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The rich form their own banks

By Judy Martel · Bankrate.com
Monday, August 12, 2013
Posted: 6 am ET

Children of the super-rich may think the family money is there for the asking, but their parents feel differently. By forming a "family bank," parents are able to invest in the next generation and give them a dose of fiscal responsibility at the same time.

Family banks are not new, but after witnessing the effects of the recession on their children and grandchildren, more families want to lend a little financial assistance, but in an arms-length transaction.

Just as with a traditional lender, family banks require borrowers to fill out formal applications and submit business plans if the money is for a startup enterprise, for example. Terms of repayment are contractually spelled out.

Family lender has different goals

Anyone who has provided a personal loan to a family member knows it's fraught with potential problems. Relationships can be strained or destroyed if the money is not repaid. That's why so many prefer to leave the lending to independent financial institutions.

But according to a report in The New York Times, families are forming banks with a very different goal from that of traditional banks, which typically lend purely for profit. They see lending versus outright giving as a more democratic way to distribute money to younger generations, and say borrowers feel more of a personal obligation to use it wisely.

They also believe that formal lending from within is "a way to invest in ideas from younger generations, provide financing when real banks may be hesitant and teach lessons about stewardship and responsibility."

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