FAMLY BANK BEST PRACTICES Establish the family bank, actually a form of dynasty trust, in a state such as Delaware or Florida that will allow the trust to continue in perpetuity or for several generations. Think about how the trust fits into your larger estate plan and whether it would be useful to use your generation-skipping tax exemption or gift-tax exemption to fund it. Make your goals for the family bank clear in the trust document itself and in supporting documents. Choose multiple trustees, including at least one with a strong financial background.     Give the trustees the ability to enforce the trust’s provisions and maintain its integrity. Give the trustees enough flexibility to adapt the trust to unforeseen circumstances.

Estate planning advisors also recommend giving trustees enough flexibility to adapt to circumstances within a family—a special-needs grandchild, for example—or in the overall economy that no one can predict. But they also advise funders to describe their goals and intentions so that trustees have objective criteria to use in considering requests. Trustees need to know funders’ preferences, but have room to go beyond them if a justifiable need arises. Funders can use the trust document itself, as well as supporting documents such as a will or a letter to trustees, to explain their goals.

Bernstein says the goals of his family bank are twofold: to preserve the family culture of "working hard and feeling good about yourself" and to protect family assets for the future. Goals such as these make it clear that no one will have carte-blanche access to that money, and give the trustees a basis for turning down requests that seem ill-conceived or beneficiaries who seem unlikely to repay the trust’s loan.

Outside Approval
Daroff has a client who set up a bank to encourage his children to be entrepreneurs. But they have to prove their idea is worthy of the trust’s support by presenting a business plan to three financial institutions and getting two to approve a loan for it. Then the trust might decide to fund the venture or facilitate one of the bank loans instead.

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." To guard against beneficiaries taking loans with no intention of repaying them, funders should limit the amount of money any one person can have outstanding from the trust at a time.

Doyle advises directing trustees to treat these loans as arm’s-length business transactions. Loans require collateral and repayment plans, and the trust should have the ability to foreclose if a beneficiary breaches the covenants. "If someone doesn’t, say, repay a loan for a home, you foreclose, and maybe he’s better off moving into something smaller and more manageable," Doyle says. "Of course, then the trust has to think about what to do with this asset it doesn’t want."

Eileen P. Gunn is a freelance writer based in Brooklyn. Her book, Your Career Is an Extreme Sport, will be released in October.