The Vault Part 3: How They Invest Why Family Offices Increased Real Estate Allocation from 26% to 39% in Two Years, How the Geneva Freeport Stores 1.2 Million Artworks Worth $100 Billion That No One Can See, and Why "Fair Market Value" Means Whatever the Family Office's Appraiser Says It Means

🔒 THE VAULT SERIES:
Part 1: What They Are | Part 2: Where They Hide | Part 3: How They Invest (You Are Here) | Part 4: The Industry (Coming Soon) | Part 5: The Dynasty (Coming Soon)

The Vault Part 3: How They Invest

Why Family Offices Increased Real Estate Allocation from 26% to 39% in Two Years, How the Geneva Freeport Stores 1.2 Million Artworks Worth $100 Billion That No One Can See, and Why "Fair Market Value" Means Whatever the Family Office's Appraiser Says It Means

Roman Roy (Succession, Season 3):
"He's got like a shit-ton of investment Impressionisms. Like three Gauguins no one has seen for tax reasons."

The Geneva Freeport holds 1.2 million artworks. For context, the Louvre—the world's largest museum—has only 380,000 items in its collection. The Geneva Freeport stores an estimated $50-100 billion in art, including 1,000 Picassos. Almost none of it is on display. Why? Because art stored in a freeport is legally "in transit"—not in any country—which means it's subject to zero import tax, zero sales tax, zero capital gains tax, and zero estate tax. A billionaire can die, their art collection can pass to their children, and if it never leaves the freeport, no estate tax is ever paid. Family offices don't just invest differently than normal people—they invest in asset classes specifically designed to be hard to value, easy to hide, and impossible to tax. This is how.

The Asset Allocation: Why Family Offices Love Illiquidity

The 2025 Portfolio

According to Forbes' analysis of Citi Private Bank's 2025 Family Office report, family office investment strategies have shifted dramatically:

FAMILY OFFICE ASSET ALLOCATION (2025):

• Real Estate: 39% (up from 26% two years ago = 50% increase)
• Private Equity: 21-27% (varies by source)
• Public Equity: 19-31% (down 28% from 2024)
• Fixed Income: 10-15%
• Alternatives (art, wine, collectibles): 10-15%
• Cash: 5-10%

TOTAL ILLIQUID ASSETS: 70-81% of portfolio

Compare this to a typical high-net-worth individual (not ultra-wealthy):

• Public stocks: 50-60%
• Bonds: 20-30%
• Real estate: 10-15%
• Alternative investments: 5-10%

The difference is stark. Family offices are 70-81% illiquid. Normal wealthy people are maybe 15-25% illiquid.

Why Illiquid?

There are three reasons family offices prefer illiquid assets:

1. Valuation Flexibility

Public stocks have a price you can't argue with. Apple trades at $180.50—you can't claim it's worth $90 for tax purposes. But real estate? Private equity? Art? Value is whatever the appraiser says it is.

If you own a $50 million Picasso and hire an appraiser who values it at $20 million for estate tax purposes, who's going to challenge it? The IRS? They'd need their own art expert, and even then, art valuation is notoriously subjective.

2. No Forced Disclosure

Public stock holdings above $100 million require 13F filings—your positions become public. But private equity? Real estate? Art? Totally private. No one knows what you own or what it's worth except you and your family office.

3. Control

With public stocks, you're subject to market volatility and other shareholders' decisions. With private equity and real estate, you control the asset directly. You decide when to sell, how to operate it, and how to value it.

Real Estate: The Tax-Advantaged Asset Class

Why 39% of Family Office Portfolios

Family offices increased real estate allocation by 50% in just two years (from 26% to 39%). Why?

