Family office document retention: FAQs about how to manage risk

INSIGHT ARTICLE  | 

Authored by RSM US LLP


In this rapidly evolving virtual world, many of our family office clients are revising or creating document retention practices to make sure they have secure access to critical personnel and family financial records. An up-to-date practice or policy can help mitigate concerns over loss of key information and facilitate a faster response to sensitive or urgent matters such as a cyber incident, material health event or family business transaction. Here are a few of the most common questions and responses:

What documents should I be keeping?  

  • Federal, state and local tax documents – Save all supporting documentation for all income and expenses, as well as all underlying data. For income, that includes: W-2s, K-1s, Forms 1099s and realized gain/loss schedules. For deductions, that includes: receipts and related substantiation, records supporting the cost basis of depreciable business assets and investment assets, etc.
    In addition, save calendars, journals or other contemporaneous written records or correspondence that help support the level of personal activity in businesses to establish the necessary “hours” involvement threshold to be considered “active” in a business vs. “passive.” This support is frequently requested in IRS examinations where losses are claimed from trade or business activities. Calendars or other contemporaneous written records are required to help support deductibility of business travel, automobile, meals and entertainment expenses. Detailed flight logs and captain’s logs indicating the passengers, the places and distance of travel, etc., are required to substantiate business use of aircraft and watercraft.
  • Credit card statements – Save items related to business transactions and personal transactions. For nonbusiness and nontax-related transactions, retention is only needed as you personally deem appropriate. For business transactions, the same general rules outlined above apply for retention.
  • Digital financial account logins – Your bank account, financial institutions, brokerage, software and credit card logins should be secured ideally by a reputable password manager with two-factor authentication log-on.
  • Insurance information – Declaration pages for all insurance policies and related summaries should be saved. (Retaining expired policies may not be necessary because the insurance underwriter should have them on file in the case of casualty and liability policies.) Save life insurance and disability policies and related beneficiary designations. Save health care and long-term care insurance policies, summaries and related information.
  • Business records – Save copies of current and historical fully-executed entity formation documents, stock transfer ledgers, operating agreements, partnership agreements, assignments or grants of interests, buy-sell agreements, shareholder agreements, or other contracts relating to business and investment entities; board and officer meeting minute records, shareholder and owner meeting records and minutes; employment agreements and contracts, deferred compensation plan agreements and documents, stock option and restricted stock agreements and plan documents, and any other documents relating to deferred compensation awards and plans.
  • Private equity – Save copies of subscription agreements, entity ownership agreements and private placement memorandums for all current private equity and other private investments.
  • Real estate transactions – Closing statements for all personal and investment properties, deeds, capital improvements should be retained. Such documents must be able to support the cost basis of any real estate investment for subsequent sale or disposition, as well as support any tax deductions based on annual depreciation allowances.
  • Estate planning documents – Save all previously filed Forms 709, U.S. gift (and generation-skipping transfer) tax returns for family members, copies of any fully executed trust agreements, wills, will codicils, “living trusts,” powers of attorney, health care powers of attorney, directives to physicians, business interests operating agreements, assignment documents relating to entity assignments or transfers. In addition, save all previously filed Forms 706, U.S. estate (and generation-skipping transfer) tax returns and related Forms 8971 (information regarding beneficiaries acquiring property from a decedent) for estates of parents or others from whom you inherited assets; life insurance policies and beneficiaries; retirement plan beneficiaries; donor advised fund “successor advisor” designations; private foundation formation and operational documents, by-laws, charitable trust agreements and related documents, etc. 
  • Other legal documents – Retain passports, voter registrations, licenses, permits, titles to assets, documents to establish provenance, life insurance policies and retirement plan information.
  • Family office business records – If applicable, save employment agreements, payroll registers, earnings records, payroll tax returns, state unemployment tax records, nondisclosure agreements, bill pay and expense approval policies, segregation of duties and internal control policies, accounting policies, leases, contracts, operating agreements, maintenance agreements, business contracts and agreements of any type.
  • Other personal property assets – For valuables such as art, wine, boats, cars, airplanes, racehorses, livestock, firearms, coins and currency (traditional and crypto), jewelry, etc., it is important to maintain inventories, records of costs, appraisals, insurance policies, proof of ownership and title (including chain of ownership and provenance), title, registrations, certificates and appropriate records.

