Transcription
One of the most self-destructive things we can do in our lifetime is be employed in the cause of figuring out what to do with money we didn't earn. Free money, free money, free money. That is toxic to the soul. Instead of just giving them the money, we can with our own genius, our own labor, our own effort, our own ideas, our own work, go out and create new wealth and a family that will thrive for generations to come.
[Music]
So what's a family bank? A lot of people talk about family banks and they actually mean different things to different people in different times. In fact, if you hear about the family bank strategy, that's a way of using life insurance to create multigenerational wealth and to get certain tax advantages of tax-free growth of cash value inside of a life insurance policy. That's an awesome thing which I use personally and we've seen a lot of our clients use very much to their benefit.
But there's a family bank entity. Now, this is not a particular type of entity. It might be a trust. It might be an LLC. It might be a limited partnership. It'll almost never be a corporation. So, one of those. And it has a certain function. When properly structured, a family bank will be an entity that protects the cash and the value that it holds from hostile third parties. Think of a bank vault. You put your money and your coins inside the bank vault and you lock it. And in theory, absent some dynamite, the robbers can't get in the vault and steal the money. So, a family bank is an entity designed for the purpose of protecting wealth.
Then, well, what do we do with that wealth inside the family bank? Well, we're going to invest it. We're going to put it to work. We don't want it sitting idle and doing nothing. And so, a family bank structure may own portfolio assets. It may own rental properties. It may own other business entities. And all of those things are putting the money to work so that the money is growing and getting a return on investment. And the value increases over time, which is what a prudent investor would do with their money.
But think about how it's then deployed in a family. Often we think of a trust or estate planning as a way of getting money from the dead people. Grandma and grandpa passed away and now I get a piece of their money. And that's often how they function. But that's not always optimal. That's not always what's best either for the people or for the money. A family bank can become a privately held institution that provides banklike benefits for the family members. Now, it's not technically a bank because banks have very specific regulatory and legal requirements that they have to meet. It's not a formal bank as that term is defined by the law. But it is a bundle of financial assets that are available to do bank-like things.
So let's talk about what are some of those bank-like things that that a family bank entity might do. And one is it may loan money to the family members. So, as an example, when there's an inheritance on the table, instead of giving them the money, which has some consequences that may not always be what you want it to be, instead of just giving them the money, they can get loans from the family bank. And those loans can be secured by other assets. So, for example, a family bank entity can finance the purchase of a home by a beneficiary. So the beneficiary buys their home and like most of us when we buy a home we don't just have enough cash to drop and buy the home. Most people don't. So where do we get the cash? We borrow it. We borrow it from where? A bank. Well, what if the lender was your family bank? What if the lender was the institution created by your parents or your grandparents or that you create for your children or your grandchildren where there's this bundle of money and capital assets available to loan to family members so that they can build equity in their own life so that they're not beholden so they have the value and the benefit emotionally, psychologically, spiritually of knowing I I paid for this. I I earned this. I have equity in my house because I paid off the stinking loan. But I'm grateful that I could get the loan because that enabled me to buy the house at a time when I just didn't have that much money laying around. So that ability to loan family members money so that they can make capital acquisitions like a home or starting a business or any other capital acquisition could be financed through this family bank. So loans to family members.
Then other things family banks structures can do is capitalize or invest in family businesses. And this can be multi-generational. And if you think about it, when people have a business idea and they go, "Wow, my business idea is really great. If I only had capital, I could build my business." So what do you do to get capital? Well, you can go borrow money from somebody from a bank if it's bankable or from family members and friends if it's that kind of thing. Or you can get private equity, venture capital money, investors that will come in privately and put money in your deal and capitalize it. Or if it's really such an awesome idea, you can go public, which means have an investment that people in the public can generally invest in by buying stock or an interest in your venture. And there's a a lot of variations of how that might be structured, but you get somebody else's money and then you build your little business and then it becomes a big business and you get the value of all that growth and all that increased value and so do your investors. They share in the upside of that and of course they also share in the downside in the risk. So your family bank can be that source of capital.
