What Is a Family Constitution?
Think of a family constitution as the family's "operating agreement" - a comprehensive document that outlines how the family will govern itself, particularly regarding wealth, business operations, and succession planning. Unlike a legal will or trust, which focuses on asset distribution, a family constitution addresses the broader question: How will our family work together to preserve and grow our legacy?
Family constitutions are most commonly used by:
- Multi-generational family businesses navigating succession and employment policies
- Ultra-high-net-worth families managing significant wealth across descendants
- Families with complex assets including real estate portfolios, trusts, or investments
- Philanthropic families coordinating charitable giving across generations
Why Create a Family Constitution?
Preventing the "Shirtsleeves to Shirtsleeves" Phenomenon
The old proverb warns that wealth rarely survives three generations: the first builds it, the second maintains it, and the third squanders it. Research from The Williams Group confirms this pattern, finding that 70% of wealth transfers to the next generation fail, and 90% fail by the third generation. A well-crafted family constitution directly combats this by establishing governance structures, educational requirements, and value transmission mechanisms that prepare each generation for stewardship.
What Does a Family Constitution Include?
According to the Family Firm Institute, well-structured family constitutions address both "soft" elements (values, communication) and "hard" elements (ownership, governance) to create a comprehensive framework.
While each family constitution is unique, they typically contain the following core sections:
1. Family Mission and Values
This foundational section articulates the family's core principles, purpose, and vision. It answers: What do we stand for? What legacy do we want to leave?
Example: "The Smith family is committed to integrity, education, entrepreneurship, and service. We believe wealth is a tool for creating opportunity and positive impact, not an end in itself."
2. Governance Structure
Details on how decisions are made, including:
- Family council composition and responsibilities
- Board of directors for family businesses
- Voting rights and requirements (age thresholds, eligibility criteria)
- Meeting schedules and quorum requirements
- Decision-making processes for major choices
3. Business Ownership and Employment
For families with operating businesses, this section is critical:
- Requirements for family members to work in the business (education, outside experience)
- Compensation policies—are family members paid market rates?
- Performance evaluation processes
- Succession planning framework
- Dividend and distribution policies
Example: "Family members seeking employment must obtain a bachelor's degree, work outside the business for at least three years demonstrating relevant competence, and be hired through the same process as non-family candidates."
4. Ownership Transfer Rules
How shares or assets move within the family:
- Right of first refusal requirements
- Valuation methodologies
- Transfer restrictions and approval processes
- Treatment of divorcing or deceased members
5. Participation and Membership
Who is included and what are their rights?
- Bloodline members vs. spouses/in-laws
- Age requirements for participation
- Treatment of adopted children or stepchildren
- Exit procedures for members wishing to sell their stake
6. Education and Development
Preparing the next generation through:
- Financial literacy programs
- Business mentorship opportunities
- Educational funding policies
- Leadership development pathways
7. Conflict Resolution
Mechanisms for handling disputes:
- Mediation processes
- Arbitration procedures
- Independent advisors or family office involvement
8. Philanthropy and Giving
If applicable, guidelines for:
- Charitable priorities and mission
- Funding allocation processes
- Family foundation governance
- Individual vs. collective giving
How Long Is a Family Constitution?
Family constitutions vary significantly in length depending on complexity:
- Concise versions: 5-15 pages focusing on core principles and essential governance (suitable for smaller families or those just starting)
- Comprehensive versions: 30-100+ pages with detailed policies, procedures, and appendices (common for large multi-generational families with complex businesses)
- Modular approach: A brief charter (10-20 pages) supplemented by separate policy documents that can be updated more easily
The document should be professional and clearly written (not dense legalese) so all family members can understand and engage with it.
Who Should a Family Constitution Cover?
The scope varies widely based on family structure, size and preferences:
Common Approaches:
Bloodline Only: Covers descendants of the founding generation. Spouses may participate in some activities but typically don't have voting rights or ownership stakes.
Inclusive Model: Spouses gain participation rights after marriage or after a specified period. Some families grant full equality to spouses, while others create tiered participation levels.
Extended Multi-Generational: Governs all descendants of a common ancestor, potentially covering dozens or hundreds of people across 3-5+ generations. This is common in established European or Asian family enterprises.
Nuclear Family Branches: Separate constitutions for each sibling's descendants, more common when different branches have distinct businesses or wealth.
Key Considerations:
- In-laws and spouses: Do they sign the document? Vote on decisions? Attend family council meetings?
- Age thresholds: When do children gain voting rights? (Typically 18-25)
- Geographic boundaries: Does living abroad affect participation?
- Divorced spouses: Usually exit the governance structure but may retain certain benefits for children
Is a Family Constitution Legally Binding?
Family constitutions are typically not legally binding contracts - they're moral and ethical agreements that family members commit to upholding. However, they often work alongside legally binding documents like:
- Shareholder agreements
- Operating agreements for LLCs
- Trust documents
- Buy-sell agreements
The constitution provides the framework and values, while legal documents enforce the mechanics.
Creating Your Family Constitution: The Process
Step 1: Assess Readiness
Does your family need a constitution? Consider creating one if you have:
- A family business entering second or third generation
- Significant assets requiring coordinated management
- Multiple family members involved in business decisions
- Concerns about maintaining family harmony as wealth transfers
Step 2: Gather Stakeholders
Identify who should participate in the drafting process: typically current decision-makers plus key next-generation members.
Step 3: Define Values and Mission
Start with foundational questions: What values unite us? What is our family's purpose? What legacy do we want to leave?
Step 4: Work with Advisors
Engage professionals experienced in family governance. Organizations like the National Association of Estate Planners & Councils can help you find advisors, including:
- Family business consultants
- Wealth advisors with multi-generational experience
- Estate planning attorneys
- Family therapists or psychologists (for family dynamics)
Step 5: Draft and Refine
Create initial drafts, circulate for feedback, and refine through multiple iterations. This process often takes 6-18 months.
Step 6: Ratify and Implement
Hold a family meeting where all members review and formally adopt the constitution. While signatures aren't legally required, they demonstrate commitment.
Step 7: Review and Update
Schedule regular reviews (every 3-5 years or after major family events) to ensure the constitution remains relevant.