The key ideas

Family Wealth: Keeping It in the Family

James E. Hughes Jr., 1997

There's a saying: shirtsleeves to shirtsleeves in three generations. The grandfather makes the money, and the grandchildren start from zero again. A lawyer who worked with wealthy families for decades explains why, in his experience, this happens, and suggests looking at wealth differently: people and their knowledge first, money second.

Who it is for

For anyone who thinks about what they'll leave behind for their children and grandchildren, and for anyone curious why families lose what they've earned, even when there's a lot of money.

Successful long-term preservation of wealth requires a system of joint decision-making in which, over a hundred years, the family makes slightly more good decisions than bad ones.

What the book is about

The grandfather starts from zero and builds a business. The father preserves it. And the grandchildren often start from zero again. Why does money earned by one generation so often fail to last until the third?

James Hughes is an American lawyer who for decades advised wealthy families on inheritance and on making decisions together. In his view, bad investments cost a family money less often than failing, in time, to look after its people and how they decide things together.

Hughes self-published the first edition in 1997, and the book spread by word of mouth. An expanded edition came out in 2004.

An honest caveat right away. This is a practitioner's model based on his experience, not research. The book was written for very wealthy families and their advisers, and the bridge to an ordinary family is Livria's application. This is not financial or legal advice.

Idea 1. Shirtsleeves to shirtsleeves

In America they say: “shirtsleeves to shirtsleeves in three generations.” The first generation works with its sleeves rolled up, the second lives on what was earned, and the third rolls up its sleeves again.

Hughes notes that a similar saying exists in many cultures. In China they speak of going from rice paddy to rice paddy. In Europe there's a version about going from clogs to clogs.

This saying often comes with percentages about how many families lose their wealth by the third generation. We don't cite them: the origin of these figures is disputed. Hughes compares this saying to what physics calls entropy. This is the author's analogy, not a physical explanation: in his image, everything that has once been gathered together tends to fall apart over time unless new effort is put in.

Every summer the whole family gathered in grandmother's garden. After she passed away, no one took the garden on, and five years later the plot was sold.

In Hughes's view, the breakdown of family wealth resembles the natural course of things. So to stop it, each new generation may have to put in effort all over again.

Read in Livria

About the author

James E. Hughes Jr. is an American lawyer and family adviser. For many years he worked with wealthy families on inheritance and family governance, and he has lectured on preserving family wealth. “Family Wealth” is his best-known book.

All books by this author: James E. Hughes Jr.

Terms from the book

  • Entropy
  • Human capital: In Hughes's model, the family members themselves: their health, character and abilities. The author sees it as the most important part of a family's wealth. Here the term is used in the author's sense, which is broader than the economic one.
  • Intellectual capital: In Hughes's model, the family's knowledge and skills, as well as how it learns and makes decisions.
  • Family governance: An agreement on who makes decisions in the family, how, and by what rules. Hughes sees it as the foundation for preserving wealth over the long term.
  • Family constitution: The family's written rules, based on its values and mission. In the author's view, each generation adopts them anew. A tool from the author's practice, not a legal document: on its own it has no legal force.
  • Family bank: Hughes's scheme: part of the family's capital goes into loans to younger family members for risky but promising ventures. The author's scheme, not a universal financial recommendation.

All terms

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