If there’s one financial strategy that’s never failed me, it’s cashflow banking. I wrote about this strategy in my book What Would Billionaires Do?, but the basic premise is: start earning interest instead of paying it, cut out the middleman (the bank), and have access to your money before 59½, along with a multitude of other benefits.
You might have heard this strategy referred to as a “family bank” because it’s a way to invest in the pursuits of your heirs instead of just leaving them money. While this is an overarching strategy, at the heart of it is overfunded cash value life insurance. That’s the key to establishing a family bank and being able to avoid borrowing money from financial institutions.
I want to walk through the specifics of setting up a family bank in this article, but I’m not going to focus on the financial side as much since I cover that in my book. Instead I’m going to answer some questions I frequently get from readers who want to set up their own family bank:
-How do I go about getting my family onboard?
-Should I have a contract in place, or just a general agreement?
-Who should be able to benefit from the family bank?
Every situation is different, of course, but from my experience helping people work through this process, I’ve developed some general guidance that can help you deal with these issues.
How Do You Get Your Family Onboard?
To answer this question, I’ll start with a story. Earlier this year, I was walking the streets of Antigua when I saw a friend of mine, Pablo, driving by. He slowed down and told me through his window that his parents were reading What Would Billionaires Do? They were very excited by the ideas in the book and the prospect of establishing their own family bank with Pablo.
I share that story to say this: sometimes it’s best if the idea comes from outside the family. This provides external validation and removes the worry of shooting down a relative’s idea.
Beyond that, I’ve found that you can’t force people to change. What you can do is model the change you’d like them to make. When I was 19 years old, I started setting aside $50 a month. As my income increased, I set aside more money. When I got married, I got an overfunded cash value life insurance policy for my wife, and when we had kids, I got policies for them, too.
When I eventually sat down with my parents to discuss this idea, it took some convincing (especially with my mom), but they bought in because I’d spent years walking the walk.
So, lead by example and focus on progress, not perfection. It doesn’t matter how much money you’re putting away. What matters is that you’re putting away something.
What Pieces Do You Need to Have in Place?
Set aside the notion of contracts and agreements for a moment. Instead, I want you to focus on what I call the three family legacy rings, which are critical for starting a family bank.
The first ring is the family office. This is a concept lifted straight from the Rockefellers, who had so much wealth that they hired their own financial team that only worked for their family. A family office consists of attorneys, accountants, fiduciaries, investment advisors, and more.
The family office is a cohesive team that’s working on your family’s behalf. You don’t have to be wealthy to have access to one. At Wealth Factory, we created a virtual office that works not just with our family, but with other families that are working to create their own bank.
The second ring is the family constitution. This is a document where you spell out the most important lessons, philosophies, values, and principles that you want to share. You also create a family mission statement that points out why you’re trying to preserve, protect, and perpetuate the family’s wealth. What you include will serve as signposts for future generations.
Create this as part of your estate planning, and be sure to designate who will be responsible for instilling these values in your children if something happens to you and the other parent.
The third and final ring is the family retreat. This is the reason I was in Antigua when I saw Pablo. Over breakfast, we were going through our family mission statement together. We also signed up for a family 5K, which we ran together in February. What we’re doing is bringing our children into these conversations early in their lives and having these experiences together.
If you want your family bank to endure as long as the Rockefeller family’s bank has, the onus is on you to educate and inspire future generations so they appreciate what’s being built.
Who Should Be Included in the Family Bank?
The answer to this question is: it depends. Here’s what I can tell you from my personal experience and my experience writing my book. The Rockefeller family has somewhere between 150 and 200 family members who receive benefits from the bank. Obviously, when your family’s collective worth is in the billions, you can support quite a few people.
With my family bank, it’s me, my wife, our kids, and my parents. I didn’t include my sisters in our bank because, with siblings, it’s a little more complicated setup. I’m not saying it can’t be done, but if you’re looking to keep things simple, start with just your core family members. (And it’s worth mentioning that both my sisters used this strategy to start their own family banks!)
Knowing the best way to get family members onboard with the idea, and what is involved in the process, you can decide who to bring into the fold if you want to look beyond the core family.
Cut Out the Middleman and Become the Bank
A family bank, cashflow banking, the Rockefeller method—whatever your preferred term, the idea is the same: don’t just leave your kids and grandkids money when you die.
Instead, by utilizing overfunded cash value life insurance policies and following the overarching strategy the Rockfellers have used for generations, you can create opportunity for your heirs now, while you’re alive, and instill in them values that will keep that family bank alive, too.
Author: Garrett Gunderson
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