The Family Constitution

Author of the article: Mgr. Vendula Růžková, LL.M., MBA, ARROWS (office@arws.cz, +420 245 007 740)

Do you have a family business that you have been building with love for years and want to pass it on to your children? Or are you managing a family estate and worried about what will happen when the next generation inherits it one day? A family constitution can be your best tool to ensure that everything you've built will continue to serve your family - without hassle, lawsuits or loss.

What is a family constitution and why do you need one?

A family constitution is a document that sets the rules for the operation of a family estate or business. It helps prevent conflict and protects relationships and assets from unnecessary litigation.

Imagine you have spent decades building a business that is now thriving. You have two children - one is actively involved in the company, the other is in a completely different field. But what happens when they both inherit the company? Without clear rules, tensions can arise that threaten not only the business but also family relationships. A family constitution sets fair rules for all and prevents unnecessary conflict.

A family constitution is most often used when the transfer of a business or property to the next generation is imminent. But beware - the sooner you create one, the better. The greatest value of a constitution is prevention. It helps to unify family ideas about the future and prevent situations where family disputes end up in court - not only with the loss of money, but also good relationships.

How does a family constitution help you preserve assets and relationships?

1. Preventing family disputes

Family disputes often arise because of different expectations. One sibling wants to grow the business, the other prefers to sell it. The family constitution prevents these situations by clearly defining who has what rights and responsibilities.

For example, it sets out who can participate in the management of the company, how profits will be distributed, or what happens if a family member leaves the company. These rules protect all family members and give them the assurance that they will be treated fairly.

Example:

Imagine that a brother and sister inherit the family business. The brother is interested in the business, but the sister is not. Without clear rules, they quickly find themselves in conflict. The brother wants to invest in development, the sister would rather get her share in cash. With a family constitution, the situation would be handled smoothly - it would be clear in advance what the options are for paying out the share or taking over management.

2. Protecting assets from unexpected situations

A family constitution allows you to set up rules for situations that you don't consider today but may catch you off guard in the future. For example, what happens if a family member enters into a marriage and later divorces? Is there a risk that part of the family assets will go to the former partner?

The constitution can help regulate the rules for new members to join the family and protect family assets from the risks associated with divorce or other life upheavals. This preventive step can save millions in losses and protracted litigation.

3. Clearly setting up generational change

Passing a business from one generation to the next can be emotionally and legally challenging. A family constitution helps ensure a smooth transition. It determines when and how the new generation will take over management, whether they need to obtain certain training or have experience outside the family business.

For example, it may be stipulated that a son or daughter will take over the management of the business only after reaching a certain age or after completing a management course. In this way, the family constitution will prevent a situation where an inexperienced offspring takes over the business too early and jeopardises its stability.

What are the risks of not having a family constitution?

Without clear rules, conflicts often arise that can lead to lawsuits. These disputes not only disrupt relationships but can also lead to loss of assets.

For example, if one of the heirs sells their share to a stranger, someone completely unknown with different interests may get into the family business. This can lead to the destabilisation of the business or its gradual disintegration.

Warning: litigation over family assets can be lengthy and costly. You can lose tens, sometimes hundreds of thousands of crowns in legal fees alone. Not to mention the loss of peace of mind and family ties.

Example:

Consider the case of a family that owned a thriving farming company. After the father died, the inheritance was divided among three siblings. One wanted to develop the business, one wanted to sell it, and the third was undecided. Years of legal wrangling ensued, the company lost key customers and eventually had to be sold for a fraction of its value. All this could have been prevented by a clear family constitution.

How to create a family constitution? With an expert and tailored

A family constitution is an individual document that should reflect the specifics of your family and business. Ideally, it should be drafted with the help of a lawyer who has experience in family businesses and inheritance law.

Together you will discuss all possible situations - from the day-to-day running of the business to crisis moments such as the death of a key family member. The lawyer will help you set up the rules so that they are understandable, legally binding and in line with current laws.

A third, independent person can also help moderate discussions within the family. It is often these conversations that will reveal previously hidden concerns or expectations of individual members.

Conclusion: protect your property and family today

A family constitution is a tool to give you peace of mind and security. Don't underestimate the power of prevention - it is always better to prevent disputes than to resolve them. Contact us today and let's work together to create a family constitution tailored to your needs. You'll protect not only your assets, but also your good relationships with those you care about most.