Three years ago I helped a business owner rescue his succession plan from imminent failure.  We restructured the plan to both enable him to withdraw from the business (with enough money to secure his lifestyle) while enabling his junior partners to have enough cash to pursue an acquisition to grow the firm (and secure their future).

In the time since the business owner’s exit, he has enjoyed some travel and leisure but came back to me recently expressing a desire to use some of his money to benefit members of his extended family.  Specifically he wanted to foster a sense of shared values centered on conscientious participation in the communities in which they live.  He also wanted to use the money to enable family members to start businesses that fit their skills and interests. Beyond that he wanted to use some of his wealth to help family members with temporary financial needs.  The family bank is the structure that we settled upon as best suited to his objectives.

So what is a family bank? 

It is a formal legal entity with specific rules that govern how members of the family may access funds and under what terms and time frame the money will be repaid.

As to why a family would want to implement such a structure the primary reason is that it brings discipline and structure to the lending process and in so doing can eliminate potential conflicts that arise in the course of how loans are structured and repaid.

Dick Blakeley, CEO of The Blakeley Group, a wealth management firm in Santa Clara, CA  describes it this way

“…we bring the idea of the Family Bank to our clients as a means to … help  family leadership support their children, limit potential liability and improve family communications based on a common goal of fostering entrepreneurship among succeeding generations.  The first step we tell our clients is to build a team with competent accounting and legal support to go with our back-office support so you have the foundation to support the family’s endeavors effectively.”

If you are involved in a family that has enjoyed a significant liquidity event and are looking at how to use at least some of your money to foster financial discipline and business development by family members then the private bank structure is worth a closer look!