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We, the Family: The Benefits of a Family Constitution

Wealthy families can serve many dissenting interests by establishing a family constitution

Originally published
Originally published: 9/1/2022

Wealth and family can be a tricky mix. Affluence can help families achieve great things and realize their shared vision, of course. But it also can create resentments and rifts that could potentially damage a family’s financial position and cause estrangement among family members.

What’s more, as wealthy families grow and expand over time, one big issue is keeping them and their shared capital together. Unfortunately, sometimes the wealth remains comingled because of legal structures, such as in the case of multigenerational trusts. However, family members who feel wronged in some way may take legal action to try to break such trusts—creating still greater family disharmony and possibly jeopardizing the family’s bottom line.

To avoid these and similar outcomes, consider creating a formal family constitution to help build and encourage familial harmony. We have seen much ultra-high net worth (net worth of $500 million or more) families take this step, with positive results.

Here’s a look at family constitutions –  what they are, what they do, and how to create one with your own family.

Facilitating Family Harmony

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. Often, family constitutions also lay out the future direction and actions the family intends to take.

One of the key goals of a family constitution is to prevent family conflicts that can tear families apart and diminish fortunes. The goal is to detail how the family will deal with dissent. When the specific methods for managing and dealing with family conflict are well documented and described, a family can potentially be very effective at reducing infighting. The overarching goal is to avoid conflict by promoting communication and striving for consensus among family members around their core principles, values, and long-term intentions.

Family constitutions recognize that there is contentiousness in nearly all families. As such, they aim to spell out specific ways a family can effectively address conflicts that are almost certain to arise over time and across generations.

Important: While the family constitution is a written document, it is only a set of guidelines and prescriptions. It is not, in most cases, a legal and binding document.

A family constitution should, among other things, help your family equitably address issues around its wealth—which might include assets such as an operating business and properties (real estate, art) as well as invested wealth and other savings.

Specifically, a constitution should specify:

    •    How family members should use the wealth

    •    The limitations on how the wealth is spent, invested and donated

    •    Decisions about who makes the decisions and how to arrive at them

    •    How family members should provide input or impact the decision-making around the distribution and use of the wealth

    •    The number of family members prepared to perpetuate family values and manage the family wealth

In developing a family constitution, it’s necessary to gain consensus among family members. Without broad-based agreements, no one will write the family constitution—and if it is, someone will very probably contest it. Ideally, a family should write a constitution when relationships are strong (or at least not strained), making consensus more likely. Then, all parties should be motivated to reach agreements and develop shared solutions.

In general, a family constitution will include three key sections:

    •    Who is defined as the family? As families become larger, sometimes decisions are made specifying who is family and who is not. For example, some families exclude those who marry into the family.

    •    The ideology of the family. This spells out what the family stands for, including its values and objectives.

    •    The reasons for staying together. This details the rationale for managing the joint capital and the benefits of maintaining family cohesion. Factors such as love and concern, along with financial considerations, are usually part of this section.

Important: You must view a  family constitution as a living document, not a static “one and done” agreement. It will likely be essential to modify the constitution over time as family circumstances evolve.

Cooperation from Family

Gaining consensus requires openness and cooperation among family members. Many wealthy families use facilitators to help them work through the relational issues and the emotions that are often attached to financial issues. We have seen that conversations around family money can get very intense, as they often overlap with family history and any acrimony that exists. Social and political differences also make conversations around family money more complicated. A neutral third-party facilitator can help keep tensions at bay and keep family members focused on agendas instead of anger.

A Family Constitution Serves Many Interests

In general, a well-crafted family constitution will accomplish several objectives:

    •    Memorialize a 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 family can adapt to change.

    •    Provide disenchanted family members with a viable means of exiting.

Best news –  even though family constitutions are a strategy often employed by the uber-rich, you don’t need millions of dollars to create one for you and yours!

Keven P. Prather is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. Call 216-592-7314, send an email to kprather@financialguide.com or visit www.TransitioNextAdvisors.com for additional information.

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