Managing Your Fortune: Family Banks

Thomas N. Silverman was recently quoted by the Palm Beach Daily News in an article about preserving family wealth.

Article Link on Palm Beach Daily News Website. By Gail Liberman

Is Junior having problems getting a loan from a bank these days? The Jupiter-based GenSpring Family Offices suggests that your family consider forming its own “family bank.”

It’s a great way, says Hunter Wilson, senior partner at the family office affiliate of SunTrust Banks Inc., for family members to work together through philanthropy, a family business or investing. It also can help thwart the odds of your wealth disappearing in subsequent generations. About 70 percent of families fail to sustain their wealth across more than about two generations.

“It’s a very powerful opportunity,” Wilson suggests.

GenSpring, which Wilson says is one of the limited number of banks that serve family banks, charges nothing extra for that service, he says. But there may be fees to draw up legal documents, such as the bank charter or loan documents.

A family bank, Wilson notes, has been credited with the Rothschilds’ uncommon success at preserving that family’s fortune for generations.

Meyer Amschel Rothschild created five new banks for each of his sons in financial capitals of Europe, writes James E. Hughes Jr. in a summer 1998 issue of Family Business. He charged less than a traditional lender and asked for no percentage of the bank profits. Loans, though, had to be repaid so future family members would have capital for their endeavors. Each son was required to issue a report on what was happening in each financial center and information was shared to help each family member outdistance competitors.

Your family bank can have a legal structure — depending upon how formal the family wants it to be. It could be an existing trust; a dynasty trust, in which assets are passed to subsequent generations, perhaps using loans, to escape taxes; or a limited liability corporation.

Loan rates, which may come under scrutiny by the IRS, must be set at least at the IRS Applicable Federal Rate, substantially lower than a traditional bank’s rates. In September, those rates ranged from 0.21 percent on loans to three years to 2.18 percent on loans greater than nine years. Charge less than that for Junior’s loan and you could wind up owing the IRS. Business plans and loan applications should be required.

Sticky wicket: What happens when Junior defaults on his or her loan? That’s determined jointly in advance by family members. “I’ve seen where it affects the potential estate value for that family member,” Wilson says.

Palm Beach Gardens estate planning attorney Tom Silverman acknowledges he has had inquiries about using a dynasty trust to take advantage of the current $5.12 million gift and estate tax exemptions. But it’s fraught with problems — not the least of which is tax uncertainty.

“There has been a lot of litigation today about whether the trustee breached a fiduciary duty by making or not making distributions to beneficiaries,” Silverman says.

In fact, Silverman recently was involved in one case in which a large local bank tried to deny a woman $35,000 she wanted from her family’s $25 million trust to build a new kitchen. The bank ultimately made the distribution and the woman moved the money to another institution.

“There’s a paternalistic feeling on the part of bankers,” Silverman warns. “And a family has to live with controls they may not like.”


If you or a loved one needs help with a situation involving one of these areas, please contact Thomas N. Silverman, P.A. at 561.775.7500 (24 hours) or info@FloridaProbateCounsel.com.

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