Banking on the Family

What exactly is a family bank and what are its applications?

Mainly used to pay for education, buy a home, or start a business, (though it certainly can have other applications, depending on its rules) the Family Bank is not a brick-and-mortar lending institution, partnership, nor is it a corporation. It does, however, operate as an entity formally independent of the family.

How does a family bank serve families if it is not a “real” bank?

Its basis is typically an informal arrangement where grantors (i.e., parents and/or the family patriarch and matriarch) form a trust. The trust is often used to teach and foster responsible money behaviors in a family. We offer Heritage Design, a customized plan that often includes a Family Bank, to our clients. Those who establish a family bank may do so in an effort to protect assets that children and grandchildren might otherwise lose through inexperience managing assets, changes within their household, (i.e. divorce), or indecision and/or disagreement about how the assets are managed.

Is securing a loan from a family bank a “better” option than from an outside institution?

Not necessarily. If the objective of the borrower is to establish or increase credit with a commercial institution, s/he may wish to do so. However, instead of giving monetary gifts outright, the family can loan money, with certain strings attached, to foster success, independence, and business acumen for heirs. They may need to write and present a business plan, or, propose a course of study at a specific institution or program. Such proposals may require approval from an advisory committee.

Who is on the advisory committee?

It may include professionals, members of the immediate family or a mix of both. If the final group is comprised of those from within and outside the family, there may be a separate review board serving to educate and prepare heirs for eventual decision making. Those on the review board could have the opportunity to sit in on advisory committee meetings and develop experience learning how the review process works.

Do family banks differ from commercial banks or family asset-management companies?

Three things separate a family bank from an outside institution.

1) The family bank’s primary mission is the protection and stewardship of assets as the family sees fit. It can provide loans without a traditional institution’s constraints and conditions. If an heir’s credit isn’t perfect, that could be irrelevant within the family bank, however, it would be a red flag at a traditional bank.

2) Commercial banks and asset-management companies are likely to offer a breadth of services and products that fall outside of the scope of traditional lending; the family bank doesn’t.

3) Family banks can forgive a loan, perhaps even give the heir the loaned amount as a gift; whereas traditional institutions require repayment of loans—complete with interest and penalties when the agreement isn’t honored.

Read more in Barron’s. This article also appeared on the Huffington