70% of wealthy families lose their wealth by the second generation—and 90% by the third. In many cases, the culprit isn’t bad investing. It’s poor communication, unprepared heirs, and a lack of shared purpose.
But, what if you had a “family bank strategy”?
This approach, used by a growing number of high-net-worth families, turns wealth into a teaching tool. Instead of giving money away and hoping for the best, a family bank strategy provides structure, accountability, and legacy alignment.
Here’s how to know if your family might be ready to set up a family bank.
Table of Contents
Just What Is A Family Bank?
- A “values-based” lending model within the family
- Often structured with trusts, LLCs, or family investment committees
- Supports heirs in education, business ventures, and charitable goals
We took a deep dive into how family banks work in our recent Imagine That™ newsletter, which you can read here.
Five Signs Your Family Is Ready For A Family Bank
- Your estate exceeds $5 million
- You’re concerned about entitlement or preparedness of your heirs
- You already provide informal support to younger family members
- You want your wealth to reflect shared values
- You’ve seen gifting cause friction or confusion
Four Common Structures
Here are four options we most commonly see when families have set up a family bank strategy.
Irrevocable or Dynastic Trust:
Used to hold and protect the family’s core financial assets. These trusts can last for multiple generations, shielding wealth from estate taxes and creditors. They also enable the original wealth creator to define how assets are distributed, ensuring alignment with long-term family goals.
Family LLC or Partnership:
Provides a flexible way to pool and manage family investments. A family LLC can lend to individual members, invest in business ventures, and centralize oversight. It also offers liability protection and governance benefits … especially when paired with a family trust.
Family Loan Committee:
A committee made up of family members—often across generations—that reviews loan applications, sets repayment terms, and tracks progress. This structure builds transparency and accountability, ensuring that lending decisions reflect shared values and strategic priorities.
Family Constitution or Charter:
A non-binding but influential document that outlines your family’s mission, values, lending criteria, and expectations for participation. It helps reduce ambiguity, helps guide decision-making, and gives heirs a framework for resolving disputes or misunderstandings.
Five Benefits Of A Family Bank Strategy
Promotes financial literacy and responsibility.
Instead of giving funds with no strings attached, a family bank strategy requires heirs to apply for and justify the use of funds. This builds skills in budgeting, planning, and financial communication, which are critically important for long-term stewardship.
Keeps wealth circulating within the family.
Loans are repaid to the family entity rather than lost through consumption or outside debt. This recycling of capital means each generation can benefit from and contribute back to the family’s financial ecosystem.
Replaces entitlement with earned opportunity.
By tying funding to clear goals and expectations, the strategy discourages a “trust fund mentality.” Heirs must earn access to funds through proposals, participation, and accountability.
Encourages collaboration and unity.
Family members serving on loan committees or advisory boards work together to make decisions, creating shared experiences and reinforcing the family’s mission and trust in one another.
Connects money to mission, not just milestones.
Whether it’s education, business, or philanthropy, the strategy connects financial support with family values. It ensures capital serves a purpose beyond consumption—supporting long-term goals that reflect the family’s legacy.
Three Common Mistakes
- Vague or unwritten policies – Put everything in writing
- Unequal treatment (AKA “favoritism”) without transparent feedback – Consider using committees for evaluations and have a documented feedback process
- Leaving out the next generation – Involve them early, even as observers or non-voting committee members
What Are The Indicators That Now Is The Time To Start A Family Bank?
- A desire to teach, not just give.
- You worry about how your heirs will handle wealth now or in the future.
- You want to link money to purpose.
- You are informally helping family members financially or by mentoring.
- Structure and clarity would reduce stress for the more affluent family members.
- Family financial requests that are turned down create family tension.