What Is a Family Bank? The Loan Nobody Writes Down

A family bank is a formal practice, not a chartered institution: a family lends its own capital to its own members — for a house, a degree, a first venture — on written terms. An amount, an interest rate, a repayment schedule, and a scheduled conversation about how it is going. The money still flows. What changes is that everyone can see the rules.

The idea has a pedigree. James E. Hughes Jr., whose Family Wealth: Keeping It in the Family¹ shaped a generation of family-office thinking, argued that a family which lends with some discipline — a plan required, a term agreed, a record kept — teaches the next generation to be borrowers and stewards rather than recipients. Most families never get that far. The first request arrives at a kitchen table, a cheque follows, nothing is written down, and three years later a sibling asks why their own request was handled differently.

The questions below are the ones worth settling before that first cheque — put to the structure, to the advisor helping build it, and to the family itself. They are not a substitute for counsel in the relevant jurisdiction.

Is this a loan, a gift, or an advance on inheritance — and does the paper agree?

A good answer names one of the three and produces a document that says the same thing. If it is a loan, there is a promissory note — the plain written promise stating who owes what, at what rate, by when — signed before the money moves, with funds transferred by bank so a record exists. If it is a gift, it is recorded as one. If it is an advance against a future inheritance, the estate plan says so in writing, and the same treatment applies to every branch.

A weak answer is "we'll sort that out later," or the more common version: "it's a loan, but obviously we won't chase it." That second phrase is a gift wearing a loan's clothing. Tax authorities and courts generally start from the assumption that money moving inside a family is a gift until the family can show it behaved like debt — a note, interest charged, payments actually made, a lender who expected repayment.

Ambiguity is never read as neutral. The borrower, and every sibling who did not borrow, reads it as a verdict on who is trusted and who is being rescued. Written terms remove the interpretation.

Who may borrow, and what is the money actually for?

A good answer is a policy written before anyone is in the room asking. It names who is eligible and what the capital is for. Hughes distinguished two purposes: investment loans, meant to grow the family's financial capital through a member's enterprise, and enhancement loans, meant to grow the member — education, training, a first home. Both require an application: purpose, amount, a repayment plan, and for a venture the kind of short memo an outside lender would expect. Three honest pages beat thirty decorative ones.

A weak answer is "the parents will know when it is right." That sentence cannot be said out loud to the person told no. A policy that never states what is out — ordinary living costs, a speculative punt, a bailout of a prior loan — has not actually decided anything.

A family bank that cannot say no is an allowance with better stationery. One that says no without a rule is a court.

Why charge interest when the family could charge nothing?

A good answer points to an outside reference rather than a feeling. In the United States the tax authorities publish each month a minimum interest rate for private loans, in three bands by length — up to three years, more than three and up to nine, and longer.² For a fixed-term loan, the rate in effect in the month the money goes out can be locked for the life of the loan.² A family that pegs to that published minimum, or to a stated margin above it, can show every borrower the same rule.

A weak answer is "we're family, so the rate is zero." Zero is not free. Where a loan charges less than the published minimum, the tax code can treat the missing interest as though the lender had gifted it and the borrower had paid it back — so the lender may owe tax on interest never received, and the shortfall counts as a gift.² There are carve-outs for genuinely small loans; a house or a business is not small.

Interest also sets a price on shared capital. Interest never charged is a subsidy one branch received and the others never saw itemised.

Who decides, and can the reasons be given to the person told no?

A good answer names a process: a small committee — often a mix of family members and one outside advisor — that reviews requests against the written criteria and gives reasons. The reasons need not be long. They must be the same reasons any other member would have received.

A weak answer is that one parent decides privately and everyone else learns the outcome afterwards. This is the default everywhere, and it works perfectly until the first refusal, at which point it stops working permanently.

A decision that can be explained outlives the person who made it. One that cannot becomes a grievance inherited alongside the money.

What happens the first time a payment is missed?

A good answer was written before the loan was made: a missed payment triggers a meeting on a set date — not a penalty, and not silence. The family may extend the term, reduce the payment, or pause it, in writing. If it chooses to forgive part or all of the balance, that forgiveness is named as the gift it has become, reported where gifts must be reported, and entered in the ledger so other branches can see it.

A weak answer is to assume the question will not arise. It will; a first venture failing is close to the expected case. What a family cannot do is decide on day one never to collect — a loan made with forgiveness already intended was a gift with a due date.

Failure a family can describe out loud is just business. Failure nobody will name looks exactly like favouritism.

Who keeps the ledger, and who is allowed to read it?

A good answer is a named person — a family-office administrator or an outside accountant — maintaining one simple register: borrower, purpose, amount, rate, term, payments made, balance, any forgiveness. Any adult member may read it. Repaid principal and interest return to a visible pool available for the next member's house or idea, so the family can watch the pool grow or shrink over the years.

A weak answer is that the terms live in a parent's memory and repayments disappear into a general account. Memory is where the loan nobody wrote down goes to become a dispute, and the child who repaid in full is left with no evidence that it counted.

Transparency here is not surveillance. It is how siblings confirm, without having to ask, that the same rules applied to them.

Does the balance come off an inheritance, or sit on top of it?

A good answer is settled before the first cheque and applied identically to every borrower. An outstanding balance might be deducted from that branch's eventual share, left as a debt the estate collects, or forgiven at death and treated then as a gift. Whichever it is, the estate plan says so.

A weak answer is "we'll make it fair at the end." Fairness reconstructed from memory after a death is precisely where families end up in front of lawyers. One child borrowed for a house and repaid it; another borrowed and did not. If neither fact is in the file, the will cannot see them.

An untracked loan is a second, invisible inheritance. Families spend real effort deciding whether to keep wealth together or split it; informal transfers quietly do that splitting without a vote.

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Used before the first request, this list is a policy. Used afterwards, it is a diagnosis of which facts are missing and which conversations have been postponed. Families in this position rarely need the answers perfect at the outset — they need the first request handled in a way the second can be measured against. Write the terms down, keep them the same for everyone, and put the conversation in the diary.