All in the Family
A family bank can be just the thing to ensure that a family's interests are protected and that the entire clan lives up to certain standards.
In the late-18th and 19th Centuries, Mayer Amschel Rothschild established five family banks, in Frankfurt, London, Paris, Vienna, and Naples, and assigned one to each of his five sons. His action secured the assets of Europe's wealthiest family and preserved his descendants' control of their wealth and affairs for generations. It gave the sons the tools to do business on their own and to cooperate with one another.
In the present-day U.S., as in 19th-century Europe, a family bank can preserve wealth, provide family members with independent access to capital, and more—it can substantially lessen the taxes that wealthy families pay on occasions of intergenerational wealth transfer. The U.S. has also democratized the idea of a family bank: A savvy investor can begin a family bank with as little as $1 million.
For the Rothschilds, in a day when government regulation of banking was light to nonexistent, a bank was a business that did banking. In the 21st century U.S., a bank is much more complicated and much more heavily regulated. But when established and managed properly, a family bank keeps assets within the family, brings thoughtful stewardship to the family endowment, and encourages a family's legacy to thrive. It is not a traditional brick-and-mortar lending institution, not a partnership, and not a corporation, but it does operate as an entity formally independent of the family.
How does a family bank differ from a commercial bank or a family asset-management company? There are three notable distinctions between a family bank and an outside institution.
First, 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. So, for example, if an heir's credit isn't perfect, that could be irrelevant within the family bank, but would be a red flag at a traditional one.
Second, 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 does not.
Third, under certain conditions, 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.
How does a family bank work on a practical level? Imagine that a family patriarch (doubling as president of a family bank) is approached by his enterprising son for start-up capital....MORE