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Adapting to Market Volatility: Tax Strategies and Alternative Investments for Family Offices

Mar 7, 2023

By Lisa Cappiello

Recent investing volatility and higher tax bills could mean tax strategies will look a bit different this year for many ultra-high-net-worth individuals. Alternative investments, including hedge funds, private equity, venture capital, real estate, and rare collectibles are becoming more attractive to family offices since they have a low correlation to traditional stocks and bonds and offer diversification and lower volatility. With both inflation and the uncertainty of the stock market, investors are also prioritizing fixed income as part of their portfolios by adding dividend-paying stocks and high-quality, short-term bonds.

As a result of the preferential tax treatment, qualified opportunity zone (QOF) funds can still be a viable strategy for investors, but state tax implications should always be a consideration. Investors may be sitting on losses in a bear market and can use tax-loss harvesting to offset any realized capital gain; but they should be cautious of loss limitations and possibly wash-sale rules. Previously investors were using charitable lead annuity trusts (CLATs) for investment strategies, however, as interest rates remain high, a charitable remainder trust (CRT) is a more attractive option.

Family offices are using various techniques to reduce their tax burden such as 1031 exchanges, installment sales, QOZ funds, muni bond investing, maximizing tax advantage retirement and health savings accounts, front loading charitable contributions or using donor-advised-funds. Other investors have also been taking advantage of the various state pass-through entity tax credits. Investing in qualified small business stock is another very effective tax savings strategy where investors may qualify for potentially up to 100% exclusion of tax on capital gains.

Motivated by more than money – family office next generation millennials are shifting their focus and seeking out investments that are guided by Environmental Social Governance (ESG) and Sustainability principles. It is becoming more important that a properly structured ESG portfolio allow family offices to align their investments with their values. Millennials are more focused on responsible investing that embodies a sense of social good – whether it is focusing on clean energy technologies, human rights and working conditions, or increasing transparency over corporate supply chains.

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Lisa Cappiello

Lisa Cappiello is a Partner with over 25 years of tax consulting and compliance services experience and serves high-net-worth individuals, executives, and businesses in finance, real estate, and private equity.

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