How Families Preserve Assets for Generations
Since 1974, James E. Hughes Jr. has been helping families around the world preserve the wealth they have created over long years of hard work. Seven years ago, he wrote a first edition of Family Wealth: Keeping It in the Family to help families learn how to keep their money long into the future. Since then, this sixth generation counselor-at-law, now retired, has helped many families do this by facilitating family meetings and encouraging them to work through governance issues and write family mission statements. As an expert on estate and trust planning, he has added several chapters to his original publication to address topics including elders, ritual, practices, evaluation of the third generation, mentorship, and the role of the hommes d'affaires. Although the first edition was privately published and sold through word-of-mouth, this newly revised edition is now widely available and even more informative.
Rags to Riches to Rags
There is a proverb that has many translations across the globe, but in America it usually appears as, "Shirtsleeves to shirtsleeves in three generations." What this saying depicts is the rise and fall of family money: The uneducated first generation starts off toiling its way up from the fields to a fortune while maintaining a frugal lifestyle. The second generation attends university, wears fashionable clothes, owns a mansion in town and an estate in the country, and enters high society. The third generation's many members grow up in luxury, do little or no work, spend the money, and the fourth generation finds itself once again back in the fields performing manual labor.
Hughes explains that this rags-to-riches-to-rags cycle is not inevitable. In Family Wealth, he writes, "A family can successfully preserve wealth for more than a hundred years if the system of representative governance it creates and practices is founded on a set of shared values that express that family's ‘differentness.'" To do this, he explains, families must use many quantitative and qualitative techniques to help them over the long haul make more positive than negative decisions about the use of their human, intellectual and financial capital.
One of the main points he makes throughout Family Wealth is that, just as in business, a long-term succession plan is the key to a family's success at long-term wealth preservation. Hughes asks, "If the universe can achieve long-term preservation by growing slightly more than is needed to overcome stasis, why shouldn't a family follow the same logic to preserve its wealth?"
Control Without Ownership
One philosophy that Hughes uses to help families overcome the "shirtsleeves" proverb is the idea of control without ownership. He writes that this means that each family member adopts the idea that "I am the owner of something if I control it, even if I am not the legal owner of that thing." Every plan for long-term wealth preservation, he explains, has to take the issue of control into account and find a way to deal with it positively.
To describe how this philosophy works in practice, Hughes relates the story of a wealthy man in his late 60s who wanted to do some estate planning. The client explained that he wanted to leave half of his estate to his wife, and the other half to his children. After Hughes inquired deeper, he found out that the man's wife had no financial education, as well as poor siblings who constantly asked for money. His son was in a rocky second marriage and his daughter was a physician who had successfully warded off two malpractice claims. Learning this, Hughes pointed out that had his client followed his original plan, it was highly unlikely that his family would be financially sound by the time the grandchildren were grown.
After looking more closely at his own family, Hughes' client realized that, in his wife's case, her relatives would end up with most of her property. In his son's case, his second wife could end up leaving him, putting his assets at risk. And, in his daughter's case, her medical practice left her vulnerable to her patients. Hughes explains that he told his client to teach his family members that controlling something without legally owning it is the best financial position to be in. Hughes explained that if his client's wife were in control of learning how to allocate investments, create a family bank, and manage the family balance sheet, "with strong representatives she has chosen to guide her, and she doesn't bear the risk of ownership while she is learning, then she has a real chance of wealth preservation."
The rest of Family Wealth deals with empowering beneficiaries, trustees, peer review, and private trust companies.
Why We Like This Book
Family Wealth is not just about keeping money in the family. It is also a guidebook that helps families successfully manage their human and intellectual capital. By showing family members how they can make sound financial decisions with love and forethought, Hughes presents practical ways they can benefit others beyond their own lifetime.