The Pros and Cons of Family Charters

It’s estimated that more than eighty-five trillion USD in wealth will be transferred to the next generation over the next 20-25 years [1]. This could be a source of concern for both the older generation passing down the wealth and for the younger generation receiving it. It becomes even more challenging when the wealth has been accumulated through years of hard work and entrepreneurship by the patriarch/matriarch and is ‘suddenly’ inherited by the younger generation through unexpected circumstances.

Wealthy families often have a strong advisory team supporting them, including family or private client lawyers, trustees and so on.  A family charter can be a vital component of discussions that evolve around the transition of wealth and family governance of assets.

This article delves into the pros and cons of implementing a family charter, providing a comprehensive understanding of its role in wealth transition and family asset governance.  

What is a family charter?

A family charter is a written document which can cover various family protocols. They are statements of intent or agreements entered into by the family members in relation to a family business. Normally they are either not legally binding, or only partly legally binding. A family charter works alongside the formal legal documents. Helping to establish the values, visions, and decision-making parameters of a family, including the principles by which the family assets are governed, and policies regarding education, marriage, investments, businesses and more. These guiding principles are especially useful for families to refer to as each charter is unique and personalised to fit specific needs of the family.  

Benefits of creating a family charter:

Protection of family assets: When considering generational wealth transfer, one key benefit of implementing a family charter is the protection of family assets from being dissipated through the generations.

Open conversations: The process of creating a family charter and discussing it with family members can be very beneficial. This process can bring up important topics which may not have otherwise been raised and, without a family charter framework in place, could potentially lead to future conflicts. These initial discussions about implementing a family charter can often take some time and are most effective when involving all generations of the family from the beginning. Ensuring everyone participates in these discussions can empower family members and help them to understand the purpose and benefits of the charter while also helping to prevent potential resistance from younger generations who may not wish to be bound by the charter if independently implemented by only the head of the family.

Useful tool for navigating family conflicts: It is sadly a common theme for trustees to be dealing with conflicting families, and these disputes can often arise when dealing with family money and family businesses. In these scenarios, a family charter can be a useful tool for families and trustees.

Family charter challenges that can also be faced:

Managing family sensitivities: Involving all family members can be hugely beneficial, but it can also have downsides. The topics under discussion are often sensitive and may resurface historical family tensions that had otherwise been avoided. In such situations, the family’s advisory team can step in to help mediate, support, and educate the family on such discussions.

Ensuring the charter remains suitable as time passes: Family charters offer many benefits. However, it’s important to ensure that the charter is revisited on a periodic basis and used by the family. It should be a living document, so consideration needs to be given to whether the document can be changed and who in the family should have the ability to make changes. It is sensible to use family annual meetings as an opportunity to review the charter and discuss any changes in views which may have arisen since the charter was originally drafted.

The impact of timing when drafting: It’s important to consider the right timing for implementing a family charter. If family protocols have already been in place but not officially documented, changing those protocols later down the line could cause conflict. For example, if a patriarch has several children and some have got married without prenuptial agreements, but then a family charter is put in place requiring pre-nups before marriage which impacts the other non-married children, this could lead to significant family conflict. Timing is also important to ensure that the charter is not rushed due to a triggering event such as the illness of a senior family member, and to ensure that there is enough time and capacity for these important discussions.

Facilitating difficult discussions: It is likely that the initial discussions regarding the implementation of a charter may cause family disagreements. However, the mere fact that you have consulted the family members and involved them in the drafting discussions can alleviate some of the tensions when conflict arises. It is also a good opportunity for trustees to help mediate and facilitate these discussions, which can, in turn, help to build the trustees relationship with the younger generations. This relationship may not have historically been as strong as relationships with senior family members.

Summary

A family charter is a personalised document that outlines family values and decision-making parameters and is crucial for managing generational wealth transfer as it initiates important discussions, prevents future conflicts, and protects family assets. Trustees play a vital role in mediating these sensitive discussions, building relationships with all generations, and ensuring the effective implementation of the charter. Just as it is the trustees' responsibility to make sound decisions, it is also the family's responsibility to consider the charter's implications. Although this process can potentially lead to conflicts, it ultimately strengthens family bonds and preserves wealth for future generations.

Our experienced team is ready to support you on this journey. For further enquiries, please contact Vicky Stables.

Reference: [1] UBS Global Wealth Report 2024

This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained within this article without obtaining specific professional advice. Please contact Equiom Group to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.