Now, I want you to think about this in the context of multi-generational dynasty planning. When we just hand off the money to the next generation, here you go, kiddos. Here's the money. Grandma and grandpa are dead now. Mommy and daddy are dead now. Here's the money. What happens to that money? We have seen, and I know this is anecdotal. I've actually tried to do some hard research and would find it. Not a lot of data on this, but our experience in working with families over multiple generations is when they get that money, it goes away. It does not grow. It does not last. And often in the process of going away, it does very damaging things to the people.
But think about what if this inheritance comes as a pool of money. And what the family gets is not just free money to go live wildly and do crazy stupid things with their life, but they get access to capital. I can get loans to buy things. I can have a capital infusion in a business to grow and build wealth. Then what are the incentives of the family members? The incentives are be a productive, useful human being. have a job where I can afford to pay back the mortgage that I got to buy my house, support my family and my children by being a productive human being. So, the incentives become very positive. People become more self-reliant and more independent and not living life on an inheritance that they receive.
Recently, we had a client situation where I'm talking with a a family and there's four generations. Grandma and grandpa are dead. And they structured a business that has now spread across four generations. There are four generations that are all alive right now. And guess what? They're all dependent upon the stream of money coming out of that big. It's a big business, very valuable, and it gives them money. And so, you know what? A lot of them don't work because they don't have to. So, they're not productive. They're not self-reliant. They're not independent. They don't bother to go to school. They don't bother to go to church. They don't do hardly anything useful with their life. And those in the family that do try to be productive are alarmed. They're concerned at what is this doing to our family multigenerationally.
Consider though an alternative. Consider a family bank structure. And again, this could be a trust. It could be a trust in combination with some business entities, which is very likely to be the case to get secured loans and to capitalize business ventures. And doesn't just hand out free money. Oh, here you go. Free money because you're my descendant. Free money. Free money. Free money. Free money is a is bad money. Free money is a canker to the soul. It destroys your spirit. Don't take it. If you're offered free money, say no.
But on the other hand, this is actually a kind of an amalgamation of multiple clients. So, it's more than one person and the details have changed to protect their privacy. But I I have a client situation where a very wealthy client did some estate planning and there was a trust that had hundreds of millions of dollars and when his daughter found out about it, she was furious. She said, and I think rightly so, "Dad, don't insult me with your money. I don't want your free money. I can make my own." Which is awesome. But then sometime later, daughter came back to dad and said, "Dad, I found this apartment complex. It's 150 doors. I can buy it for way below market, but it's not bankable, and I don't have the credit score to borrow the money. Nobody will lend me the money. Will the family bank lend me the money?" And daddy looked at the deal and did his own due diligence and realized that his daughter had indeed found a bargain, that it was a good deal. So the family bank loaned her the money and took a mortgage or a deed of trust on that apartment building. It took her seven years. She paid it all back. So now the family bank has its capital back with interest, by the way. And what does daughter have? 150 door apartment complex free and clear paying her a massive income cash flow every month. So daughter created her own wealth. She has the satisfaction of knowing I did this. Yes, I had a leg up. I had capital because my family had a family bank. So that family bank structure can be a powerful tool for building multi-generational wealth and for protecting people from candidly the evils of free unearned money.
One of the most self-destructive things we can do in our lifetime is be employed in the cause of figuring out what to do with money we didn't earn. That is toxic to the soul. On the other hand, having access to capital so we can with our own genius, our own labor, our own effort, our own ideas, our own work go out and create new wealth because we have access to capital. That is a people and a community and a family that will thrive for generations to come. That's a family bank. That's how we use it.
So, we would love to hear your thoughts about the family bank. We invite you to check out our videos on YouTube, to go to our website at derpyawgroup.com. Our firm is helping clients establish family banks. We are taking on new clients. We are busy. So, if you want to get in the queue, click below. Let us know that you're interested and we'll get with you as soon as we can.
[Music]