Many clients are concerned that if something was to happen to them, what would happen to their assets, their children and their family legacy? Some lay awake wondering if their family is equipped with the right tools to manage short and long term needs once they are no longer able to. Often they will ask the same question… is having a Will and Estate Plan enough?
A Will directs where an individual’s assets may go, however, unfortunately it falls short on preparing the next generation and other family members for future roles and responsibilities. A tool that can assist here is a Family Constitution (or Family Charter).
The Family Constitution forms part of the family’s governance and Estate Plan. It is an overarching document designed to capture family purpose, values and wishes, with the aim of promoting unity and enabling the family to sensibly manage and preserve wealth for future generations. Collaborating to write a Family Charter helps family members build their understanding of the family history, purpose and existing governance structure. Put simply, it documents the common views, beliefs, plans and strategy of the family, now and into the future. Family members can refer to the Charter over time, providing a guide and framework for decision-making and dispute resolution.
Research shows that a staggering 70% of all wealth transfers fail and 90% of the time, it is caused by a combination of:
- Lack of trust
- Poor communication
- Not having a clear purpose of wealth
- The next generation not being ready
‘Preparing Heirs’, Williams and Preisser 2012
A Family Constitution is not a ‘one size fits all document’ and cannot be simply drafted in conjunction with a Will. Nor can it be a ‘set and forget’, adequate time should be spent workshopping as a family to agree the contents of the document and it should be reviewed as you would review your Wills. A Family Constitution needs to be given the time, appreciation and effort it deserves and it needs to be aligned with your Estate Plan. In addition, it is extremely important that the entire family is on board with the journey and are engaged in the process. Family wealth and relationships are complex so it is critical that the process is undertaken in a calm and planned manner, by a facilitator who is at arm’s length to the emotional dynamics of the family. Emphasis should be made on the communication and collaboration involved as a family in preparing others for their future roles and responsibilities.
We know that every family is different and so no Family Constitution will be the same, but generally it should address the following matters:
- What is the purpose of our family wealth?
- What is the history of our family and our wealth?
- What is the definition of a family member? i.e. is it bloodline only?
- What is our family purpose, what is our vision, what are our values and priorities?
- What is the Family Organisation/Structure including the Processes and Policies? i.e. the roles and responsibilities of the family members as part of the Family Council, the Investment Board, the Philanthropy Board or an Operating Business.
- What is our education policy, employment policy and dividend policy?
- Conflict Resolution and Exit Strategy
We have seen many examples of the Family Charter being unsuccessful either because it has been written by a lawyer at the same time as writing the Wills or all family members did not get involved in the process because one member of the family insisted it be created without involving the rest of the family. There was simply no preparation, communication or engagement. Remember, “Dad’s plan is not the family plan.’
Interestingly, sometimes it starts as a general conversation with the family, having regular family meetings to agree a strategy and then it evolves and the base of the Family Constitution has already started.
In some cases it might not even be the first generation that starts the process or believe they need it. We have seen examples of the next generation coming to us worried because mum and dad are still very hands on and share very little information with them, therefore, the concern is, what will happen when mum and dad are not around. They would like to understand what the succession plan is now and feel prepared to take over. The writing of a Family Constitution is a great way to start the conversation between generations.
So is your family ready?
If the answer to a majority of the below is yes then you are ready to start the process or if you have asked yourself these questions and cannot answer them, then it might be a good place to start the journey.
- Does the entire family know the family history and how the wealth was achieved?
- Have you shared with your family the values you hold as important (which you would hope to pass on to next generation)? What about your vision for the future?
- Does your family meet regularly to discuss topics of importance to the family?
- Do all family members have the option of participating in the management of the wealth?
- Are the next generation encouraged to participate in philanthropic decisions?
- Has your family written a statement that articulates the overall purpose of the family’s wealth and agreed on priorities?
- Are all family members encouraged to freely express an interest or passion for a future family role?
- Do family members easily communicate with one another including spouses on topics that may be viewed as uncomfortable?
- Do family members typically live up to the commitments that they set or give to one another?