Wealthy families are taking a fresh look at a specific tax strategy that can yield significant financial savings, though it also risks attracting scrutiny from the IRS, according to lawyers and CPAs interviewed by CNBC. This renewed interest follows legislative changes that permanently suspend miscellaneous itemized deductions.
The Lender Model and Its Requirements
A 2017 Tax Court case centered on the family behind Lender’s Bagels established a legal pathway allowing family offices to deduct investment expenses by operating as a trade or business. Popularly known as the “Lender” model, this approach gained traction after the Tax Cuts and Jobs Act passed that same year temporarily suspended those deductions, and interest has grown further with recent permanent extensions under the One Big Beautiful Bill Act.
Qualifying as an authentic asset-management business requires more than merely handling a family’s personal wealth. Joseph Medina, a partner in EY’s private tax group, explained that families may need to restructure their office operations, expand their professional staff, and decide on leadership roles—steps that can create friction among relatives.
Medina noted that the transition is complex and can create financial disparities among family members depending on who owns the family office and how investments perform. He added that families must carefully weigh the time and costs involved, noting that other deduction routes exist for those supporting operating businesses or charitable activities.
Medina stated that the strategy generally requires at least $300 million in investable assets to justify building the infrastructure needed to save on investment-adviser fees. Family offices focusing more on services than investments typically do not align well with the Lender model.
Navigating IRS Scrutiny and Professional Standards
Legal experts emphasize that the Lender ruling serves as a guide rather than a rigid template, as qualification depends heavily on each office’s unique circumstances. Kevin Matz, a partner at ArentFox Schiff, explained that while families do not need to identically copy the Lender family office, the precedent offers valuable direction.
The original Lender Management served four generations and numerous family members spread across different locations who had distant relations, helping demonstrate that the office functioned at arm’s length as a genuine investment management enterprise. Furthermore, the office received compensation through profits interests in the family’s investment LLCs, which held significant private equity allocations. Matz pointed out that this structure meant compensation depended directly on meeting performance benchmarks, establishing genuine entrepreneurial risk.
Charging a standard management fee for overseeing mostly marketable securities would likely have failed judicial review. Additionally, while the chief investment officer was a family member—Keith Lender, grandson of the patriarch—he worked full time, held an MBA from Northwestern University, and brought prior corporate experience.
Sarah Kerr Severson, a partner at ArentFox Schiff, noted that requiring strict professional qualifications raises standards for family employees, eliminating the relaxed oversight that sometimes occurs in less formal family offices.
Matz stated that families can lower audit risks by closely mirroring the specific characteristics of the Lender family office, including its C corporation status. Even so, Medina observed that some families ultimately decide the potential savings are not worth the regulatory risk, choosing to avoid becoming the subject of a future tax court case.
