The Family Bank
The Family Bank
What is a Family Bank? Well, to start, it’s important to understand why a Family Bank may be useful.
Why a Family Bank?
Most families who have worked hard to accumulate wealth share a concern for the long-term welfare of their offspring. They want them to have security and at the same time, they want them to thrive.
An integrated estate plan, which often includes a Family Bank, allows parents to plan and provide family incentives. It prevents the children from squandering the family fortune on unchecked extravagant living. A majority of wealthy families who do not undergo this type of planning spend their fortune in three generations.
Integrated planning allows for the preservation of wealth over multiple generations. Such planning includes Dynasty provisions in Revocable and Irrevocable Trusts that limit the amount of money distributed, so that distributions never exceed the principal.
Often, this planning encourages reinvestment of a percentage of the Trust income, which allows for the money to grow. If the family leaves the money in the Trust, it can grow from generation to generation estate tax free. This is how a lot of wealthy families have become ultra-wealthy.
What does this have to do with a Family Bank?
The Family Bank is typically a Limited Partnership (LP) or a Limited Liability Company (LLC) structured to hold all or a portion of the family assets. This would include cash and portfolio assets, non-qualified investments, low or no risk assets and more. It is taxed as a partnership.
The Revocable Trust and Dynasty Trust each have an interest in the Family Bank. If it is an LP, then we typically structure the plan to make the General Partner the Family Office. Otherwise, the Family Office is also owned by the Trusts.
We address Family Office in another article, but it is relevant here to note that we structure the Family Office to have the control of the family assets. We structure the Family Bank to own the family assets. When we separate ownership and control in this way, we substantially improve the risk management of your assets.
This means that a creditor would have more difficulty getting to your assets as a result of this type of planning.
What are the other benefits?
In addition to being a part of your risk management plan, Family Banks provide opportunities for families. One example is they can loan money.
If one of your children would like to buy a home, there are a few different ways to do it using our integrated planning model of a Revocable Trust, Irrevocable Trust, and Family Bank.
1. The Trust can give money to purchase the home outright for your child using funds from the Family Bank. This gets the job done; however, it reduces the protection of the asset because it is no longer in the Trust.
2. The Trust can purchase the home using funds from the Family Bank and your child can live in it, but the Trust owns it. This preserves the protective features included in our integrated planning model.
3. If your child is married and their spouse does not want the Trust to own their house, the Trust can loan the money to your child and their spouse. It would work as a mortgage and allow your child and their spouse to build equity and credit. This also provides a line of protection for your child. If your child’s spouse turns out to be a louse and leaves them (if they stop making house payments), the Trust forecloses on the house and your child continues to live there.
Family Bank and Life Insurance
The Family Bank legal structure can also be used in connection with what is sometimes called Family Bank Life Insurance. Learn more about that at the following links:
From Ed Slott: Life Insurance and Beyond
and from David Phillips: https://www.youtube.com/watch?time_continue=373&v=gTPGBS5K8tU
The Dynasty Trusts and related structures we help our clients establish are vital to the effective operation of such Family Bank devices.
Contact Us
The Family Bank provides several other options when it comes to how families can use their wealth to benefit multiple generations. If a Family Bank sounds like something that would be a good fit for you, please call our office at 480.324.8000 to schedule a courtesy consultation.