If you’re interested in lending money to your children or other family members, consider establishing a “family bank.” These entities enhance the benefits of intrafamily loans, while minimizing unintended consequences.

Lending can be an effective way to provide your family with financial assistance without triggering unwanted gift taxes. So long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift. This means, among other things, documenting the loan with a promissory note, charging interest at or above the applicable federal rate, establishing a fixed repayment schedule, and ensuring that the borrower has a reasonable prospect of repaying the loan.

Even if taxes aren’t a concern, intrafamily loans offer important benefits. For example, they allow you to help your family financially without depleting your wealth or creating a sense of entitlement. Done right, these loans can encourage responsible financial behavior, promote accountability and help cultivate the younger generation’s entrepreneurial capabilities by providing financing to start a business.

Too often, however, people lend money to family members with little planning and regard for potential unintended consequences. Rash lending decisions can lead to misunderstandings, hurt feelings, conflicts among family members and false expectations. That’s where the family bank comes into play.

A family bank is a family-owned, family-funded entity — such as a dynasty trust, a family limited partnership or a combination of the two — designed for the sole purpose of making intrafamily loans. Often, family banks are able to make financing available to family members who might have difficulty obtaining a loan from a bank or other traditional funding sources or to lend at more favorable terms.

By “professionalizing” family lending activities, a family bank can preserve the tax-saving power of intrafamily loans while minimizing negative consequences. The key to avoiding family conflicts and resentment is to build a strong family governance structure that promotes communication, group decision making and transparency. Establishing clear guidelines regarding the types of loans the family bank is authorized to make, and allowing all family members to participate in the decision-making process, ensures that family members are treated fairly and avoids false expectations.

To ensure fairness and objectivity, and minimize emotional factors, it’s a good idea to involve one or more outside advisors in the management of a family bank.   Estate Planning Pitfall

Estate Planning Pitfall

Your documents are hard to find

No matter how much time you invest in designing an estate plan that reflects your wishes, your efforts will be for naught if your family can’t find your documents. Here are several tips for ensuring that critical documents are readily accessible when needed:

Wills and trusts. Ask your accountant, attorney or other trusted advisor to keep your original will, living trust and other trust documents; and provide your family with his or her contact information. Be aware that it’s not advisable to place your will or living trust in a safe deposit box, however, as state law and bank policy will likely require that you present the original document or a court order to obtain access.

Financial documents. Make it easy for your family or other representatives to find life insurance policies; tax documents; deeds to real property; bank, brokerage, retirement account and credit card statements; stock certificates; and other important documents. Also provide contact information for key advisors, such as real estate attorneys, accountants, brokers and financial advisors.

There are many options for providing your loved ones with access to this information, including:

  • Renting a safe deposit box and instructing your family on how to obtain access,
  • Storing documents in a fireproof lockbox and providing your family with the location and the key or combination, and
  • Uploading digital backups of key documents to an online storage system. These systems provide family members or other representatives with access in the event you die or become disabled.

Health care documents. Consider providing “duplicate originals” or copies of powers of attorney, living wills or health care directives to the people authorized to make decisions on your behalf. You might also ask your physicians to keep duplicate originals or copies with your medical records.