Richard English, J.D., Managing Director-West Region, Commerce Family Office
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Key Highlights
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Family governance refers to the framework and practices high-net worth families can use to align on family wealth decisions. The structure that family governance provides can also help engage the next generation of your family to accomplish your long-term goals together.
Why implement family governance?
Many high-net-worth families use family governance to promote the preservation of generational wealth by instilling values that shape how the next generation thinks about money. This influences their attitudes toward saving, spending, and charitable giving, encouraging the next generation to develop habits that help them live within their means and maintain family wealth. Effective family governance measures can also help your family make informed decisions regarding family wealth or plan for asset transfer in a structured manner.
Even if you have family governance practices in place, families can change over time, making it important to revisit your governance structures periodically to ensure they remain relevant to your family’s evolving dynamics. If you have not implemented family governance structures already, consider which strategies may fit your family’s unique needs and goals.
Document your family mission statement
A mission statement, sometimes called a family’s intention statement, can be a brief description of the family values that serve as a guidepost for family wealth decisions. For example, if your family places a great emphasis on higher education, your mission statement might reflect a commitment to lifelong learning and supporting higher education institutions. If your family values charity, you may state that giving back or making a positive impact in your community should be part of your family legacy.
Some high-net-worth families go a step further and draft a family constitution, which articulates their perspectives on family values such as philanthropy, education, and stewardship in more depth. A family constitution may also include details regarding goals and family business governance.
Having these ideas written down does not mandate that family members must adhere to them in every circumstance. Rather the benefit of going through the process of documenting shared family values may simply lie in aligning on a shared understanding of these matters to inform decisions made as a family.
Meet with family regularly to foster open communication
Holding family meetings allows families to reinforce family values and goals for family wealth, promote financial literacy by discussing strategies for building and preserving wealth, and address changes or upcoming family milestones that may impact decisions going forward. Ideally, these meetings should occur at least annually to maintain continuity and make meaningful progress toward long-term family goals.
Planning for a family meeting may include setting a meeting schedule, preparing a meeting agenda, or selecting someone to lead or facilitate the meeting. You might consider conducting a family meeting as part of a family vacation or retreat to help foster healthy dialogue in a relaxed, neutral atmosphere.
Often, high-net-worth families have a smaller subset of family members who may form a family council that also meets regularly. The family council acts similarly to a board of directors, providing governance and oversight over the family’s wealth and estate. Different family members can be appointed to or voted into various roles on the council based on their skills and interests. Family councils may make decisions regarding issues like family disputes without needing to involve the entire family.
Some families divide responsibilities even further by creating committees to handle specific areas such as social events, charitable activities, or investments, promoting more effective decision-making and consistency in each area by allowing the committee to focus on specific matters.
A family may appoint designated representatives to serve as the primary point of contact with specific advisors, such as accountants or investment managers. Council updates during regular family meetings may be an efficient way to keep the family apprised of council decisions.
Implement governance for specific assets
There may be special assets for which you want to implement governance, such as real estate, art, and collectibles. For example, if you plan on your family inheriting a vacation home or a farm property, you may want to use your family governance structures to define use and guest privileges, plan for maintenance expenses, or set guidelines for future ownership and potential sale to ensure the property is managed according to your direction.
Similarly, if you have an art collection, you may want to document whether you would like the art to be donated to a museum, given to your family during your life, bequeathed at death, or sold. Since art often requires special care and can be illiquid, planning for a smooth transfer with your family can help preserve the value of the art by providing for its care and prevent conflicts over what should be done with it as it passes from your ownership.
Family governance may provide a structure to document your instructions for assets that have sentimental value, giving your family a roadmap for the transfer and care of the assets today and for your beneficiaries in the future.
Set family standards and expectations for charitable giving
For many high-net-worth families, charitable giving and philanthropy in support of causes they believe in are a reflection of their family values and pivotal to how their family legacy will be defined. Governance around charitable giving can help answer questions regarding which charities to support and how to maximize the value of your contributions over time.
For instance, a local organization may come to you seeking support for their plan to build a community garden. If you have governance in place like a mission statement or family constitution, you can evaluate this request based on how it fits with your family’s shared values. For a family that primarily values education, their charitable contributions may be better suited to educational institutions. A family that is dedicated to curing a specific medical condition may focus their giving on research centers making progress toward a cure.
Governance structures can also help ensure a family’s focus on the longevity of their charitable contributions. Instead of outright gifts, your family may assess whether establishing a charitable trust or contributing to a donor-advised fund offers advantages for the management and distribution of funds. Informed by these governance structures, families may determine that if income is generated or assets can appreciate in a charitable trust or donor-advised fund may have a more lasting impact than if funds were exhausted by an outright donation.
Tailor family governance to your financial goals
Effective family governance can establish a structure for high-net-worth families to help preserve wealth through multiple generations by implementing a framework that encourages communication and alignment around your goals for family wealth. Working with a private wealth management team that can assist your development and implementation of family governance structures can ensure you have the needed family decision-making, oversight, and communication mechanisms in place to keep family members aligned around the long-term goals of your estate plan. By taking the time to understand your unique family dynamics and values, we can help determine the governance strategies that are right for you.
At Commerce Trust, your private wealth management team is comprised of specialists in estate planning, trust administration, and tax management*. Through a team-based approach, our professionals can facilitate family meetings and coordinate with your estate planning attorney or tax advisor on the implementation and adherence to the plans laid out through your family governance.
Contact Commerce Trust today to learn more about how we can integrate family governance structures into a comprehensive estate plan tailored to your family’s goals.
*Commerce does not provide tax advice to customers unless engaged to do so.
The opinions and other information in the commentary are provided as of November 7, 2024. This summary is intended to provide general information only, and may be of value to the reader and audience
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
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