Family Constitutions: Keeping Families on the Same Financial Page

As financial advisors, you might hear terms like Family Constitution, Family Charter, or Family Protocol. These are documents that lay out the rights, values, responsibilities, and rules for managing a family’s wealth. Essentially, a Family Constitution provides a clear plan for handling financial matters and navigating any tricky situations that might come up.

At its core, a Family Constitution is an agreement on how to manage the family’s wealth. While it’s good to refer to this document regularly, it’s especially helpful during times of family crisis.

The look and feel of a Family Constitution can vary widely. It could be as simple as a one-page list of guiding principles or as detailed as a comprehensive manuscript. Some elements it might include are:

• A family history
• A mission statement
• A set of values and beliefs
• Detailed guidelines for future wealth distribution

Effective constitutions often outline roles and responsibilities both within and outside the family, as well as rules for a family council. Some constitutions are legally binding, while others are morally binding.

It’s important to address crucial issues, assumptions, and differences of opinion before external circumstances force the discussion (like marriage, offers to buy the family business, or the death of a family member). Decisions about family businesses, farms, and heirlooms are often more complex than just distributing wealth. A Family Constitution can provide key guidelines, such as:

• Family involvement in business operations vs. external expertise
• Compensation for family members’ contributions to the business
• Balancing business growth with distributions
• Conditions for selling the business

For a Family Constitution to be successful, it’s essential to get buy-in from as many family members as possible. While the younger generation might not currently make decisions, they will soon be in charge. If senior family members present the Constitution as a done deal, it can cause more harm than good.

However, if everyone feels involved in creating the Constitution, it’s more likely to succeed. This is where your role as a financial advisor becomes pivotal. Your expertise can help guide the family through this process, ensuring the document is comprehensive and practical.

The first draft of a Family Constitution won’t be perfect. Regular family meetings should be held to discuss and refine the document. It’s also wise to review the Constitution every five to ten years, incorporating the opinions of younger family members who have reached adulthood.

A good Family Constitution includes regular meetings where the document itself is a focal point. It helps with important decision-making and conflict resolution. Any shortcomings in the Constitution will become apparent over time, allowing for adjustments before a serious crisis occurs.

If you’d like assistance preparing Family Constitutions for your clients, contact us!