Everyone needs estate planning. Everyone. Every. One. But not everyone needs the same estate planning.
There are some tools that everyone should have - like a power of attorney and advance directive. There are some tools that many people should have - like a last will and testament and revocable living trust. And then there are those more specialized tools that fewer people need; yet, for those families that need them, they can make a critical and positive difference for many future generations.
One such idea is the "family bank." In this post, we'll discuss in broad terms what a family bank is, how it works, and why it's beneficial.
Special thanks to Matthew Hulse of Premier Advisors Group and David Chaney of Legacy Planning Partners, LLC for their contributions to this post.
01-What is a Family Bank?
"Family Bank" isn't a legal term or a formal designation. (Though, in some circumstances, it can become a formally chartered community bank.) It's more of a way of thinking about an asset or group of assets that are intended to benefit a clearly-defined group of family members. Those assets can be used to purchase insurance, can serve as collateral, can be loaned to beneficiaries, can be used to capitalize business ventures, can be used to purchase real estate... All the while, reducing estate tax liabilities, providing asset protection, and ensuring future growth across generations.
02-How does a Family Bank work?
Typically, a family bank is created by executing a type of irrevocable trust called an Intentionally Defective Grantor Trust ("IDGT"). The individual creating the IDGT transfers assets to the trust by a combination of gifts and sale. Those assets are removed from the individual's estate for estate tax purposes but not for income tax purposes, creating the "intentional defect" that gives the trust its name.
Inside of the trust, assets appreciate outside of the grantor's estate, which is great for the grantor, while the grantor maintains responsibility for income taxes, which is great for the beneficiaries. So far, so good?
An IDGT doesn't have to function as a family bank. It can serve as a fairly straightforward estate tax planning tool all on its own. But when it functions as a family bank, it is structured to be governed by a group of co-trustees who serve as a sort of "board of directors" who cooperate to make decisions about how the assets should be invested, whether and how they should be available to beneficiaries, whether and how beneficiaries can borrow from the IDGT, what the interest rates for loans should be, etc. It's best when this "board of directors" is made up of individuals from different generations, allowing older family members to mentor the younger ones.
In order to operate effectively, the language of the trust is fairly broad, while the board of directors (co-trustees) function under a constitution that contains very specific language about purpose and use of trust assets. While the trust is irrevocable, the constitution is drafted in such a away to allow the board of directors to amend it over time. This combination of an irrevocable trust and an amendable constitution give the family bank the perfect combination of irrevocability for asset protection and flexibility for continued governance.
03-What does a Family Bank do?
A family bank helps reduce estate tax liability and protects assets for your spouse and beneficiaries. Those two functions are clear-cut. But everything else a family bank may do is really up to you. You could create the family bank to:
A) Purchase insurance that builds a large cash value outside of your estate.
B) Serve as qualified shareholder of S Corp stock.
C) Allow you and/or family members to take loans from the family bank for defined purposes at a predetermined interest rates.
D) Train future generations to invest and manage large and/or complicated assets by structuring the board of directors and constitution to include family members from multiple generations.
E) What else are you dreaming of doing for your family?
04-Why create a Family Bank?
To answer this question, I'm going to share a list created by David Chaney of Legacy Planning Partners, LLC. In his experience, people create a family bank for the following reasons:
- Passing down your values is as important or more than passing down your valuables.
- You are more concerned about what inherited wealth will do to your heirs than for your heirs. (Ever heard "Affluenza"? Look it up.)
- You want to help your descendants become all that they can be, giving them a hand up instead of a hand out.
- You want to provide income to those who cannot provide it for themselves.
- You want to provide financial incentives for your descendants to become productive and unselfish members of their communities.
- You have a desire to protect your family wealth from losses due to financial bad choices or bad luck, like divorcing spouses, claimants, creditors, and predators.
- You have a desire to maintain strong family relationships for generations to come
- You believe leaving a legacy is more important than leaving an inheritance.
- You want to ensure that important family assets like property, investments, or business interests stay in the family and continue to bless all family members for generations.
Or, as Matthew Hulse of Premier Advisors Group puts it, your family bank allows future generations to maintain independence and their own identity. Because a large sum of money isn't just given to the next generation, your children and grandchildren don't lose their own sense of "self net-worth." You can change how your family thinks about money by restructuring inheritance. Assets are available to the family under certain conditions and for certain purposes, but family members are still encouraged to work and save and create their own independent financial stability.
So do you need a family bank? Maybe "need" is too strong a word. Could you and your family benefit from a family bank? If your family has large and/or complicated assets - business interests, real estate, cash - and is looking for a way to reduce estate taxes and protect those assets for future generations, then we should talk.
If you want to know more, we would love to talk with you about it. Best part, the conversation about how it could benefit you doesn't cost anything. Contact us at (918) 770-8940 or firstname.lastname@example.org to set up a free consultation, either in person, video chat, or phone call. Disclaimer: Reading this blog post does not create an attorney-client relationship, and it is not formal legal advice. This is for information purposes only. Your best bet, always, is to speak with an attorney about your questions, assets, concerns, and needs.