How to Identify and Review Related-Party Transactions in a Family Office

A family office may move money between two companies, charge a trust for shared staff, lease a property to a family-owned business or buy an asset from a principal. These are not all the same transaction. The parties may share a family name while having different owners, duties and tax positions.

A related-party transaction is a transfer, service, financing arrangement or other economic dealing between people or entities whose relationship could affect its terms or reporting. Once the relationship is identified, record what each side gives and receives, who can approve the deal, how each entity will book it, and what the family report will show.

01When Do Related-Party Deals Happen, and What Types Should You Check?

It can arise in routine operations as easily as in a major investment. An office that employs analysts may charge investment vehicles for their work. A principal may guarantee a company loan. One family entity may pay another's property invoice. A trust may sell an interest to a partnership that has overlapping beneficiaries.

The relationship matters because a price or approval reached within one family may not protect every person with an economic interest. It can also make a transaction look like an ordinary expense in one set of books and financing, capital or a transfer of value in another. The office should identify the relationship before a payment is released or an asset is transferred, then check what actually happened afterward.

The table covers the principal forms a family office is likely to meet, including arrangements without immediate cash. It is a practical identification map, not a claim that every item has the same legal, tax or accounting treatment.

The FASB's archived related-party statement lists sales, services, leases, loans, guarantees and common-cost allocations. Its archived text helps identify types; advisers must assess current treatment for the actual entities.

The first record is a review prompt, not a prescribed journal entry. Tax, legal and accounting treatment depend on the parties and the agreement. The separate conflict-of-interest policy covers the interested decision maker.

The same counterparty can appear in several rows. For example, an office-paid contractor bill may begin as an expense reimbursement, become a loan if repayment is deferred under new terms, or be a capital contribution if the actual owners authorize that form. Do not change the label merely to make the ledger clear. Determine the arrangement first; then let the legal, tax and accounting advisers assess the treatment.

02What Should Happen Before the Deal Is Approved?

Start with a one-page transaction record that states the two legal parties, their direct and indirect economic owners, the people who proposed the deal and who benefits. An org chart showing common control is not enough when ownership percentages or beneficiaries differ.

Then answer five questions:

• Purpose and form: What is exchanged, and why is this form preferable to a purchase, contribution, distribution or outside provider?
• Economics: What price, interest, allocation or valuation method supports the terms? What happens if the counterparty does not pay or perform?
• Authority: Which governing document, bank mandate and entity-specific decision maker permit each side to act? Who must step out because of an interest?
• Restrictions: Do a lender, investor, trust instrument or existing agreement limit the proposed movement?
• Planned records: What will each entity book at execution, and what should be due or owned afterward?

A family principal's approval in one capacity does not automatically act as approval for every entity. The delegation-of-authority matrix and each entity's own documents should identify the signers and reviewers. A disinterested approval process can still reject a bad price or unsupported purpose.

Explore the full-width decision diagram. This decision comes before release. If cash moves without approval, the office still records it and investigates the exception.

For US entities, tax advice may be needed before relying on an internal price. The IRS explains that IRC 482 addresses allocations among controlled taxpayers under an arm's-length standard. Whether that rule, another tax provision or a trust-specific duty applies to a given family arrangement depends on the parties and facts. This article does not supply a market rate or a tax conclusion.

03Worked Example: A Proposed Loan With Unequal Owners

Assume Investment LLC A holds cash. Trust One owns 60% of A, and Trust Two owns 40%. Property LLC B is wholly owned by Trust One and needs US$1.2 million for a roof contract. The family connection is real; the economic ownership is not identical.

The first decision is a hold. A proposed transfer has no signed repayment terms, no confirmed source of B's repayment and no recorded lender-side decision explaining why A should take B's credit risk. Trust Two may share A's downside without sharing B's property benefit. Its 40% interest does not establish a US$480,000 loss; the outcome depends on A's rights, liabilities, capital accounts and actual recovery.

In this fictional route, the transfer proceeds only if every stated condition is met.

The conditional route is not permission to lend to B. If the advisers find that the proposed form cannot protect A's owners, the authorized decision may be to use different capital, seek outside finance, or decline the deal. Record the rejected route and why; do not relabel a prohibited or unsupported loan after cash has moved.

1The Principal Bridge in Both Books

The table shows running cash and inter-entity principal through 6 January. On 6 October, B pays US$1.2m to an unrelated contractor. On 5 January, a third-party bank advance adds US$1.2m to B's cash and external bank debt. That debt remains after B repays A's principal.

This is not a full trial balance. It excludes B's roof classification, bank fees, tax effects and the 7 January rent receipt and interest payment. Those amounts are traced separately above; their accounting treatment requires professional assessment.

Immediately after funding on 5 October, before B pays the contractor, a crude sum of A's and B's gross assets could show A's US$1.2 million claim plus B's US$1.2 million cash as US$2.4 million. Omitting B's matching payable makes that gross sum misleading. Including it brings the narrow example's net assets to US$1.2 million before other activity.

For this illustrative management report only, the boundary includes 100% of A and 100% of B solely to reconcile their balances. It is not Trust One's or Trust Two's attributable wealth. If the chosen report basis calls for offsetting the internal claim and obligation, the snapshot shows B's US$1.2 million cash and no internal principal; both legal-entity balances remain.

This status view follows the same 100%-of-each-entity management boundary. A is 60% Trust One and 40% Trust Two; B is 100% Trust One. This does not decide ownership-weighted wealth or produce US GAAP consolidated statements. B's roof-work cost or asset classification belongs in its own approved report line.

The 31 October interest illustration uses 27 elapsed days from the 5 October advance through the end-of-day 31 October cut-off: US$1.2 million × 6% × 27/365 = US$5,326.03, rounded to cents. It is separate from principal and creates no interest cash movement at that date. The preparer must apply the actual report basis and signed terms.

If any actual payment occurs without approval, the cash still happened: record it, preserve the bank evidence and investigate recovery and classification. An unauthorized transfer cannot be made invisible by leaving both ledgers blank.

04What Changes After Payment and at Close?

Match the agreement, bank movement and each entity's entry by date, counterparty and amount. Then track what the chosen form requires: collections on a loan, delivery against a service fee, occupancy under a lease, title under a sale, or capital accounts after a contribution. A later waiver or amendment is a new decision, not a silent correction to the original one.

An internal dashboard may show gross operating exposures, ownership-weighted interests or another defined management view. Formal legal-entity or combined statements use their own accounting framework. Their preparer must assess any related-party disclosure or elimination requirement under the applicable current standard. A convenient dashboard subtotal does not establish it.

The FASB's original related-party pronouncement explains why relationships, amounts, outstanding balances and settlement terms matter in financial statements. It is archived and does not replace current professional assessment.

At each close, the transaction-record owner confirms:

• The authorized form still matches what occurred.
• Both sides' balances reconcile, including any accrued interest.
• Overdue amounts or performance exceptions have named actions.
• The report explains material related-party exposure under its chosen basis.

Keep the source-to-report path available for the audit-trail accounting guide. For a cost allocation, use the expense-allocation policy to establish the recipient and allocation driver.

The transaction record should let a reviewer trace the deal from its owners and approvals to both ledgers, settlement and the family report. In the fictional case, October shows open principal; January shows the principal repaid, interest separately settled, and external bank debt still in B. A signed approval is the start of that trail, not its finish.