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A family charter should be considered a living document, not a static one. It should be revisited and revised as the family evolves.FG Trade/iStockPhoto / Getty Images

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“Put it in writing.” That’s common advice in the legal world of wills and estate planning to clarify who will inherit the family’s most prized possessions. But it’s also good advice for families with a business or significant wealth who want to maintain harmony as the founders transition their life’s work to their children or grandchildren. That’s where a family charter comes in.

Also known as a family constitution, a charter is a formal, non-binding document that codifies a family’s values, vision and mission. It guides communication, conflict resolution and decision-making, and may also cover topics as investments, education and the role of advisors.

In effect, it’s a kind of operating manual that defines boundaries and expectations to reduce potential misunderstandings and conflicts within the family.

The idea is to help address sensitive issues before they surface – such as how to manage a sibling who is underperforming in the family business or how best to share the family cottage.

Who needs a family charter?

Family charters are typically created by families with significant wealth and/or that have a business and are navigating a transition. That could involve the sale of the business or its transfer to the next generation.

That said, any family may benefit from creating their own unique charter that sets out their mission and aspirations and creates greater cohesion.

As Canada’s baby boomers reach retirement, many family businesses are set to change hands. A recent KPMG in Canada survey found more than three-quarters (78 per cent) of family-owned companies expect to plan for succession or are taking steps to pass leadership onto the next generation within three years.

Yet, with the greatest wealth transfer now upon us, many families are feeling unprepared on all fronts – from business decision-making to managing and distributing personal family wealth.

A process of exploring how decisions were made in the past – what worked and what didn’t – can help build a framework for future decision-making. The family could then formalize this process in their charter. Going through this exercise can also help families have thoughtful conversations and build the tools needed to feel more confident about moving forward.

Although the process itself is valuable, a physical document could guide family members when stresses and emotions are high and they need help to become unstuck.

Developing a family charter with an advisor

A good family charter is one that engages every generation and is co-created by all family members – not for family members.

Typically, a family will start by answering questions such as: What does our family mean to us? What are our guiding principles? What do we want to accomplish individually and collectively in the next five, 10, 15 years? And what decisions do we need to make now and in the future?

Families with an operating business will also need to address what the criteria are for selecting new leaders? What are the rights and responsibilities between family members who are active in the business versus those who aren’t? What’s fair when it comes to the distribution of wealth and assets?

Starting a conversation around what’s fair versus equal and how they value the sweat equity some family members have put into the business is also important. Through the co-creation process, a family will be able to share their perspectives and align expectations.

Charter should evolve with the family

A family charter should be considered a living document, not a static one. It should be revisited and revised as the family evolves, whether it’s due to the death of a family member, a new generation coming of age, the sale of an asset or significant growth in the business.

Given the magnitude of these events, it’s not advisable to hammer out a family charter in just a few days. Those are usually the ones that end up collecting dust on the shelf. It can take months and sometimes a year or more to develop a charter – along with a lot of active listening.

To make this process go smoother, working with a neutral, third-party advisor who understands family dynamics is key. Having an independent advisor at the family’s side will help ensure the tough questions are asked, emotions are managed and everyone’s voice is heard.

This guided approach can make the family charter more effective and the family itself even more successful in the long run.

Richa Arora is executive director, practice leader, family dynamics and governance, KPMG Family Office in Toronto.

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