SumIt recently attended the FOX Wealth Advisors Forum in Denver, and a recurring topic that surfaced in the structuring conversations was: how much does Lender Management, LLC v. Commissioner actually change the way a family office should be built?
The 2017 Tax Court decision is the reference point for this discussion. Lender Management, the family office behind the Lender family's investments, was found to be engaged in a trade or business under Section 162, rather than a passive investment activity under Section 212. That distinction determined whether the office's expenses could be deducted in full as ordinary business costs or treated as miscellaneous itemized deductions, a category the 2017 tax act later suspended entirely.
The court's reasoning was based on specific circumstances, including that Lender Management provided investment services comparable to a hedge fund manager, its compensation was tied to a profits interest rather than a fixed percentage matching ownership, and the family itself was large and geographically dispersed enough that the arrangement read as a service relationship rather than a family member managing their own money.
That last point, compensation structure, is where the Denver panel spent most of its time, because it is also where family offices run into the most operational difficulty.
Where the structure gets complicated
Panelists shared a range of approaches to building compensation into a family office's legal structure, and none were simple. One common model uses a single family limited partnership with sub-partnerships beneath it, allowing the office to bring in different family members at different levels without forcing everyone into the same asset allocation. The manager at the top still oversees all the assets, but each sub-partnership carries its own schedule, its own allocation, and its own profits interest calculation.
A second pattern — the one that panelists described as most common — separates liquid holdings from illiquid ones. Cash and near-cash assets such as treasuries or money market instruments often sit in their own entity, in part because they require far less active management than a private equity stake or a direct investment, and a profits interest priced as if it required hedge-fund-level attention on a Treasury bill invites IRS scrutiny.
Direct investments raise the same question from the other direction — once a family office buys a direct stake, there may be little left to manage beyond holding it, which argues for a smaller profits interest on that piece of the structure.
Layered on top of these allocation questions are the tax exposures that come with holding too much undistributed profit inside a management entity, such as accumulated earnings tax, personal holding company classification, and, for anyone eventually looking to unwind the structure, the deficit restoration obligation tied to the partners' capital accounts.
Several panelists noted that once a family understands the tax cost of unwinding, most decide it isn't worth doing. Restructuring the profit interest or replacing it with a straightforward management fee is possible, but it is materially more complex than setting up the original structure.
Accounting has to keep pace with the structure
A Lender-style structure is a tax and legal decision first and foremost, but how it runs in practice every day is uniquely an accounting problem. For example, every sub-partnership needs its own capital account and its own profits interest calculation, and waterfall distributions have to route correctly across entities without breaking allocation logic.
Further, the family, the manager, and the tax preparer all need a consolidated view that allows them to see each entity's activity individually. Having that separation is often the entire reason the structure exists.
This is a layer where generic accounting tools tend to fall short, and it's also the layer SumIt was built around. Partnership accounting, capital roll forwards, and inter-entity accounting are at the core of how SumIt models a multi-entity family office, whereas other generic software usually charges a fee to add these features.
A structure like the ones described in Denver, with sub-partnerships, tiered profit interests, and liquid/illiquid separation, is a familiar complexity to the team at SumIt. This is why SumIt’s entity map and one-click consolidations were designed specifically and intentionally. Though the rules behind them are complex, we knew we could make them intuitive.
Family offices weighing a Lender-style restructuring, or already living inside one and feeling the accounting strain, are welcome to reach out to see how SumIt's partnership accounting and multi-entity tools handle this in practice!
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