Single-family office, multi-family office, or outside advisors: the tax and entity consequences

Households with significant assets usually end up with one of three arrangements for managing their finances: a single-family office (SFO) that the family owns and staffs, a multi-family office (MFO) that serves many families for a fee, or a set of outside advisors coordinated by the family or by one trusted person. The choice is about service, control, and cost, and those are not tax questions. But each arrangement has different tax consequences: who the employer is, which entity pays the fees, whether those fees are deductible, and what returns and payroll filings follow.

This post covers the tax and entity consequences of each arrangement for 2026. It does not recommend one, it does not evaluate any provider, and it is not investment or legal advice. It is what your preparer will need to know once the family has chosen.

The fee deductibility problem

For individuals, investment management and advisory fees are miscellaneous itemized deductions under IRC Section 212. The 2017 law suspended those deductions through 2025, and the 2025 legislation made the elimination permanent. For 2026 and later, an individual paying an advisor, an MFO, or an SFO for investment management generally gets no federal deduction for the fee. Some states still allow it on the state return. This one rule shapes much of the tax discussion around the three arrangements.

Fees are still deductible in some settings:

• Fees paid by an active business for services to the business are ordinary and necessary expenses under IRC Section 162.
• Fees for rental property or other Schedule E activities are deductible against that income.
• Trusts and estates can deduct costs that would not commonly be incurred by an individual holding the same property, under IRC Section 67(e) and Treas. Reg. Section 1.67-4. Ordinary investment advisory fees paid by a trust are generally not in that category, but certain fiduciary-specific costs are. A bundled trustee fee may need to be allocated.
• Fees embedded in a fund reduce the fund's income before it reaches you, which works like a deduction in practice.

Single-family office: the entity and trade or business question

An SFO is usually an LLC or corporation owned by the family that employs staff and pays rent. Its tax treatment depends on whether it is carrying on a trade or business.

In Lender Management, LLC v. Commissioner, T.C. Memo. 2017-246, the Tax Court held that a family office LLC was engaged in a trade or business, so its expenses were deductible under Section 162. The facts mattered: the office was owned mostly by family members who were not the investors, it received a profits interest as compensation, it served investors with different interests, and it acted like a professional manager. An office that simply manages the money of the people who own it looks more like an investor than a business, and its expenses fall under Section 212, which individuals can no longer deduct.

If the family is considering an SFO structure designed to qualify as a trade or business, that design belongs to tax counsel. It involves the entity's ownership, profits interest terms, partnership allocations, and possibly investment adviser registration questions. The preparer's job is to report what the structure is, not to build it.

What an SFO creates for the return

• An entity return each year (Form 1065, 1120-S, or 1120).
• Payroll filings: Forms 941 quarterly, 940 annually, W-2s, and state payroll accounts.
• Benefits plan filings, such as Form 5500 for a retirement plan with employees.
• State registrations and filings where staff work.
• K-1s to the owners, and possibly profits interest allocations, which have their own reporting.

Multi-family office: a vendor relationship

An MFO is a service provider. Its fees are paid like any other advisory fee. For individuals, that generally means no federal deduction in 2026. If an MFO bills a family business, trust, or rental entity for services to that entity, the portion for those services may be deductible there. The record that matters is the invoice: an MFO that sends one bundled bill to the household makes it hard to allocate any portion to an entity that can deduct it. Ask for invoices broken down by entity and service.

An MFO may also provide tax preparation, bill pay, or household payroll services. Those services carry their own records. If the MFO runs household payroll, the household is still the employer and still files Schedule H with Form 1040 (or uses a payroll provider that files on its behalf). The responsibility does not transfer with the task.

Embedded or outside advisors

Many households use separate advisors: an investment firm, an estate attorney, a CPA or EA, an insurance agent, and possibly a bookkeeper. Tax treatment follows each bill. Legal fees for estate planning are generally personal and not deductible. Tax preparation fees are deductible only to the extent they relate to a business or rental schedule. Bookkeeping for an operating business is deductible by the business.

When a business owner has advisors who serve both the company and the household, splitting the bill matters. A business that pays the owner's personal advisory or legal fees is paying a personal expense, which can be a constructive distribution or wages. The holdco post covers where assets and costs belong.

State treatment of advisory fees

The federal elimination of miscellaneous itemized deductions does not bind every state. A few states that do not conform to the federal change, or that compute itemized deductions under their own rules, still allow some investment expenses on the state return. California, for example, did not conform to the federal suspension and continues to allow miscellaneous itemized deductions above 2% of AGI on the state return. Whether this applies depends on the state of residence each year, so a household that moves should expect the treatment of the same fee to change. The records needed are the same: invoices that identify the service and the account or entity served.

A comparison for the preparer

Item	SFO	MFO	Outside advisors
Entity return	Yes, the office entity	No	No
Payroll filings	Yes, for office staff	No (unless household staff)	No (unless household staff)
Fee deductibility for individuals	Depends on trade or business status	Generally none federally	Generally none federally, except business or rental portions
Invoices to allocate	Internal cost allocation	MFO invoices by entity	Each advisor's invoices
Who files Schedule H for household staff	The household	The household	The household

The scored diagnostic

Score each item 0, 1, or 2. Zero means missing. One means partial or out of date. Two means current and documented.

Item	0, 1, or 2
The arrangement in use is written down, with each provider and entity
Invoices are broken out by entity and type of service
Business and rental portions of fees are identified
Trust-specific fees are separated from ordinary investment fees
Any SFO entity has its own EIN, bank account, and return
SFO trade or business position reviewed by tax counsel
Payroll filings are current for every employer entity
Household payroll responsibility is clear even if outsourced

A total of 13 to 16 means the preparer can report fees correctly. A total of 7 to 12 means some deductible fees are probably lost in bundled bills. Below 7, start with the invoices.

Illustrative: a bundled MFO bill

Illustrative: A household pays an MFO $180,000 a year. The fee covers investment management for personal accounts, bookkeeping for two rental LLCs, administration for a non-grantor trust, and household bill pay. The MFO sends one invoice to the couple.

As billed, none of it is deductible on the couple's federal return. With a breakdown, the rental bookkeeping is deductible on Schedule E for each LLC, and part of the trust administration may be deductible by the trust under Section 67(e). The investment management for personal accounts stays nondeductible federally. The preparer needs the breakdown from the MFO, not an estimate made in March.

Whatever the arrangement, ask each provider at the start of the engagement how its fees will be billed, to whom, and with what detail. Changing invoice formats midyear makes allocation harder for both the provider and the preparer.

Who owns what

The family chooses the arrangement. Tax counsel designs any SFO structure. The preparer reports the entity, payroll, and fee items and asks for invoices in a usable form. The providers send bills that match what they did, for whom.

Next step: ask every advisor and provider to break next year's invoices out by entity and service, starting January 1.

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Educational only. This is not tax or legal advice for your situation. Consult your own CPA, EA, or attorney before acting.