Family Bank

A family bank is not a licensed financial institution but rather a formalized internal mechanism through which family wealth is deployed as loans to individual members or branches of the family. The defining characteristic is structure: loans carry stated interest rates, repayment schedules, and written agreements, distinguishing them from informal gifts or handouts. A qualified attorney and CPA must evaluate any particular family's implementation, as the legal and tax requirements are meaningful.

The underlying logic is that a well-run family bank can encourage entrepreneurial initiative while protecting family capital. A hypothetical founder who sold her logistics company might establish a family bank so that her adult children can access capital for business ideas without the family's investment assets being liquidated or pledged as collateral. Potential advantages include preserving a culture of earned opportunity and keeping wealth productive across generations.

Potential disadvantages include the administrative burden of documentation, the emotional complexity of enforcing repayment among relatives, and the risk that favorable terms could create unintended gift tax consequences if loans are not structured at the IRS's applicable federal rate. Families sometimes consider pairing the family bank with a governance document, such as a family charter, that sets eligibility criteria and limits on loan size. This helps depersonalize decisions that might otherwise strain relationships.