Can I transfer ms funds to my bank

No. One funds are on your account, all you can do with them is use them to purchase content.

Oh i thought you meant rewards points as funds because you said family account. The connection is that in a family account, points are transferrable within family hence "funds". If you're trying to add funds, easiest way to buy giftcard and gift it to them ao they can add it to their account. Otherwise if its just a bank to bank transfer, then you'd have to contact the bank obviously.

Yes and i don't see the funds in my account, but i see on my bankaccount that is has been transfered to MS.

Depending on how you paid they place holds on your funds without technically charging you. I too ordered the XBSX from MS store on launch but my funds in my bank are still processing till they ship. Its stupid

My son accidently set up a new MS account in our family domain. The account is not active but when asked to provide him funds I accidenlty put the funds in this dead account instead of his active account. How do I transfer the funds out of the account
or have MS send them back to my Paypal account?

Paypal would be the simplest option. Not being able to transfer between accounts is like a security feature in case of a account is over taken by a 3rd party