I recently read about a growing trend of family businesses establishing a “family bank.” Typically, the senior generation uses some of the wealth they have accumulated from their family business to set up the “bank.” The bank can then, in turn, lend money to family members based on predetermined criteria such as starting a new business, buying ownership in the existing family business, going to college, or purchasing a home.
The family bank is formed in the same manner as any other legal entity, except that it is not established as a traditional bank and therefore would not be subject to all the associated bank regulation.
The bank can employ family members, but it would typically rely on an independent committee or board to make final lending decisions, so as to not interfere with Thanksgiving dinner.
The family bank concept can provide ways for the senior generation to share their wealth other than through direct inheritance. This can be especially enticing with the passing of each generation and the increasing number of family members involved.
It is important to note that historically, the family banks that have failed often lacked professionalism in the way they operated and wound up becoming another form of entitlement for family members. For the banks that succeeded, however, the senior generation was able to create another alternative for the family to create self-sufficiency and leave a legacy.
Have you considered establishing a family bank? Why or why not? Share in the comments.