A Family Office is a corporate organization dedicated to managing and administrating a family’s wealth. Over the past few decades, they have gained significant importance in Central America and are utilized by families with substantial assets who, therefore, require clear rules to preserve and grow their wealth across multiple generations while maintaining family unity.
The need for a Family Office arises when there is a separation between the company’s assets and the family’s wealth. The company has achieved such levels of success that it has generated considerable wealth for the family, which must be managed separately. The primary function is to centralize the administration of the family’s assets derived from the company’s profits.
This phenomenon, taking place in Central America, is a consequence of an even larger trend, as Family Offices are one of the fastest-growing tools worldwide, playing an essential role in the growth and transfer of family wealth to subsequent generations.
Although there is no consensus on their historical origin, literature usually considers that their first typical traits emerged during the Industrial Revolution. The Rockefellers (oil), Pitcairns (energy and glass manufacturing), and Morgans (banking) were among the first families in the United States to create Family Offices. As a result of amassing enormous fortunes in their respective industries, these families founded companies dedicated exclusively to the management of family wealth.
In Central America, an increasing number of families with high business reputations are opting to create their own Family Office to manage the wealth they have generated, usually thanks to the efforts of multiple generations. Although each Family Office in the region is unique, the motivations behind their creation, the activities they undertake, and the way they are structured can be very similar.
Family Offices are often established due to generational change. First, there is the company founder, who has worked diligently for several decades to accumulate considerable wealth. Then, the members of the second and third generations find themselves needing to manage the generated wealth. These new generations have studied in the United States or Europe and have encountered sophisticated financial and legal instruments, which they wish to replicate within their families in their respective countries.
While the primary objective of this tool in the region is to preserve the family’s wealth for future generations, the functions it performs can be as varied as the founder’s desire. Generally, a Family Office is dedicated to managing the family’s assets, making investments, and carrying out wealth planning.
However, they can also be designed to undertake other activities that, although not financially driven, contribute to the family’s well-being. These activities can vary widely, from managing the education of family members and covering their insurance to engaging in philanthropic endeavors. These types of activities do not generate wealth per se but help in the long-term preservation of family wealth and the company and, more importantly, help maintain a spirit of cohesion within the family.
This is one of the attractive aspects of this institution: an enormous flexibility in its architecture that allows each family, based on its values, culture, and lifestyle, to determine the activities its Family Office will undertake. As a result, its structure can be simple or quite complex, even having its own internal team of professionals responsible for the smooth operation of the office.
Regarding the jurisdictions for establishing a Family Office, among the most used by Central American families are Panama, due to its proximity and shared language, and the United States, due to the legal solidity and certainty offered by that country, but Canada and Europe are also options. However, the trend is that the more sophisticated the Family Office, the more jurisdictions it operates in.
In conclusion, having a Family Office brings significant benefits to families with large assets. Investing time and money in structuring a new governance will save future problems within the family. When there are clear rules for managing relationships with wealth, the company, and the family members themselves, frictions tend to decrease, and when they do arise, it reduces the damage that could be caused to the entire family structure. In recent years, Central America has seen accelerated growth in the use of Family Offices, and the region has come a long way in a short time, with Family Offices as complex as those found in the United States or Europe.
