What is a Family Constitution?
A family constitution is an aspirational document that can evolve over time. While not a contractual document here in Australia, a family constitution is a set of guiding principles for how to manage and enhance existing and future wealth across generations.
We assist families with their family constitution in conjunction with estate planning. Estate planning, particularly where there are businesses involved, often focuses on the creation, retention and enhancement of family wealth through a bloodline. When a family operates a business in which some or all of the children have started to work, this is typically when a family constitution springs into focus.
What should effective Family Constitutions cover?
Generally speaking, a family constitution should answer these key questions:
- What are our guiding principles?
- What is the history of our family wealth?
- What is the purpose of our family wealth?
- What are we looking to achieve as a family?
- Who do we consider part of our family structure?
A family constitution may also answer questions about longer-term goals, such as what the family is looking to achieve in the next and following generations. It can also include provisions for specific roles, rights and responsibilities within the family businesses and investments, including details of how transitions are to be managed effectively.
You may wish to ensure that within your family:
- There is a continued focus on education;
- Business opportunities are to continue to be created through the family;
- Everyone will always have somewhere to live and maintain a good standard of living;
- If someone wishes to work within the business, they will require certain experience, training and/or qualifications;
- If someone no longer wishes to be active in the family business, or wishes to operate independently rather than as a unit, how that is to be managed; and
- There are to be insurance requirements for specific role holders within the family
By detailing principles like these, if there is ever any issue or confusion about what to do, the family can refer to the family constitution and be reminded of what is important to the family and to use it to govern their decision-making.
In some families it can be wise to have family members form an advisory board, with the support or inclusion of external advisors if they wish, to collectively contribute to all decision-making relating to family wealth. If an advisory board is used, then governing principles for how the board is to operate will need to be detailed. While not an exhaustive list, this may include provisions for:
- The process for nomination, assessment and appointment of board members
- The role and powers of the board
- Rules about the composition of the board
- A board Code of Conduct; and
- Rules for how often the board is to meet across a year
What happens if family members disagree?
An effective family constitution will also include a dispute resolution mechanism. That is, guiding principles for how to get to a resolution in the event family members are in disagreement about any element that affects the management, retention or enhancement of family wealth.
Who is a Family Constitution ideal for?
A family constitution is ideal when there is a business, enterprise or significant assets held in a family business entity or trusts. Usually, the patriarchs and/or matriarchs that seek our support with this process have concerns about not having a set of guidelines in place for their family to follow now and into the future.
It is also helpful where families own multiple entities. Typically, each entity has its own governing documentation; however, the family constitution can be one document that can be used as the governing document for all entities, eliminating potential inconsistencies.
A will in isolation documents who will be given what upon the death of the will maker. A family constitution can ensure that family wealth can be maintained and enhanced, with tailored guiding principles designed to aid a smooth transition for incoming and future generations.
Who should be involved in shaping a Family Constitution?
The more detailed your family constitution is, the more you should consider involving family members in the process. The key to having your family follow the family constitution across generations is to ensure that there is engagement from all stakeholders from the very beginning.
As part of this process of involving family members, it is vital to identify the elements that can prove to be contentious at times. In our work, we identify what can create issues later and can guide you as to when family input may be beneficial.
When complete, the next step is to ensure that all family members are aware of the family constitution, and its contents. Over time that will involve educating new generations as well as updating the Constitution itself. While the family values will still be at its core, it will need to be updated as family wealth, investment strategies and financial markets evolve.
Family constitutions have varying degrees of comprehensiveness. The degree of detail you wish to include will be influenced by your objectives. Involving an independent third party with a deep understanding of business and family dynamics, and complex financial structures is the very first step to ensure that you can be alert to gaps or risks to your family constitution. With all elements taken into account, you have the ability to finalise your family constitution, confident that your legacy can be lasting, as intended.
Phil Davey and the DDCS Lawyers team have a vast knowledge of family constitutions and business and complex financial structures. We specialise in identifying suitable provisions for your family constitution, tailored to family circumstances. To discuss your needs, phone our team on (02) 62127600 or fill in the contact us form, and our team will be in touch.