'A Family Bank' Can Serve Many Planning Purposes

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.