Tuesday, September 8, 2020

Can(‘t) explain Family Constitutions?**

Today’s post considers the above-mentioned topic in a ‘vidcast’.

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below.

In relation to the classic form of family constitution, there is no legal enforceability of the terms of the document.

One clear advantage of this is that there are therefore definitely no transaction cost issues with entering into a family constitution.

This is because the document is simply a memorandum of understanding, a statement of intent, a handshake agreement, a best wishes or best endeavours arrangement, but nothing else.

In other words, there is no change in legal ownership of any assets.

Thus, there is no stamp duty triggered.

Similarly, there is no tax event triggered.

It is simply a non-binding arrangement that doesn’t actually have any other legal impact.

Some families therefore rightly ask – “Why is there any need for approaches such as umbrella trusts, trust splitting, trust cloning, and related ideas? Let’s just keep it simple with a family constitution. We may not even get any professional involved in drafting it up because we can download one off the Internet. Let’s just make it up as we go along, and really, as long as the communication levels are there, we don’t need anything else.”

This said, our experience is that for many families, even when they are confident that the informal approach will succeed, they have a mantra of ‘in times of peace, prepare for war’.

In other words, if the family is robust enough to be able to have the critical discussions and get a non-binding family constitution in place, that’s the exact type of family that should build on the positive platform, go to the next level, and get legally binding arrangements in place as well.

As always thanks to the Television Education Network for the video content here.

** for the trainspotters, the title here is riffed from the Who song ‘Can’t explain’.