Family governance: charities, philanthropy, education and family offices

by | Sep 30, 2014

Family Governance is how families make decisions together. If they create a good system, i.e. one that includes transparency, accountability and participation—they should be able to avoid the family fights that often occur in inheritance-related disputes. The process the family follows in creating a good governance system is easy to understand but requires the commitment of all family members. By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner. This article includes “how to” create a good family governance system.

Why do wealthy families have such public fights about inheritance issues? How can they avoid them? How can creating a good family governance system help?

Charities, philanthropy, education, family offices and good Family Governance

  • Family Charities and Philanthropy. Many families are involved in charities that are important to the family. Sometimes these are areas of concern that pull the family together; sometimes these are actual operating family charities. These can also be included in a Family Constitution. Some examples include:
    • Agreeing on annual grants from the family charity to direct needs
    • Creating and supporting an orphanage, a business school, a mosque, etc.
    • Working through “RFP”s (request for proposals) to ask direct charities what they would do if they received a grant of a specific amount.
    • Creating a “younger generation” group that would be authorized to agree on and distribute a certain amount each year.
    • Include an investment committee that would provide oversight to ensure that the investment funds being held for charity would include restrictions on the permitted investments that would be aligned with the family’s values.
  • Family Education Oversight. In looking ahead to the future many families decide that the quality of education of all of the young family members will be a critical factor in the long-term success of the family. Those families have included in the Family Constitution an obligation to oversee the education of all family members. Some create specific education modules that are designed to make the younger family members future owners with a strong knowledge base in the areas of concern to the family (this could be only investment skills or could include an understanding of the family business.)
  • Creation and Operation of one or more Offshore Trusts. Many families decide that they want to separate out some “safety” amount of the family wealth to set aside for any unforeseen needs of the family. A trust is often the ideal arrangement to use, and to diversify any economic or political risks, these trusts are usually set up in an off-shore jurisdiction. The terms of the trust can usually be written to cover any of the specific needs the family wants to provide for. For example, many families are concerned about potential uninsured catastrophic health care costs. Sometimes the trust is to be available for starting a business or buying a home.
  • Creation of a Private Trust Company. Whenever a family has a substantial number of trusts the issue of selecting the right trustee (or trustees) is often difficult. Several states in the United States have passed very friendly laws for families to create their own trust companies. Those trust companies can then serve as trustee of the family trusts (and the family owns the trust company.) In some cases the family trust company will partner with a large institution to provide the back office administrative and regulatory services. Several off-shore jurisdictions also have laws that welcome private trust companies.
  • Establishing and Operating a Private Family Office. When a family decides it has needs that justify hiring dedicated staff employees to serve those needs, it often decides to create its own “family office.” The provisions about the family office would be very much tailored to the needs of the individual family. They might include:
    • Individual budget reviews
    • Payment of all bills
    • Hiring and supervising household staff
    • Maintaining additional homes, yachts, aircraft, etc.
    • Curating any special collections
    • Obtaining appropriate risk coverage
    • Putting in place emergency provisions (including kidnap protocols)
    • Coordinating trusts and wills
    • Overseeing the operation of any family charities
    • Ensuring that appropriate tax planning is always in place
    • Overseeing the investment of liquid portfolios (in some cases this is the only function of the family office, in which case they are more accurately referred to as private investment firms.)
  • Family Venture Funds Most families received the family wealth historically from an entrepreneurial business venture. With a concerned eye on the negative “shirtsleeves to shirtsleeves in three generations” proverb, many families are working proactively to instill and encourage that original entrepreneurial spirit. One way to do that is to create a Family Venture Fund, which might include the following:
    • A fund from the family wealth is set aside to be used for new entrepreneurial projects.
    • A family member would present a proposal, with a complete business plan, to the committee in charge of approving proposals.
    • The approval committee could include a non-family member with experience in the particular field involved in a proposal.
    • The committee could require a pay-back schedule.
    • The funding could be as an ownership investment, a loan, or a gift.
    • If it is funded as an ownership interest, the family will have one more common asset to tie them together.
    • On-going monitoring is usually included (part of “accountability”).
  • Annual Family Gatherings. Finally, for the family to stay strong and connected to each other, they need to be with each other. Most families who work on family governance include a provision for annual gatherings. The annual gatherings can include:
    • Celebrations of family milestones (anniversaries, graduations, public recognition, etc.)
    • Fun team-building activities (river rafting, mountain climbing, camping, group cooking, fishing, etc.)
    • Educational programs, about the family business or investment topics or professional skills building
    • Reports on the operation of the family business, family investments and any family charities.
    • Family stories and family history presentations
    • Creation of a family history book
    • Talent shows by family members

How can family a succeed?

• By creating a tailored family governance system.
• Family governance can take many forms—go ahead and be creative.
• The key is to include and respect all family members in creating a system for family decisions.
• With “transparency”, “accountability” and “participation” a family’s governance system should result in multi-generational success and continuation. (end of 4th article?)