I briefly mentioned my goal of leaving a financial legacy in the About Me section of this website. The term financial legacy has multiple definitions. To me a financial legacy is a creating a family bank with dividends. If setup properly, a family bank will benefit you in life and give for your family long after you pass away. The concept of a family bank is not new, in fact, wealthy families have created family banks throughout history. For the wealthy, family banks serve two purposes; tax avoidance and ensuring their offspring are wealthy for generations to come. The truth is anyone can create a family bank and leave a financial legacy.
The first step is to know your end goal. Why do you want to create a family bank? Maybe you want to help your offspring, or leave a continuous funding source for public institutions, art galleries, museums; or all the above. You can truly leave your financial mark on this world and help people, even after your death.
Most financial planners recommend buying whole life insurance to build a family bank. For inactive investors I am a fan of this approach. But for actively engaged investors I think there is a better investment vehicle. I would rather buy term life insurance, for pennies on the dollar, and invest my money into publicly traded companies offering dividends. My plan is to live modestly and retire on my 401k, Investment Hunting Portfolio, and supplement later in life with Social Security. For the purpose of this post I am only addressing my dividend portfolio. I view my portfolio as evergreen. I can harvest my portfolio every growing season while never hurting the investment. By establishing a living trust, my investment strategy will live on after my death. The great thing about living trusts is that they come with rules added by their creator. These rules make sure the trust is managed properly during its lifetime. Don’t worry, I am not talking about leaving money for spoiled offspring to blow. I am not in the business of building a generation of trust fund babies. I am however, in the business of leaving options to my family that I never had. Those options will be managed by a board of directors who make sure rules I put in place are followed.
When I die, my monthly dividends will be in the $1,000s. This is enough money to allow for “keeping it in the family.” Why would my grandson get a bank loan for a car, home, college and pay a ton of interest to a bank when his family bank can loan him the money? My family bank will not be free money. My offspring will learn the value of harvesting. My grandson will still pay principal and interest on his loans, but he is essentially paying himself and his offspring back. As the founder of my living trust, I have the right to add variables to my lending strategy. College tuition for example is something I would never deny my offspring. Loans for college could come with loan forgiveness. If my offspring earns a college degree and maintains a 3.5 GPA, my trust would forgive the loan balance. If a family member wanted to start a business, they would need to create a business plan and have it approved by my appointed board of directors.
I love the concept of a well planned trust with a family bank. If leaving a financial legacy is important to you as well, I suggest reaching out to you financial planner, tax accountant and an attorney for advice. Do your homework and find an attorney and accountant who are like-minded and share your vision. To learn more, read this overview of family banks.
Does this sound too good to be true, well it partially is. Investments have different tax rules than life insurance policies. My family will need to sell some stocks to cover taxable events. However, my portfolio will be large enough that it can re-grow in rapid succession. Imagine the size of this asset if multiple generations continued growing and harvesting.
Disclaimer – I am not a financial planner, accountant, or attorney. My blog addresses the things I am doing to reach financial independence and should not be used as your financial advice. Wills and trust are complex and have tax implications. Please seek the advice of legal counsel before pursuing a family bank.