Many clients have wondered how to give money to adult children without creating dependence. Financial dependence can be an “addiction that is as serious as dependence on alcohol or drugs.”
This becomes even more problematic when you start looking to give assets to grandchildren and successive generations. One simple yet sophisticated tool to create a financial pool that can be self-perpetuating is a family bank.
The main purpose of the family bank is to use assets to improve the human and intellectual capital of each successive generation.
Rather than just gifting assets away, you create a “bank” where the children or grandchildren can apply for a loan through a formal process. There is a board of trustees, formed of family members, that reviews the application and approves or denies the loan. The loan is then repaid over time at an interest rate that is slightly lower than the prevailing interest rates. The repayment of the loan replenishes the family bank for future family members to use.
The benefit of using a family bank is that it promotes a sense of accountability as the recipient has to first prove the merits of their request and second return the capital based on the returns they receive from their endeavors.
Frequently, family banks are used to help pay for college, provide mortgages, or provide seed capital for a start-up business.
Again, the goal should be to improve the human and intellectual capital of each family member. It should be more than just a son asking his mom for $20. It should not be a gift that has no purpose and no expectation of repayment.
To set up a family bank you can use a legal document like a trust or a Limited Liability Company (LLC) to dictate how the family bank is operated.
As you work with an attorney to create these documents, be sure to include a mission statement. The purpose of the mission statement is to explain your intent and goals to help guide future generations in the administration of the family bank.
Once the governing documents are created, you can open an investment account that is titled in the name of the trust, LLC, or family limited partnership. It can be invested according to the restrictions in the documents.
If it is planned and implemented correctly, a family bank “can be a powerful mechanism to put wealth to good use for the benefit and development of the family.” If you have questions about how to set up a family bank, please contact one of our private wealth managers.
*Smedley Financial and its employees do not provide tax advice; therefore it is important to coordinate with your tax advisor regarding your specific situation.