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11 April 2019
Over the past decade, matriarchs and patriarchs of successful families, whether from the United States or elsewhere, have increasingly been concluding that their children are sufficiently provided for and have thus shifted the focus of their family's largess to a broader group of individuals, such as grandchildren, siblings, nieces and nephews and family by affinity. In the United States, this is the result of a wave of large gifts to children and grandchildren in 2010 and 2012 and the tremendous success of estate freezing gift strategies over the past decade, along with the passage of various tax laws increasing the US estate, gift and generation-skipping transfer tax exemptions to a current $11.4 million per person ($22.8 million per married couple). Outside the United States, this increase in scope of family largess is also attributable in part to the unexpectedly resounding success of gifts previously made to children and grandchildren over the past decade; it is also due to an increasing awareness of the material advantages in establishing trusts in the United States that use extremely powerful, substantive trust laws of various US states,(1) regardless of whether a trust's beneficiaries are US or non-US individuals (for further details, please see "Establishing 'foreign' trusts in the United States").
How are these families executing on the expansion of their family's largess? By creating so-called 'family banks' to provide capital to that broader group of individuals for business ventures, public-spirited projects and knowledge in a way that fosters personal commitment, accountability and multi-generational mentoring.
Family banks are typically trusts that are funded for a customised set of purposes. They are used by or for families with the expectation that their flexible design will financially support one or more of the following types of activity:
Family banks make capital available for purposes that blend personal and family values and promote active family participation in both wealth building and philanthropy, without being confined to traditional models of organising family wealth or philanthropy. Those who establish family banks recognise that controlling or using capital to build businesses, improve the lives of family members and others and expand knowledge is usually more satisfying than merely funding a person's lifestyle. Family banks emphasise the tangible and intangible returns on a family's investment and active participation. Further, they provide younger generations with the opportunity to learn decision-making and financial skills from actual, hands-on practical experience and from role models and mentors.
That said, family banks are not a typical family wealth management strategy. They are not intended to fund personal consumption or living expenses per se and there is no sense of economic entitlement. Similarly, they are not intended to fund traditional charity, because, unlike a tax-qualified charity, there are few constraints on the family's ability to define the use of funds, whether to finance profit-making endeavours or public-spirited projects. Notably, family banks are also not so-called 'incentive trusts'; there is no 'if you do x, then you get y' formula.
Rather, a family bank is a pool of capital available to family members and others who have demonstrated that they can put that capital to productive use. Potential beneficiaries must demonstrate that they meet these requirements before receiving any assistance, similar to a grant process or a loan application process for a small business. Further, they must meet these requirements on an ongoing basis, thus creating a system of accountability from inception to completion.
Those who create family banks often do so because they believe that it is more satisfying to use capital to build businesses or careers, improve the lives of family members and others and expand knowledge. These individuals believe that, through financial support and mentoring, they can:
Family banks can be customised to fit a family's agenda. While the family bank's design must accommodate tax costs, particularly in the United States, but also certain other jurisdictions if applicable, tax issues should not limit the use of funds, as is the case in most family wealth structures today. The following elements are commonly inherent in family banks:
Individuals wishing to establish a family bank must answer certain fundamental questions concerning how the family bank will operate:
While difficult, answering these types of question is necessary for the proper design of a family bank, and more importantly, for families to have a long-term, healthy relationship with, and understanding of, available resources.
There are, of course, risks in the family bank structure. If operated improperly, a family bank could become a mere incentive trust used to control conduct rather than promote commitment, personal growth and family and community values. Further, potential conflicts can arise between using funds to enhance family members' careers and funding the dreams of individuals in less fortunate circumstances, because of the powerful temptation to use family money for experimenting with business ventures and careers and conserving personal money for future personal use. Further, there is a generalised risk that beneficiaries may diverge from the intended purpose of the bank or misuse funds because there are few inherent checks and balances supplied by the law, as there are with personal trusts and tax-regulated charitable trusts and foundations. These risks, while undeniable, are readily manageable with thoughtful design and operation of the family bank and sufficient built-in flexibility and adaptability.
Now is the opportune time to consider a family bank for US and non-US individuals who want to provide well-managed and effective assistance to their family, certain family friends and others who they would be unable to help without a family bank, as these family banks make it possible to help individuals pursue entrepreneurial opportunities, venture philanthropy and knowledge in a structured and more-likely-to-succeed manner.
For further information on this topic please contact Jennie Cherry at Kozusko Harris Duncan's New York office by telephone (+1 212 980 0010) or email (firstname.lastname@example.org). Alternatively, please contact Miles Padgett in Kozusko Harris Duncan's Washington DC office by telephone (+1 202 457 7208) or email (email@example.com). Please note that the authors are unable to provide legal advice to non-clients. The Kozusko Harris Duncan website can be accessed at www.kozlaw.com.
(1) For further details on state trust laws please see "State law allows settlors to modify trustee duty to inform and report", "State law allows settlors to tailor trust investment objectives", "State law allows modifications of irrevocable trusts", and "Planning for non-US trusts using state decanting laws".
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