Family Offices Revisit Lender Model Tax Strategy for Potential Savings

More wealthy families are revisiting a tax strategy called the Lender model to generate investment expense deductions. This strategy gained attention after a 2017 Tax Court case involving the family behind Lender's Bagels established a pathway for family offices to deduct investment expenses if they operate as a trade or business. This was significant because the 2017 Tax Cuts and Jobs Act temporarily suspended miscellaneous itemized deductions.

With the One Big Beautiful Bill Act making this suspension permanent, family offices have renewed interest in the Lender model. However, qualifying as a bona fide asset-management business requires significant operational changes, such as hiring more employees and restructuring management. This can create tension within families because not all members may share ownership or bear investment outcomes equally.

Joseph Medina, a CPA at EY, noted that typically at least $300 million in investable assets are needed to justify the infrastructure costs to benefit from the Lender model. Family offices that focus more on services than investments may not qualify. The specifics depend on each office's unique facts and circumstances. The Lender ruling serves as guidance rather than a strict template for other family offices.

This matters because the tax strategy can lead to meaningful expense savings for qualifying family offices. However, substantial operational changes and familial implications mean families must carefully weigh the costs and benefits before adopting the model.