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Financial Planning > College Planning > Student Loan Debt

'A Family Bank' Can Serve Many Planning Purposes

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A Family Bank Can Serve

Many Planning Purposes


Most baby boomers are looking to preserve the wealth theyve built up over the course of their lives, but they also are concerned with the distribution of that wealth, according to Herbert K. Daroff of Baystate Financial Services, Boston, Mass.

“The overwhelming majority of my clients have as their primary estate planning objective, How do I protect my assets from my daughters next husband?” Daroff explains.

The second most common objective he hears is they want to make sure to leave their children enough assets so that they can pursue any kind of life they would like but not so much as to spoil them.

A strategy that Daroff uses to address both these concerns is what he refers to as a “Family Bank.”

The family bank, he explains, is a combination of a Limited Liability Corporation and a dynasty trust that holds family assets. The family bank approach gives his clients much more flexibility than a typical trust arrangement. Through the bank, individuals are motivated by the use of taking loans.

For example, in a typical trust arrangement, distributions can be made to pay for a childs education. But many clients may object to “paying for their childs third freshman year of college,” Daroff says.

To solve this problem, he explains, the family bank will make loans to the student, provided he or she maintains a certain grade point average. The student then must repay the loans before the trust makes any other discretionary distributions to the student.

“Theyre only going to get their student loans if they keep their grade point average up, and were not going to make discretionary distributions until they pay their student loans back,” he says.

Another issue the family bank addresses is the concern of an in-law ending up with family assets following a divorce.

In a typical trust arrangement, he says, a daughter can take distributions to buy a house with her new husband. The problem here is “who ends up with their home if they get divorced?” Daroff asks.

Through the family bank, the daughter can take a loan to buy a house, but instead of repaying the loan, she only makes interest payments to the trust. In the event there is a divorce, the family bank forecloses on the mortgage and then owns the house, Daroff explains.

“So, basically, the daughter still owns the house, its just not part of her divorce,” he says.

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 25, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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