REAL ESTATE TAX ADVANTAGES:

• Depreciation: Deduct building value over 27.5-39 years (even if property appreciates)
• 1031 Exchanges: Sell property, buy another, defer capital gains indefinitely
• Cost Segregation: Accelerate depreciation by separately valuing components
• Mortgage Interest: Fully deductible on investment properties
• Property Tax: Deductible on investment properties
• Step-Up Basis: When owner dies, heirs get property at current market value (erasing gains)
• Offshore Ownership: Hold through Cayman entity = zero US tax on foreign property

The Depreciation Magic

Here's how this works in practice:

Example: Family office buys a $100 million commercial building in Manhattan.

1. Purchase price: $100 million ($20M land, $80M building)
2. Annual depreciation: $80M ÷ 39 years = $2.05 million/year deduction
3. Actual market value: Building appreciates to $150 million over 10 years
4. Tax treatment: Family office claims $20.5M in depreciation deductions over 10 years
5. Result: Property gained $50M in value, but family office reduced taxable income by $20.5M

Then they do a 1031 exchange—sell the $150M building, buy a $200M building, and defer all capital gains taxes. The wealth compounds tax-free indefinitely.

Where They're Buying

According to recent data, family offices are concentrated in:

• Prime real estate: London, New York, Miami, Dubai, Singapore
• Trophy assets: Landmark buildings, luxury residential towers
• Development projects: Ground-up development for maximum control
• Agricultural land: Bill Gates is now largest US farmland owner (268,984 acres)

Private Equity: The Valuation Black Box

Why Family Offices Love Private Companies

Private equity represents 21-27% of family office portfolios. The appeal is simple: you control the valuation.

PRIVATE EQUITY VALUATION GAMES:

• Quarterly marks: Family office values holdings internally (no external verification)
• Discount for illiquidity: Can claim 20-40% discount vs. public comparables
• Discount for lack of control: Minority stakes can be discounted 30-50%
• Timing flexibility: Revalue quarterly, annually, or only when selling
• No forced sale: Never have to mark to market like public stocks
• Pass to heirs: Discount private holdings 50%+ for estate tax

The Estate Tax Arbitrage

Here's the most aggressive strategy:

Scenario: Billionaire owns 100% of a private company worth $1 billion (market comparable).

1. Before death: Transfer 49% to children as "minority stake"
2. Valuation discount #1: Minority stake (no control) = 35% discount → Value now $318.5M (not $490M)
3. Valuation discount #2: Illiquid private company = 30% discount → Value now $223M
4. Estate tax owed: 40% of $223M = $89M
5. If publicly traded: Would owe 40% of $490M = $196M
6. Tax savings: $107 million

And the children still own 49% of a billion-dollar company. They just paid estate tax as if it were worth $223 million.

Who Challenges This?

The IRS can challenge aggressive valuations. But family offices hire the best valuation firms (Duff & Phelps, Houlihan Lokey, etc.), who provide detailed reports justifying every discount.

The IRS would need to hire their own experts, go to Tax Court, and win. That's expensive and time-consuming. So most aggressive valuations go unchallenged.

Art and Collectibles: The Ultimate Tax Shelter

The Geneva Freeport: Where Art Goes to Avoid Taxes

The Geneva Freeport (Le Freeport) is a 500,000 square-foot storage facility near the airport that holds what some call "the greatest art collection no one gets to see."

GENEVA FREEPORT BY THE NUMBERS:

• Artworks stored: 1.2 million (vs. Louvre's 380,000)
• Estimated value: $50-100 billion
• Picassos alone: 1,000+ paintings
• Art as percentage: 40% of all holdings
• Also stores: Gold, wine, luxury goods
• Climate control: Museum-grade temperature/humidity
• Security: Biometric access, armed guards, earthquake-proof
• Cost: $1,000/month for medium painting, $5,000-12,000/month for small room

How Freeports Work: The "In Transit" Loophole

The legal magic of freeports comes from their original purpose: temporary storage for goods in transit.

Originally, freeports were created so importers could store goods before re-exporting without paying import duties. A shipment arrives in Geneva, sits in the freeport for a few weeks, then gets re-exported—no Swiss taxes or duties.

