemption, these vehicles can eliminate US tax exposure entirely for non-US families seeking exposure to US private markets.

Outside of private markets, non-U.S. investors can achieve tax-efficient exposure to dividend-generating US public equities while mitigating the 30 per cent FDAP withholding tax on dividends. For example, certain Irish-domiciled ETFs benefit from the US-Ireland tax treaty, which reduces withholding tax on dividends from 30 per cent to 15 per cent. Additionally, synthetic equity solutions, such as derivatives held by swap-based ETFs, may avoid FDAP withholding taxes entirely. When structured appropriately, family offices can build globally diversified, tax-optimized portfolios across both private and public markets.

Estate and wealth transfer planning
Cross-border family offices and globally mobile UHNW individuals must navigate a complex U.S. estate and gift tax system, which differs significantly from income tax rules. Non-domiciled individuals face a substantially lower US estate tax exemption of $60,000, compared to the nearly $14 million exemption available to US citizens and residents in 2024. This lower threshold creates significant tax exposure for non-US families holding US situs assets such as real estate or shares in US corporations.

For families with wealth preservation goals during the grantor's lifetime, foreign grantor trusts (FGTs) can be utilized so that income is taxed directly to the non-US grantor, who thereby avoids U.S. income tax except on US-source income. This structure can allow wealth to grow tax-free (aside from U.S.-source income) during the grantor’s life and provides the grantor with flexibility and control over trust assets. However, FGTs generally do not automatically shield assets from US estate tax unless additional planning is implemented.

For longer-term planning, foreign non-grantor trusts (FNGTs) can offer tax efficiency when combined with indirect ownership of US situs assets through foreign entities. FNGTs effectively shield assets from US estate and gift tax exposure and defer US income tax until distributions are made to US beneficiaries. When structured carefully, they can hold US situs assets indirectly, ensuring these are not included in the grantor’s estate and preserving the trust’s global tax efficiency.

FNGTs also offer income tax advantages. For example, if a family invests in a US private credit fund relying on the portfolio interest exemption, income can accrue within the trust without US tax exposure. Distributions to non-US beneficiaries bypass US tax entirely, while distributions to US beneficiaries may trigger income tax under certain punitive throwback rules.

The choice between an FGT and FNGT depends on the family’s objectives. An FGT may be preferable for families seeking lifetime income tax efficiency and grantor control, while an FNGT offers broader estate tax protection and is often advantageous for intergenerational planning. Both structures require meticulous compliance with US and foreign tax laws to fully optimize their benefits.

Navigating US Securities law risk
While tax compliance is crucial, non-US family offices with U.S. investors must also carefully structure their investments to avoid inadvertently becoming subject to US securities regulations. Many advisors focus solely on whether non-US investors fall within the US tax net due to their investment activities but overlook the potential applicability of US securities laws. Structuring to qualify under the US family office exemption or carefully managing the number and type of US investors is essential to avoid these regulatory traps.

Manager selection: A cross-border perspective
Manager selection remains a top priority for cross-border family offices, particularly when navigating jurisdictions with different legal, regulatory, and tax environments. RIAs play a vital role in guiding clients through due diligence, identifying managers with experience in specific markets, robust liquidity management capabilities, and cross-border tax planning expertise.

In the current environment, top-tier fund managers with a global footprint and strong compliance records are most likely to attract cross-border capital. As David Chiang, president of outsourced CIO provider Idyllic Partners, notes, “Navigating the global alternatives landscape within the unique needs of family offices requires not only finding and accessing top managers but also ensuring they have the local expertise to manage cross-border complexities.”

Conclusion
As non-US family offices continue to allocate more capital to US private markets, they must adopt tailored strategies reflecting the nuances of cross-border taxation and regulatory requirements. Through thoughtful tax planning, prudent regulatory compliance, and geographic diversification, family offices can optimize portfolios while achieving long-term growth. Partnering with experienced tax and investment advisors is essential to navigate this complex landscape and secure a multigenerational legacy.