How long do we need to keep these documents?

Before finalizing an entity’s record retention procedures, it is recommended that the IRS regulations, state and local government retention requirements and the AICPA’s Filing and Record Retention Procedures Guide be reviewed. In addition to several key tax considerations below, there may be other legal, regulatory or other guidance to consider based on your specific situation. For additional questions or clarifications, please speak with your accounting, tax and legal counsel.

  • For federal income tax purposes, there currently exists a three-year statute of limitations period that does not begin to run until a complete and accurate income tax return is filed for a taxable period. Generally, if a tax return is filed prior to an original tax return filing due date (April 15, for example, in the case of Form 1040), the statute of limitations does not begin to run until the original due date has passed (April 15 in this example). For complete and accurate tax returns filed after tax return filing dates have been extended (post-April 15, for example, in the case of Form 1040), the statute begins to run upon receipt of the tax filing by the IRS. Please keep in mind that these are general rules and there can be exceptions, particularly with IRS extensions granted due to federal disasters, etc. A taxpayer may enter into an agreement with the IRS to extend a normal three-year statute of limitations for additional periods. Such extensions of the statute should also be considered in determining a record retention policy. You should always consult your tax and legal advisor.

    The IRS requires supporting documentation for all income, gains, deductions, losses and expenses, as well as all underlying data (receipts, invoices, K-1s, Forms 1099, W-2, substantiation of deductions and expenses, cost basis records for depreciable property and for property sold, etc.). If the taxpayer is found to have underreported or omitted more than 125% of their income for a tax year, then the statute of limitations for that year is extended from three years to six years. In the case of fraud, the statute of limitations never runs and always remains open. Absent fraud, many professionals advise their clients to retain tax-related business records for a period of at least seven years following the tax period in question. Again, agreements entered into with taxing authorities or others to extend the statute of limitations must be considered in setting policies. 
  • Records establishing cost basis for assets purchased or otherwise acquired should be retained until after the asset is disposed of; then apply the general statute of limitations period for the tax returns reporting the year of asset disposition.  This would include records for public security purchases and any other asset acquisitions.  One item not to be forgotten is the purchase of securities at financial institutions where accounts are no longer maintained, being careful to document the dates of acquisition and the purchase price information. Be aware that after several years, the financial institution may no longer retain records for closed or dormant accounts.
  • For all estate planning documents – These are considered permanent records. Making sure the documents that are retained include both historical and current versions of various ownership interests in businesses with related or third parties may help to mitigate contractual disputes during the estate administration process. Forms 709, U.S. gift (and generation-skipping transfer) tax returns, should be retained for all years since these are required to be attached to and filed with a person’s Form 706, U.S. estate (and generation-skipping transfer) tax returns. Forms 8971 (information regarding beneficiaries acquiring property from a decedent) and Forms 706 for estates of parents or others from whom you inherited assets should be retained for as long as you continue to own the inherited assets to prove cost basis, and for periods until the statute of limitations runs for the tax returns reporting the disposition of such assets.

Where should I keep them stored?

Historically, when paper documents were the primary source of records, typical locations in the home, such as fireproof boxes or safes, or off-site, such as safety deposit boxes, or third-party custodians were most common, and they still are today. However, as families have become more mobile and their documents more commonly electronic, a digital “vault” is an increasingly common subject of clients’ questions. While there are many types of secure online storage tools, such as Microsoft SharePoint, OneDrive, TeamDocs and Collaborate, here are a few considerations for your virtual family office document retention strategy:

  • Have you evaluated the benefits and risks of varying technologies and storage solutions (i.e., local or cloud-based)?
  • How are you sharing and storing sensitive documents with advisors (wealth managers, accountants, lawyers, trust officers), family members and business relationships?
  • Do you utilize secure email?  Is email your retention system?
  • How do you efficiently and securely convert paper records to digital records?
  • Who has access to the records? Is access removed/protected appropriately?
  • What are considered best practices for cybersecurity proactive assessment for digital document retention and destruction?
  • How does prolonged working from home affect your document management needs and solutions? Learn more

Conclusion

Managing risk of your most sensitive information has never been more complex. RSM’s family office professionals work not only with family offices that have document management policies in place but also help families consider whether establishing new or updated practices makes sense for their specific situation.