Family Constitutions – The Rules

I have a saying that as soon as a parent passes away the children revert to how they felt when they were six years old. The rules as imposed by the parent often go out the window. Good communication between family members is vitally important when faced with business and investment decisions arising from an estate or for the longer term in a family company.

To create a formal document to govern the future decision making by the family group is optimal but often difficult to achieve. So how should you go about it and what level of documentation is required.

Firstly, if the entity that has the money and the assets is a company or a trust, the formal document governing management can be amended to accommodate the “rules” and it will be legally binding. A “family agreement” is a less formal way of achieving the goal but can be highly effective.

A  family business must make hard decisions each day to be successful and by adding a family dynamic it can be just that much harder to get a good outcome. The key to a family constitution is that the procedures are in place to enable good decision making to happen.

To have a successful business the business leaders need to adopt a strong Code of Conduct to build a brand and engage with the employees.This applies to all family members who want to be involved. On the same basis, a constitution can set out a method by which the shareholders plan to create capital and pay dividends according to sound policy. This might include retained earnings and limits on capital expenditure in any financial year, with a keen eye on the strategic growth plan for the business. These guidelines encompass communication between family members, confidentiality, dealing with employees and social media.

So how can you get there? By creating a platform for discussion and having independent advice on the process to build a skeleton of rules, great things can be achieved. Almost akin to a mediation a guiding hand can build on strengths and eliminate conflict by having a strong focus on shared benefits. To build harmony the shareholders need to accept that there must be a sensible way to resolve conflicts built into the rules. This might include regular meetings and agenda setting to identify areas of potential conflict, as well as acceptance of majority voting decisions on some matters, whilst reserving the right for a unanimous vote on others. A great start is to include an independent advisory board who can add professional skill to the culture of decision making.

The single driver is to ensure that the strategic plan as agreed from the outset is and remains the focus of the group. Profit is not always king but an important element of any measure of success. With profit comes choices and the ability to accommodate a wider set of goals. A sustainable business over the generations is a major milestone and having clear conflict resolution methods will generally enhance this position.

Life teaches us that there is always an end to things and planning for an exit by all or by one, is an essential part of the strategy. By getting agreement on a fair and sensible solution in times where an exit is unplanned or must happen for the good of the business, it is more likely all parties will benefit in maintaining capital value and profitability.

It is extremely challenging at times when family members want to or need t transition out of the business. A Family Constitution can set a framework for stepping through this succession process to ensure fair value for the leaver and for the continuing proprietors.Education, key performance indicators and philanthropic measures can all be built into a family Agreement to enable clear goals as well as being a dynamic process ope to change. The aim should always be for continual improvement. Ask us how we can create your Family Constitution today!

International Update

International Tax Changes

I am constantly intrigued with the tax changes in other jurisdictions around the world. As a member of the Society of Trust and estate Lawyers we see a number of administrations that cross international borders including trusts controlled by resident Australian taxpayers.


Take a look at some of the recent changes of disclosure in member countries to the Hague Conventions on tax and succession.

FRANCE: Public access to trusts register is provisionally suspended pending hearing on privacy challenge

France’s Conseil d’Etat has suspended the public’s recently created right to view the online register of trusts that have connections with France, pending a full hearing at the constitutional court (CC). The CC is to determine whether public access to the register is a proportional measure under the French constitution. The case results from the appeal of an American citizen who claims that this register runs counter to the right to privacy. On 27 June STEP stated its opposition to public access to the trust register, noting that the data was supplied for tax purposes in good faith, and with no permission for it to be made public.

SWISS BANKING: UBS clients withdraw funds as end of secrecy approaches

Clients based in emerging markets, especially Latin America, have withdrawn CHF2.3 billion (approximately USD2.4 billion) from UBS bank accounts, according to press coverage of the Swiss bank’s most recent quarterly report. The bank’s management expects the outflows to continue for the rest of 2016 and into 2017 as emerging market countries implement voluntary disclosure programmes in anticipation of the full implementation of the OECD’s automatic exchange of information.

JERSEY: Trust law soon to be amended again

An expert at international law firm Ogier examines potential changes to Jersey’s trust law currently in the pipeline. A recently completed consultation centred on amendments clarifying that there is no need for the trust to have a beneficiary at all times during its existence; the rights of beneficiaries to information in respect of the trust; reservation of powers by a settlor; arbitration; retrospective approval of self-contracting by trustees; extended indemnity provisions for departing trustees; accumulation and retention of income in trusts; power of the Royal Court to vary a trust; and others.

MAURITIUS: Ultra-wealthy investors to be granted five-year ‘tax holiday’

Mauritius’ 2016–2017 budget introduces several reforms intended to boost its financial services industry. Foreign ultra-high-net-worth individuals investing a minimum of USD25 million in Mauritius will be granted a five-year tax holiday, as will licenced overseas family corporations, licenced asset and fund managers managing a minimum asset base of USD100 million, and international law firms issued with a global legal advisory services licence – to that effect, a limited liability partnership bill will also be introduced.

CANADA: Consultation on draft tax legislation

Draft legislation has been published implementing the important tax changes announced in Canada’s 2016 federal budget. They include proposals concerning multiplication of the small business deduction, avoidance of the business limit and taxable capital limit, country-by-country reporting and the Common Reporting Standard penalty.

US: FinCEN extends customer identification rules for real estate agents

The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has extended its ‘temporary’ orders requiring US title insurance companies to identify the natural persons behind shell companies used to pay ‘all cash’ for high-end residential real estate in six major metropolitan areas. Similar ‘geographic targeting orders’ are already in place for Manhattan and Dade County in Miami, two of the US’ prime property areas. ‘All-cash’ does not mean actual banknotes but rather the purchase of property not funded by a loan.

NEW ZEALAND: Guidance on Common Reporting Standard for automatic information exchange

New Zealand’s Inland Revenue Department (IRD) has published guidance for financial institutions on the upcoming automatic exchange of financial information, based on feedback from a recent consultation. Draft legislation will be introduced in August.

If you have any questions regarding assets located overseas in terms of your trust and estate planning, please give us a call. Regards Tony