But there's no time limit on "temporary."

According to the New York Times investigation, some artworks have been in the Geneva Freeport for decades—technically still "in transit."

The Tax Advantages of Freeport Storage

TAXES AVOIDED BY FREEPORT STORAGE:

• Import Tax: 0% (art is "in transit," never technically imported)
• Sales Tax/VAT: 0% (no sale in Switzerland if bought/sold inside freeport)
• Capital Gains Tax: 0% (sale occurs in international zone, not in any country)
• Estate Tax: 0% or minimal (depends on owner's domicile, but art location unknown)
• Property Tax: 0% (freeport is international zone)
• Disclosure: Zero (artwork owned through shell companies, owner anonymous)

The Transaction Inside the Vault

Here's how a typical freeport transaction works:

1. Billionaire A owns Picasso stored in Geneva Freeport (through Cayman shell company)
2. Billionaire B wants to buy it
3. Transaction occurs: Painting never leaves storage room
4. Ownership transfer: Cayman company shares transferred to Billionaire B
5. Taxes paid: Zero (painting never entered Switzerland, sale occurred in freeport)
6. Public record: None (both parties anonymous)

The painting might stay in that same storage room for 50 years, owned by five different billionaires, and never trigger a single tax event.

Other Major Freeports

Geneva isn't alone. Major freeports now operate in:

• Singapore: Singapore Freeport (opened 2010, 30,000 sq meters)
• Luxembourg: Luxembourg Freeport (200,000 sq feet)
• Delaware: Multiple facilities (US-based alternative)
• New York: Crozier Fine Arts (near JFK airport)
• Monaco: Le Freeport Monaco
• Beijing: Beijing Airport Freeport

Combined, global freeports store an estimated $200-400 billion in art and collectibles.

Wine, Cars, and Other "Passion Assets"

The Alternative Allocations

Beyond art, family offices invest in what the industry calls "passion assets"—collectibles that appreciate and can be enjoyed while avoiding tax scrutiny.

PASSION ASSET ALLOCATIONS:

• Fine Wine: $5-10M typical allocation, stored in temperature-controlled facilities
• Classic Cars: $10-50M collections, stored in private garages or museums
• Watches: $1-5M, Patek Philippe and Rolex as "wearable investments"
• Rare Books: $1-10M, first editions as inflation hedge
• Jewelry: $5-20M, colored diamonds and rare gems
• Whisky Casks: $500K-2M, appreciating 10-15% annually
• NFTs/Crypto Art: $1-5M, post-2021 speculative plays

Why These Assets Work

Wine Example:

• Buy $5M of 2000 Bordeaux first growths
• Store in bonded warehouse (legally "in transit" = no tax)
• Wine appreciates 8-12% annually for 20 years
• Value now $25-45M
• Sell through auction house to another collector
• Transaction occurs through holding companies (buyer/seller anonymous)
• Capital gains? Depends on jurisdiction—many countries don't tax wine as investment

Classic Cars:

• 1962 Ferrari 250 GTO: Bought for $10M (2010), worth $70M+ (2024)
• Stored in climate-controlled private garage
• Occasionally driven at private track days (personal use)
• Appreciates as "collectible," not "investment" (many jurisdictions don't tax collectibles)
• Pass to heir through estate—claim "sentimental value" discount for tax purposes

The Valuation Game: When "Fair Market Value" Is Whatever You Say

How Aggressive Valuations Work

The core strategy across all illiquid assets: Hire friendly appraisers.

