Posted on: March 1st, 2021
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. Sometimes the wealth remains commingled because of legal structures, such as 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—and to help build and encourage family harmony—consider creating a formal family constitution. We see many Super Rich (net worth of $500 million or more) families taking 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.
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 directions and actions the family intends to take.
One of the key goals of a family constitution is to prevent the types of 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 head off conflicts by promoting communication and striving for consensus among family members around their core principles, values and long-term intent.
Family constitutions recognize that there is contentiousness in nearly all families—and 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 that must be adhered to.
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:
In developing a family constitution, it’s necessary to gain consensus among family members. Without broad-based agreements, the family constitution will likely not even be written—and if it is, will very likely be contested. Ideally, a family constitution would be written when family relationships are strong (or at least not strained), making consensus more likely. All parties should be motivated to reach agreements and develop shared solutions.
In general, a family constitution will include three key sections:
Important: A family constitution must be seen as a living document, not a static “one and done” agreement. It will likely be important to modify the constitution over time as family circumstances evolve. Adopt a flexible approach so that, say, certain family members can be given more authority over time. That approach will encourage family harmony.
That said, we see that some family members, given the opportunity, choose to not participate in developing a family constitution. The reasons vary but often include:
Because of the possibility of family members choosing to opt out, it’s often advisable to include a methodology as to how the opt-out process operates. Unless the family constitution is a legal document that is tied into legal structures, the family members are not bound by it. They can contest whatever approach is specified and go to court if they so choose (where they may very well win).
Gaining consensus requires openness and cooperation among family members. To that end, many wealthy families use facilitators to help them work through the relational issues and the emotions that are often attached to the financial issues. We have seen that conversations around the 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 the 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.
In general, a well-crafted family constitution will accomplish several objectives:
Family constitutions have been used by the Super Rich for a long time. However, these documents can also be highly effective for a wide range of affluent families with less wealth. For example, with the burgeoning growth of virtual family offices, more and more successful individuals and families are being introduced to the best practices of the Super Rich—including developing family constitutions.
This report was prepared by, and is reprinted with permission from, VFO Inner Circle. AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.
Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.
Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures
VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
© Copyright 2021 by AES Nation, LLC. All rights reserved.
No part of this publication may be reproduced or retransmitted in any form or by any means, includ- ing, but not limited to, electronic, mechanical, photocopying, recording or any information storage retrieval system, without the prior written permission of the publisher. Unauthorized copying may subject violators to criminal penalties as well as liabilities for substantial monetary damages up to $100,000 per infringement, costs and attorneys’ fees.
This publication should not be utilized as a substitute for professional advice in specific situations. If legal, medical, accounting, financial, consulting, coaching or other professional advice is required, the services of the appropriate professional should be sought. Neither the authors nor the publisher may be held liable in any way for any interpretation or use of the information in this publication.
The authors will make recommendations for solutions for you to explore that are not our own. Any recommendation is always based on the authors’ research and experience.
The information contained herein is accurate to the best of the publisher’s and authors’ knowledge; however, the publisher and authors can accept no responsibility for the accuracy or completeness of such information or for loss or damage caused by any use thereof.
Unless otherwise noted, the source for all data cited regarding financial advisors in this report is CEG Worldwide, LLC. The source for all data cited regarding business owners and other professionals is AES Nation, LLC.
