Jeremy Cline, ‘Don’t wait until crisis strikes’, STEP Journal Plus (May 2020)Published on 14 May 2020
Jeremy Cline explains how implementing a family constitution can reduce the potential for disputes after death.
Too often, questions about the purpose of wealth and who or what processes control it only come to the fore in times of crisis, triggered by the death of the head of the family or an external bid for a business. When the pressure is on and time is of the essence, families often rush to find a quick, shorttermsolution that is, usually, imperfect. A family constitution can help to avoid such situations.
Constitutions outline guidelines and parameters to help a family make decisions about the use and investment of its wealth. Done properly, they promote unity and reduce the potential for disputes as they help people reach agreement and resolve differences.
However, before any constitution can be drawn up, a family must first agree on a purpose for its wealth. It is important not to leave this open to interpretation as views may differ, and frequently do.
This can happen in families where a business, art collection, charitable foundation, landed estate or other heritage assets are concerned and economic success is not the only consideration. In the case of a business, a constitution might articulate the reasons for a family being involved in the ongoing management or ownership, or indeed the circumstances in which a sale would be preferable.
Where there are no heritage assets, a family’s wealth may comprise a diverse portfolio of investments. Here, it can be helpful to define whether, in the future, a family expects to distribute its wealth out equally or on another basis, in which case ‘fair’ will require defining.
The process of agreeing and writing the terms of a constitution should not be a one-off event. A family may not get it right first time and learning from experience is an important takeaway. Circumstances change; younger family members grow up and mature and social mores evolve, sometimes very quickly. What was right ten years ago may not be today and so a family should revisit a constitution regularly to ensure it is still fit for purpose.
From the beginning of the constitution process, engaging people at every level of the family is crucial to ensure their buy-in. A successful ultimate outcome is more achievable and disagreements are more easily avoided by involving family members who will be affected by future decisions and can contribute meaningfully. Involving younger family members early, even if only to observe meetings initially, will help them prepare for when they become part of the decision-making process.
Assisting decision making
A family constitution provides the criteria against which to judge the merits of a particular course of action. It helps to answer questions as to whether it is consistent with the stated purpose of the family. If the answer is ‘no’, the family can either accept that it is not the right decision or agree why it can be justified by changed or unforeseen circumstances.
In this way, the constitution provides a means by which to challenge whether something that has always been done in a particular way should continue to be done so. It is a vehicle for healthy, ongoing debate. It is particularly valuable in family dynamics where the younger generation defers to their seniors, or where subtle differences need to be aired to bring generations together.
If a family starts its discussions early on they can head off trouble further down the line when emotions are more likely to be running high. Facilitated where necessary by an external advisor, families can take time to work out where differences lie and agree a common approach. If they cannot agree, they will at least get a better understanding of each other’s point of view, which may help take the heat out of future differences.
Additionally, a family will find it easier to discuss and agree points of principle before they become personal. If, for example, a family has already agreed the circumstances under which it would be prepared to sell a family business, those involved will have a much clearer idea of what to do when it receives an unsolicited bid from a prospective buyer.
The constitution provides a record to remind family members of that has been agreed. If a family’s purpose is its direction, the constitution provides it with the means to stay on course and promote family harmony in the process.
The views expressed in the STEP Journal and Trust Quarterly Review are not necessarily those of STEP.
Read more articles by Jeremy.