Family Constitution and Family Bylaws

July 20th, 2015

Family bylaws and family constitutions are very unique tools for wealth planning and family governance. They aren’t for everyone, though. In fact, some might feel they’re unnecessarily tedious. However, if you’re faced with extraordinary circumstances, they aren’t just helpful but vital for safeguarding your family members and their futures.

Circumstances Where They Are Needed

Circumstances which are grave enough for you to consider establishing a family constitution or bylaws could result from a variety of situations. They could be of a financial nature or a debilitating state of affairs of sufficient severity, to persuade family members to take extreme steps for securing the family’s future.

Here are a few situations where family constitutions and bylaws can prove invaluable:

  • Family member/s are prone to extreme profligacy or an overindulgent lifestyle
  • External influences, like cults or clans are putting your family’s future at risk
  • Addictions or drug/substance abuse that could jeopardize your family’s finances
  • Your dependents lack initiative in growing your wealth and are overwhelmingly dependent on it
  • Family members with financial control habitually make poor financial judgments which could have severe consequences
  • Other conditions that cause you to doubt your family’s ability to efficiently manage their state of affairs

Family constitutions and bylaws alone are typically insufficient to safeguard your family. However, when they are reinforced by other safeguards, notably some sorts of trusts, they can be extremely powerful means for ensuring your family’s future is secure.

The Role of Independent Financial Advisors

Experienced independent financial advisors are a great asset for family governance, bringing a professional perspective and mature, sophisticated viewpoint that can only come with experience. As a group or team, they can often out-vote members participating in financial decisions that are particularly concerning for senior family members.

Apart from that, they can play other vital roles in planning and ensuring the longevity of your family’s wealth, like:

  • Independent financial advisors can utilize their know-how and experience to assist you in setting up wealth planning structures
  • They can serve as trustees to help ensure the family’s wealth is not depleted by reckless spending or poor judgment calls
  • As a more involved role, they may function as family office executives, or even as directors if you have a family foundation
  • Senior members of the family, as well as other concerned members, can benefit from their vast knowledge by seeking financial and legal counsel

The Role of Family Governance Documents

Family governance documents may be useful in certain circumstances, but the downside is that they may create additional concerns about litigations in the future. Fairly often, senior members of the family worry that youngsters could at some point use litigation, or the threat of filing suit, to put pressure on guardians and trustees to act in a manner that benefits them.

In extreme situations, there could be concerns about litigation being used to attack, weaken or even completely destroy the measures and protected devices implemented to safeguard and limit risks to finances. Here’s how family governance documents can be useful:

  • The documents can be structured to include provisions that commit family members against exculpating and indemnifying fiduciaries
  • Clauses and provisions can be included, which prevent members from challenging fiduciary acts if they were taken in good faith
  • They can include provisions for controls over dissemination of information to satisfy some requirements for disclosure (notably for initiating applicable statutes of limitations)
  • They encourage regular approval and accounting of transactions, acts, etc. by fiduciaries

Family governance documents can also require or advise younger members to pay attorney’s fees incurred by them, but not for funding litigation. This may seem counterintuitive, but it ensures that they have independent counsel available to them should they disapprove or not consent to fiduciary decisions, acts, transactions etc. This increases the likelihood of their approval or consent being enforceable.

Generally, the family constitution only expresses a general philosophy and the principles of the family governance instruments that you choose to implement. The functioning, especially the actual wealth management and workings of the structure, are more specifically addressed by the bylaws. For the most part, it is the size of your family and the members that decide how useful family constitutions and bylaws will be, and if they are necessary.

pdf-icon Download Family Constitution Specimen

pdf-icon Download Family Bylaws Specimen