THE VALUATION PLAYBOOK:

FOR GIFTS/ESTATE TAX (Want LOW value):
• Hire appraiser who specializes in discounts
• Emphasize: Illiquidity, lack of control, market uncertainty
• Use: Lowest comparable sales, most conservative assumptions
• Result: $100M asset valued at $40-60M for gift/estate tax

FOR INSURANCE (Want HIGH value):
• Hire appraiser who specializes in replacement value
• Emphasize: Rarity, provenance, rising market
• Use: Highest comparable sales, optimistic projections
• Result: Same $100M asset valued at $120-150M for insurance

SAME ASSET, SAME YEAR, 3X DIFFERENCE IN VALUATION

Real Example: The Estate Tax Audit

When wealthy individuals die, their estates file Form 706 with the IRS, listing all assets and their values. The IRS audits less than 10% of estate tax returns.

But when they do audit, valuation disputes are common:

Case Study (Anonymized from IRS data):

• Billionaire dies owning art collection
• Estate appraisal: $45 million
• IRS hires own expert: $120 million
• Dispute goes to Tax Court
• Settlement: $75 million (split the difference)
• Estate saves: $18M in taxes (40% of $45M difference)
• Cost of dispute: $2-3M in legal/expert fees
• Net benefit: $15M

Even when the IRS catches aggressive valuations, fighting it and settling is cheaper than paying the full amount.

The Portfolio Strategy: Maximum Opacity

Why 70-81% Illiquid Makes Sense

Family offices deliberately construct portfolios to maximize valuation flexibility and minimize tax leakage:

THE OPTIMAL FAMILY OFFICE PORTFOLIO:

30-40% Real Estate
• Depreciation deductions
• 1031 exchanges
• Control over valuation
• Step-up basis at death

20-30% Private Equity
• Quarterly mark-to-market (self-reported)
• Valuation discounts
• No public disclosure
• Pass to heirs with discounts

10-15% Art/Collectibles
• Store in freeports (zero tax)
• Extreme valuation flexibility
• Enjoy while it appreciates
• Transfer via shell companies

10-20% Public Equity
• Liquidity when needed
• Mostly index funds (minimize trading)

5-10% Cash/Fixed Income
• Operating expenses
• Opportunistic purchases

RESULT: 70-80% of portfolio is valued internally, reported annually (or less), and structured to minimize taxes at every transaction

Family offices don't invest like normal people because they don't face normal constraints. They can hold assets for decades without selling. They can value those assets however they want for tax purposes (within reason). They can store $100 million in Picassos in a Geneva vault and never pay a single tax on appreciation. They can depreciate buildings that are actually appreciating. They can pass private companies to heirs at 50% discounts. And the best part? It's all legal. The shift from 26% to 39% real estate allocation in just two years isn't random—it's family offices recognizing that the more illiquid your portfolio, the more control you have over valuations, and the less tax you pay. By 2030, 10,720 families will manage $9.5 trillion using these exact strategies. And almost none of it will be publicly visible, transparently valued, or fairly taxed.

NEXT IN THE SERIES: Part 4 examines the industry that enables all of this—the lawyers, accountants, consultants, and appraisers who structure these portfolios, execute the strategies, and defend them against IRS challenges. We'll document exactly how much it costs to run a family office ($3.2M/year average), who the major players are (Big 4 accounting firms, white-shoe law firms), and why this "industry" is actually more like a private club where everyone knows everyone. The data will show that family offices don't just avoid taxes on their own—they've created an entire professional ecosystem designed to help them do it.

Sources & Further Reading

1. Forbes: Family Offices Are Increasingly Dumping Stocks for Property (2025)
2. Private Banker International: Family Offices Increase Real Estate, Private Equity (2025)
3. The Economist: The Unseen Art Collection (2016)
4. New York Times: One of the World's Greatest Art Collections Hides Behind This Fence (2016)
5. ARTnews: The Best Freeports for Art Storage
6. Investopedia: Section 1031 Like-Kind Exchange
7. IRS: Estate Tax
8. Bloomberg: Why Billionaires Buy Art They Can't See

Disclaimer: This blog post presents research and analysis based on publicly available sources. All factual claims are cited and linked to their sources. Interpretations and conclusions are my own. This is educational content, not financial or legal advice.