Family Constitution: The “Operating System” for Generational Wealth
Tax Tips / Family Governance
Family Constitution: The “Operating System” for Generational Wealth
💡 Executive Summary
- Problem: 70% of wealth transfers fail by the 3rd generation. The cause is rarely taxes or investment returns—it is family conflict.
- Solution: Draft a “Family Constitution” that defines the mission, values, and rules for decision-making.
- Result: Turns a chaotic group of heirs into a disciplined “Joint Venture” focused on stewardship.
⚠️ MORAL VS. LEGAL
A Family Constitution is not typically a legally binding contract (like a Trust Deed). It is a “moral contract.” However, smart Trustees use it as the Letter of Wishes to guide their discretionary distributions.
A Family Constitution is not typically a legally binding contract (like a Trust Deed). It is a “moral contract.” However, smart Trustees use it as the Letter of Wishes to guide their discretionary distributions.
We have discussed Dynasty Trusts, Family Offices, and Tax Shelters. These are the “Hardware” of wealth. The Family Constitution is the “Software.” Without it, the hardware eventually crashes due to human error.
🧐 Core Concept: Human Capital First
The constitution shifts the focus from “How much money do we have?” to “What is the purpose of our wealth?” It sets the rules for how family members interact with the family assets.
The constitution shifts the focus from “How much money do we have?” to “What is the purpose of our wealth?” It sets the rules for how family members interact with the family assets.
Performance Simulation
Wealth Survival Rate (3 Generations)
Default (No Governance)
Only 30% Survive
Consumed by Conflict
With Constitution & Education
~80%+ Success Rate
Stewardship
Key Pillars of a Constitution
| Component | Purpose | Typical Rule Example |
|---|---|---|
| Employment Policy | Prevent Nepotism | “Family members must work 3 years outside first.” |
| Distribution Policy | Manage Expectations | “Distributions match W-2 income (Matching).” |
| Conflict Resolution | Avoid Lawsuits | “Must use Family Council mediation before court.” |
Culture eats estate planning for breakfast. The Family Constitution is your attempt to design that culture before the money destroys it.”
🔗 Related BMT Playbooks (Internal)
🛡️ The Enforcer: Family Office (Implements the Constitution) ⚖️ The Vessel: Dynasty Trust (Controlled by these rules) ✅ The Tool: Intrafamily Loans (A policy within the Constitution)🏛️ Institutional Resources (External)
📘 Harvard Business Review: Family Business Governance 🏛️ Resource: FamilyBusiness.org (Governance Guides) ⚖️ Industry Body: Family Firm Institute (FFI)
BMT designs for tax reality, not theory.