Bernstein’s predicament is familiar to many wealth creators. They fear that ingenuity, ambition and financial savvy will fund complacency, lack of ambition and extravagance in their offspring. Their goal is to imbue their children with the entrepreneurial flair that has enriched their lives, and they also want to ensure that the young people will see wealth not as the resource for supporting a dissipating luxury lifestyle, but as a tool that allows them to find fulfilling ways to support themselves.

TOP VIEW: A family bank—a modified form of dynasty trust—is a tool that can reflect a family’s values and priorities while providing children or other heirs with both support and incentives to pursue entrepreneurial projects. The most successful family banks employ trustees who can help approve or veto requests for funds and prescribe standards and procedures for obtaining loans or grants. But families must take care to set clear standards for disbursing funds and be prepared to take action if a family member violates the trust’s provisions.

Bernstein’s method is the family bank, a form of dynasty trust that provides a perpetual financial resource, along with ongoing tax advantages and asset protection. Because of its long-term nature and flexibility, many people use it to define their values and priorities for their families and to encourage them in certain behaviors—toward public service or the arts, for example. Bernstein wanted to promote education and employability, so he funded a trust to pay for his sons’ education until they are 28. Following that, they can still tap the trust for schooling, but they have to show a plan to make a living within a certain amount of time from the additional training.

Family banks can make outright distributions, just like all trusts, but in practice they are best utilized to provide loans and direct investments for family business, real estate and education. In fact, most family banks have rigid standards stipulating these uses. This arrangement gives heirs access to this money while keeping it out of their taxable estates and beyond the reach of anyone who might sue or divorce them. This strategy also enables the trust to renew itself and grow as loans are repaid and interest and investment returns accrue. The Bernstein family bank decrees that the children can ask the trust for noneducational endeavors, but they need to make a case for their ideas to the trust’s advisory board, which includes Bernstein, his wife and three trustees.

The oldest son, a musician, was interested in living off campus when he went away to college so that he would have practice space where he lived. He researched the local real estate market, came up with figures comparing the costs of renting and buying, then devised a plan to sublet part of a house to roommates to cover the ownership costs. He also researched mortgage rates so the trustees could decide whether it was more cost-efficient for the trust to lend him the money or to cosign on a mortgage. In the end, the trustees approved his plan to buy a house and lent him the money to do it. He still lives in the home.

"It’s a lot of work to make sure you aren’t just giving them things," Bernstein says. But, he adds, he is already seeing the payoff for these efforts. The musician, who recently graduated, would like to set up a practice studio and has begun researching the economics of it—such as where and how to set it up at a reasonable cost and how to rent out time to others—so that he can present another plan to the trust. "When he wants to build this studio, he can use it as an income source for his lifestyle. And he has an entrepreneurial path that he’s familiar with for how to make that work," Bernstein notes.

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.

Trustees usually create their own succession plan, but sometimes call on family members or outside advisors for advice. Herb Daroff, an attorney and financial planner with Baystate Financial Services in Boston, says that one of his clients arranged for each trustee to nominate his own successor, with approval from the other two. "If a trustee dies without a successor, the family’s law firm picks someone," he says. Ideally, Bernstein says, a family should maintain its original balance of interest and expertise, professionals and family members.

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.