The approach originates from a 2017 Tax Court ruling involving the Lender's Bagels family, gaining fresh attention after the One Big Beautiful Bill Act permanently eliminated miscellaneous itemized deductions. To qualify, organizations must transition from passive wealth management into legitimate commercial enterprises with dedicated staff and performance benchmarks. According to EY partner Joseph Medina, the setup typically requires a minimum of $300 million in investable assets to absorb the overhead costs. This structural shift frequently triggers internal friction by granting equity ownership and financial windfalls to select members over others.
Key points
Transitioning to a bona fide asset-management firm introduces relational friction by crea…: Transitioning to a bona fide asset-management firm introduces relational friction by creating distinct economic winners and losers within the family.
Entities must adhere to strict operational standards, such as utilizing performance-based…: Entities must adhere to strict operational standards, such as utilizing performance-based profits interests rather than standard flat fees.
Families must weigh substantial tax savings against heightened IRS scrutiny and substanti…: Families must weigh substantial tax savings against heightened IRS scrutiny and substantial administrative hurdles before adopting this framework.
Sources checked by our analysis pipeline: 1
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More wealthy families are revisiting a tax strategy that can generate big savings but also draw IRS scrutiny, lawyers and CPAs told CNBC.
In 2017, a Tax Court case involving the family behind Lender's Bagels helped establish a pathway for family offices to still deduct investment expenses if they operated as a trade or business. The so-called "Lender" model took off after the Tax Cuts and Jobs Act, passed that same year, temporarily suspended miscellaneous itemized deductions.
Now with the One Big Beautiful Bill Act making the suspension permanent, family offices are showing renewed interest in the Lender model. But qualifying as a bona fide asset-management business requires more than simply managing the family's own wealth. Families may need to reshape how the office operates, hire more employees to build out professional services, and decide who gets to run the office, which can strain family ties, according to Joseph Medina,…
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