Protect Your Assets With a ‘Family Bank’

One of the biggest drains on your account may not be the market but rather family requests for money that may never be repaid. Preserve assets—and emotional health—by setting up a “family bank” where loan requests are reviewed, approved of, and monitored.

Left with a sizable portfolio, Doctor Smith thinks her financial future is secure. Little does she realize that one of the biggest threats to her assets is not the markets and not her health, but her own loving children, who think she has cash to spare. One by one, they quietly approach her for loans that will never be repaid. The guilt she feels from turning them down is worse than the fear created by the draining of her assets, but what’s a mother to do?

One possible solution in this familiar—and for most people, it is familiar— scenario might be for Doctor Smith to informally set aside a reasonable portion of her portfolio in a separate account and consider it the family bank. Although the amount she uses to seed this account will depend on her financial situation, she should remain cautious regardless. This account will always be registered in her name, just as her portfolio is now, but the expectation will be that these funds will be available to help her family from time to time. Her children may request a loan from the family bank at any time, using a more formalized process; a bit different than hitting up mom for cash while she’s cradling her first grandson in her arms. By adopting a few basic ground rules, you can forestall years of emotionally taxing personal and family stress.

Written loan request

Anyone desiring to borrow money from the family bank must draft a written request for the loan. The request should identify the following items:

  • The amount of the loan requested.
  • The repayment schedule desired. Hopefully, this will be expressed as a specific amount over a fixed period of time. In some cases this might be a bit more vague, such as, “I’ll repay it as soon as my house/boat/car is sold,” or “Once I get a new job, I’ll begin to make payments.”
  • The intended purpose for the loan proceeds. This needs to specify what the money will be used for (debts, education, acquiring a house or car, etc.).
  • A summary of any other outstanding loans from the family bank. This should include any existing loans made directly by Mom before the family bank was established. In fact, it is a good idea to address any existing loans to family members, whether current or in default.

Tough love

It can be emotionally difficult to request a signed promissory note from a family member, especially a child. It may be even harder to enforce such a note if the child defaults. The signed promissory note creates a needed formality, with the expectation for repayment that often does not exist with family loans. Another asset protection strategy may be to request that if the borrower is married, the spouse must sign the note as well. It is amazing how this stipulation can cut down on frivolous requests.

Don’t be afraid to ask for help

Make sure you keep an open line of communication with your financial advisor. As in most financial relationships, the benefits of transparency and accountability should never be underestimated. While you should feel comfortable making decisions as the director of your own family bank, there is real value to keeping your financial advisor well in the loop. If you choose to do so, you can even appoint your financial advisor as chief executive, while still retaining full veto power. By handing over the burden of loan approval to your financial advisor, you can keep emotional and transactional relationships with each child exclusive, while still creating a mechanism to help out. If the directors approve any loan that you don’t care to make, you have the choice not to distribute the funds from your account.

In many cases, the children will simply choose not to request a loan from the family bank when it involves this level of disclosure. And in the case of younger members who have not yet been able to establish a credit rating, or a sister just emerging from a divorce, access to funds via the family bank may be a tremendous advantage for getting on sound financial footing. After all, isn’t this what families are for?

Fairness is key

As a doctor, there is usually no real fear that the money might run out; rather, the issue is one of maintaining a sense of fairness for those members who would be eligible to request a loan. Another benefit is that the family bank as a practice offers valuable lessons to children of all ages.

The family bank essentially puts the pressure appropriately on the borrower and removes you from the process of approving or monitoring the status of a family loan. It also forces a level of accountability among siblings or other family members that might be uncomfortable for you alone. This accountability often leads to a more professional level of interaction among siblings. Coupled with the fact that you retain full control over your accounts at all times and have the right to ignore any recommendation for making a loan, a family bank could be a real win-win for you and your family.

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