When it comes to successful families and multiple generations, a significant question is…
Why should they stay together?
More specifically…
Why should they co-mingle their funds?
As wealthy families expand over time, one of the most significant issues is keeping them and their shared capital together. Sometimes the monies remain commingled because of legal structures such as multigenerational trusts that force the issue. However, even when such trusts are in place when family members are truly displeased, they may very well resort to legal action to break the trusts or other structures.
The ability to achieve cohesion within the family can be very effective in keeping the family together and aligned and fostering the ability to maintain or grow the family’s wealth. To help avoid inter-family conflicts, wealthy families are approaching this objective in several ways, including developing a family constitution.
What is A Family Constitution?
A family constitution can be an effective tool for dodging serious conflicts and facilitating agreement among family members. It can help family members address their concerns and preferences constructively. Family constitutions also often lay out the future directions and sometimes the actions the family will take.
The family constitution is a written document that details a consensus the family members have around core principles, their values and the long-term intent of the family. Very importantly, the family constitution describes how the family deals with disagreements. The aim is to specify ways the family can meaningfully address the many points of contention they are likely to face.
One of the family constitution’s primary aims is to prevent conflicts that can tear the family apart and diminish the family’s fortune. The goal is to detail how the family will deal with dissent. Because the methods for managing conflict are well documented, a family constitution can effectively reduce the possibility of altercations. The overarching goal is to avoid disputes by promoting communication and striving for consensus among family members.
While the family constitution is a written document, it is not necessarily legal as it is not binding. It is only a set of guidelines and prescriptions that need not be adhered to. On the other hand, as a legal document tied to the family trusts or integrated into the bylaws of corporate structures such as the family business or the family office, it can force family members to adhere to the processes therein.
Developing A Family Constitution
Drafting a family constitution requires openness and cooperation among family members. One of the most important aims for wealthy families is to address the family’s wealth fairly. This regularly comprises all the family’s assets, such as operating businesses, properties (e.g., real estate, artwork) and invested monies. The objectives are to specify:
- How the wealth is to be used by family members
- What limitations are there on how the wealth is spent, invested and donated
- Who makes the decisions, and how are these decisions made
- How family members can provide input or impact the decision-making around how the family wealth is used and distributed
- How family members are prepared to perpetuate family values and manage the family wealth
The family constitution must be seen as a living document. Being able to modify it as circumstances change will likely be very important. For example, for a well-established multi-generational family, their family constitution written long ago said that only men were permitted to decide the family fortune. Updating the family constitution and putting women family members on an equal footing with male family members was essential to keep the family together.
In sum, a well-crafted family constitution will:
- Memorialize the family’s principles and values
- Establish checks and balances among different interests as well as ways to address conflicts and communication protocols
- Promote accountability of family members
- Ensure flexibility so the single-family office can adapt to change
- Provide disenchanted family members a viable means of exiting
While family constitutions are increasingly normative for wealthy families, they are just as effective for addressing family/family business concerns.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.
