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Want to Promote Family Entrepreneurship? Consider a Family Bank

Posted on: January 1st, 2019

A foundational objective among many single-family offices serving Super Rich families is to enable future generations of family members to build their own wealth and create their own entrepreneurial legacies.

With that in mind, the Super Rich are embracing ways to develop the business acumen of inheritor family members—as well as ways to support them in forming new ventures of their own.

One way the Super Rich are making that happen is through family banks. And increasingly, families that aren’t as wealthy as the Super Rich are using these banks as well.

A way to generate family wealth—and family financial intelligence

A family bank is a formal legal entity a family sets up, with rules that govern how family members can access funds to start or support business ventures as well as how those family members are expected to pay back that money.

Family banks are designed to bring a level of structure, professionalism and accountability when providing money to family members to fund initiatives. As such, they can help instill financial intelligence, financial responsibility and financial values in family members—while also helping to avoid accusations of favoritism in families with multiple children.

Certainly, family banks have one clear and overarching goal: creating new wealth. As seen in Exhibit 5, a full 95 percent of the single-family offices that have established family banks (as well as those that employ a defined process without a formal family bank structure) say “new wealth creation” is a top reason for having a family bank.

The concept of the modern family bank dates back to the founder of the Rothschild dynasty, Mayer Anschel Rothschild. To protect his heirs from the problems created by inheriting significant personal fortunes, he decided the Rothschild fortune was to be used for the education of heirs as well as investment—including new ventures. Rothschild inheritors were expected to grow the family fortune by making their own way in business, backed by the family’s resources.

Today, family banks are structured and used in a few ways:

  • One use of the family bank is to provide short-term loans to family members who have experienced a personal setback. The monies are intended to help them get back on their feet.
  • Another is to loan money to family members for business ventures that can potentially generate additional family wealth.

Fostering growth from new family businesses

Increasingly, family banks created by the Super Rich are focusing on promoting and supporting entrepreneurship among family members who inherit wealth. The funds provided by a family bank are intra-family loans, equity investments in the new entrepreneurial ventures or both. For example, a patriarch might loan his daughter money through the bank so she can start a consulting business. The daughter agrees to repayment terms at a preferred rate.

In a survey of 199 single-family offices, almost a third of them (62) had a formalized process for supporting the venture activities of the second and third generations. Of those 62 single-family offices, about half had established a family bank as a separate legal entity to perform this function (see Exhibit 6).

Additionally, many family banks are designed to foster the creativity and capabilities of the next and future generations—in essence, to build human capital along with financial capital. Therefore, some family banks incorporate formal and informal entrepreneurial education and mentoring support.

Danger: Beware of taking an informal approach. About 60 percent of these exceedingly wealthy families are supporting the entrepreneurial activities of subsequent generations through informal arrangements that lack legal documentation—usually gifts or intra-family loans. Informal arrangements greatly increase the possibility of family conflict. For example, two or more family members might, and often do, remember agreed-upon financial arrangements differently. These situations can easily become destructive to family unity—such as when the senior family member dies and there is no documentation concerning the existence or terms of intra-family loans that he made.

With family banks, accountability is paramount. Family banks are not just pools of money that family members can draw on as they see fit. Obtaining funds from a family bank is very much akin to getting funding from a venture capital firm or commercial bank: The transaction must meet established criteria and be well-documented.

The need for customization

Family banks, like single-family offices, are not cookie-cutter entities. They need to be customized around the often idiosyncratic nature of the particular wealthy family as well as the family’s specific circumstances. That is why some exceptionally wealthy families with single-family offices choose to establish and run stand-alone family banks while others run the process through their single-family offices without setting up another entity. It is all a matter of the particularities of the situation.

Flexibility is key. Family banks tend to evolve from being very simple to fairly complex. It’s wise for family banks to have plenty of built-in flexibility when they’re established so they can adjust as circumstances change.

Example: Consider one single-family office started by a Super Rich multigenerational family. What started off as a formal process for them to provide intra-family loans over time morphed into a family-only venture capital firm able to deliver a diverse range of sophisticated financing strategies.

Solutions for the not-so-Super Rich

All this said, family banks are not the exclusive domain of the extremely wealthy. Families with considerably less wealth can also use a family bank as a lending and investment vehicle to support the commercial activities of their heirs.

Whereas the exceptionally wealthy move assets around in order to fund their family banks, those less wealthy are not always in such a financial position. Instead, they may need to build a pool of money that family members can use.

Example: A family could use the tax-free buildup from certain types of life insurance to amass wealth that family members can then use to fund their own entrepreneurial ventures.


Family banks are one tool that many wealthy families use to foster a culture of entrepreneurship and financial responsibility among children and grandchildren—as well as create new wealth for the family coffers. As an entrepreneur yourself, you may wish to explore whether a formal family bank or family bank-style arrangement meets your particular goals and family dynamics.

You can explore the topic further with your legal or financial professional to help you consider the pros and cons of family banks or an alternative solution given your unique situation.

This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
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