Family constitution: mere trend or meaningful approach to the regulation of family affairs?

Does your family have a constitution yet? It does not? You may be asking yourself what the purpose and need for such a family constitution could be since now, you can handle family matters without any grand-looking documents and formalities. But is that really the case? We would like to briefly introduce the concept of the family constitution, because nowadays we are encountering this topic with our clients on regular basis, not only in connection with the intergenerational transfer of business and other activities.

A family constitution is a document that serves to consolidate and clarify family relationships and values. The aim of the family constitution is to establish the successful management of family assets for future generations. However pretentious this definition may seem to you (and you would not be the only one), we can confirm from our experience that the true purpose of a family constitution can best be understood when you try to write one for your family.

What can be included in the constitution?

In the course of preparing a family constitution, you will organise your thoughts, clarify principles and values, and at the same time, you will generally reflect on the direction of the family which might often lead you to new ideas about how to approach the management of family assets in a comprehensive way. A family constitution should also help to ensure that the interests of individual family members are safeguarded, and principles are laid down to resolve any conflicts. You will surely agree that for the successful and long-lasting functioning of the family estate, and in fact of the family as such, it is important to set out the basic principles and rules of the family system – these principles and rules may govern, for example, rules on communication, the treatment of property, the resolution of disputes, the creation and establishment of family bodies and their possible links with the bodies of family companies and their holding structures. Such principles may also be formulated in accordance with the cultural, religious, and moral values of the family.

It can be legitimately argued that the interests of individual family members, possible conflicts, or questions about the direction of the family business can be resolved (authoritatively or by mutual agreement) during a Sunday family lunch, and it is not necessary to have principles and rules for proceeding in such situations. Yes, for the most part, you are certainly right. However, we always counter by saying that it is important to look at the family as a whole with a critical distance not only from oneself, but especially with the benefit of hindsight. Today, such a family typically includes the father, mother or the founding spouses, their offspring, who often already participate in the family business, and their possible descendants, at most finishing their university studies with (un)clear ideas about their future. The political development of the second half of the 20th century made it virtually impossible for families with a longer entrepreneurial tradition to exist in the present-day Czech Republic as well as other countries. It is important to realise that over time your family will grow and quite understandably more and more family members may participate in family companies, use family assets, and become involved in the management of the family as a whole, for example long after the father, mother or the founding spouses are no longer alive. It is thanks to the family constitution that the founders can pass on their wishes, ideas, and rules concerning not only the family functioning itself, but also the fate of the assets and business that they themselves created, to the future generations.

The family constitution in a nutshell

  • A non-legally binding document with an important interpretative function.
  • It allows for a comprehensive setting-up of the rules and functioning of the family and family business.
  • It is considered to be an effective tool for family assets management and intergenerational transfer.
  • Its very drafting up can provide a new perspective on the current state and future arrangement of family relations.
  • It represents an expression of the responsible approach of the founder(s), who can imbue it with their own ideas and values for future generations.

Not legally binding, but helpful in ambiguous situations

The family constitution is by nature confidential and primarily intended for family members only. It should be noted that it is a document that is not legally binding and in the event of a violation of individual provisions of the family constitution, the violation is not legally enforceable. What, then, is its function and purpose? First and foremost, of course, it is purely symbolic, in that its very existence and the clear drafting of the principles and rules of family coexistence might have a very authoritative effect on the family members and provide a clear basis for further actions. In our experience, however, a family constitution can also have a very strong interpretative function. By drawing up the constitution, family members define their ideas about family values and the functioning of the family business which can then circulate in the family for generations. Thus, the family constitution will indicate what was intended from the outset for the family business and assets and how its management should be approached.

The family constitution can also be a very effective interpretive guide for (not only judicial) interpretation of wills, statutes of trusts and endowment funds, or agreements of partners or shareholders of a family company. In the case of holding company structures, it may be possible to consider linking the family constitution to traditional corporate documents such as articles of association or bylaws, thereby linking the provisions of the family constitution to the internal structure of the holding company and among its members.

In some countries, the legislation confers legally binding effect on the family constitution. For example, in Germany, a family constitution can be legally binding if it is drawn up by a notary and meets certain requirements. In Western European countries, family constitutions are becoming increasingly popular and vital. Indeed, it can also be pointed out that the most influential families in modern history, such as the Rockefeller, Vanderbilt, Porsche, and Arnault families, have long had family constitutions and statutes and consider them, together with trust and the common pursuit of prosperity, to be the cornerstone of the entire family establishment. In the context of our experience with the establishment of trust and endowment funds for family purposes, including the restructuring of private assets, we firmly believe that the family constitution will become a common document in the regulation of family relations and setting the course for Czech and Slovak families for future generations.

The purpose of a family constitution is to establish rules that can then be reflected in the status of a family trust or endowment fund as appropriate tools for managing family wealth and preserving it for future generations. In the long term, it may not be possible to run or pass on a particular part of a business or family firm for a variety of reasons, but what can be passed on are skills in caring for the family assets built up and an approach to dealing with them in a meaningful way.

If you are interested in the topic of the family constitution and are considering adjusting your family setup, we will be happy to assist you in this matter. We know from experience that simple feedback on the current situation and asking the right questions can move you further along in your family arrangement considerations and help you gain an outside perspective on our most precious relationships.

Arranging family property through trusts or endowment funds

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