The Social Contract
The structure of a family bank enables parents to feel they are
treating their children fairly without doling out equal shares of cash to them.
Parents decide when they establish the trust what its objectives will be, what
standards or conditions family members have to meet to receive money from it,
and in what form the money will come. They also decide how much latitude the
trustees will have to approve, veto or coach requests. Every potential
beneficiary has equal opportunity to request this money, and those who have a
suitable ambition, need or sense of responsibility will receive it.
| To preserve the family bank’s longevity and integrity, funders also need to enforce its provisions. "You want to be able to tell kids that if they come up with a business plan and get a loan and it fails, that’s OK," Bostwick says. "They can come up with another plan and try again." |
"Ideally it’s like the process for getting any grant or loan,"
says Jere Doyle, a senior vice president at Mellon Private Wealth Management in
Boston. "You apply, the committee meets, they consider whether you have a good
use for the money and if it will be recovered for the other beneficiaries, and
then you get the money—or you don’t."
Jarrett Bostwick, an attorney who specializes in wealth and
philanthropy planning at Handler, Thayer & Duggan in Chicago, has a client
who will allow his heirs to access money from the family bank to start a
business or, after having worked a certain number of years, to take a
sabbatical. Another of his clients arranged for the trust to match the salary of
any family member who pursues one of a list of public-spirited but low-paying
careers, such as teaching or social work or being an assistant district
attorney.
Seth Pearson, a financial planner in Cape Cod, is using a
family bank to lend money to his children for graduate-level education, housing
or business ventures. One of his three children, Michael, 28, recently borrowed
a large sum to build a combined art gallery and wine bar on Cape Cod. He already
runs one successful gallery, which made Pearson believe the loan was a
reasonable risk. He is letting his son defer interest and payments on the loan
until the business is open and shows cash flow. But if the loan is not paid back
by the time Pearson and his wife pass away, he has a provision in his will to
subtract any outstanding loans and interest from the owing child’s share of the
estate. "The big thing for me is that this equalizes things," Pearson says. "It
doesn’t hurt the other kids because there’s interest accruing, and if he doesn’t
pay it back, it comes out of his inheritance."
Because of the family bank’s long-term orientation, it requires
a workable balance of structure and flexibility, along with careful planning.
Funders are forced to plan to make the trust accessible enough to be useful to a
family, but protected enough to sustain itself and grow over time. Trustees must
have clear directions without being unnecessarily hemmed in or at risk for
confrontations with heirs in second and third generations. Funders must also
plan for trustees to succeed one another.
Well-Rounded Team
Financial advisors recommend putting together a team of
trustees, so one person will not have the power to decide which relatives are
funded. Trustees should number three or five people (to avoid tie votes), and at
least one trustee needs the financial acumen to assess a business plan or an
unorthodox venture. Bernstein’s trustees include his family office’s CFO and a
family friend who is an attorney who evaluates business transactions. His
brother-in-law provides a familial ear, someone who is "good at listening to the
kids and being supportive," Bernstein explains. Bernstein and his wife round out
the board of trustees.
|
