A concept I like is one that’s called a family bank. This is not for everyone. In fact, it’s probably only something that a very few can do. I would like you to consider how you can use the principles of a family bank in your own life.
Let’s start with what a family bank is.
A family bank is typically a trust that is set up that allows for family members to borrow money from. Typically, the family bank will make loans or fund homes, education and start-up funds for a business.
Homes and start-up funds for a business are typically a loan and funds for education becomes a grant. There is no hard and fast rule here. If a family has grants for homes and education, that's just fine.
How does one decide what is a good use of family bank funds
What we often see is that a family bank grant or loan has to go through a loan process that is very similar to what you would see with a bank or an outside investor. The person who wants money from the family bank will put together a proposal for how much money they need, what the money will is needed for, why it’s a good idea for this grant or loan to be made and how it will be repaid if it’s a loan.
There is then a loan committee that are members of the senior generation of the family. Families that have very significant assets you might see a family bank have outside people in the decision process along with family members. For most family banks, they entirely leave the decision process up to senior members of the family.
You might not have the money…
For over 99% of us a family bank would make no sense. At the same time you are often asked to loan or give money to our children or grandchildren to help with the three things a traditional family bank might work with. Wouldn’t it make sense for you to think about having a process in your family for how you will loan or give money to your children and grandchildren?
Too often I see parents just give money to their children with little or no thought about whether it’s a good idea. If you think like the wealthiest families in the country, you will start making better decisions about loaning or giving money to your children.
What if you have the money?
If you have the money to set up a family bank (typically this is for families with net worth of more than $25 million) and you haven’t done so, I encourage you to think about doing so. Too often I see entitled children created by mistake. Often this is because no one has really thought through the process of how assets are being shared with family members.
Having a decision-making process will help you find ways that allow you let the younger generation now that there is a process they have to use to get funds from the family. Whether you have tons of money or just a little, having a process can go a long way towards helping you make the decisions you’re happy with.
There are good things and bad things you can do.
When sharing money you have with others in your family, it’s too easy to give others money. After all, it is the path of least resistance.
I will bet that you don’t want to have entitled children or grandchildren. I’m also willing to bet that there are times you’ve given money away that you wished you haven’t given. Wouldn’t it be nice if you had a system where you could make that decision easily?
Why don’t you leave a comment below and let me know what you think about having a family bank or setting up a system like a family bank for your family?