Family Wealth—
Keeping It in the Family
By James E. Hughes Jr.

This reviews and summarizes James E. Hughes Jr., "Family Wealth—Keeping It in the Family", (Bloomberg Press, 2004). It is extracted from Le Van, "Organizing Wealthy Families around Family Value and Vision: Creating a Family Council", ACTEC Journal, Vol. 30, p. 150 (2004) All rights reserved by Gerald Le Van 2004.

Jay Hughes, now retired, was a highly successful sixth-generation lawyer specializing in international financial transactions, when he found himself "lost in a dark wood", as Dante (and Hughes) describe mid-life crisis. After a year of extensive reading and thought, he refocused on helping families make the most of their wealth.

Hughes is a thoughtful writer about families and money, an engaging personality and personal friend. Though he focuses on old money with a New Yorker's slant, Hughes has much of importance to say to any wealthy family. His writing is ebullient and wordy, peppered with frequent references to the classics and to his own family's experience.

Below, I have summarized some of his principal points. You or I may not agree with Hughes on specific issues. At times he portrays a wealthy family as though it were an investment portfolio, referring to family members as "human capital" and to cumulative family knowledge and wisdom as "intellectual capital". He writes at length about the incorporation of family value and vision into a representative form of family governance. I wish he had said more about how to accomplish that. I wish he said much more about family interactions, family relationships and family systems.

Nevertheless, Hughes proposes a broad and positive agenda that's worth thoughtful family consideration, especially for those who are forming a family council.

  1. A family's primary wealth consists of human capital (its members), and intellectual capital (everything each member knows and the family's collective knowledge); financial capital (its fortune) is secondary.
  2. A family's greatest wealth is human capital -- the individual human beings who form the family.
  3. Growing human capital is the family's primary responsibility.
  4. Growing human capital is the surest way to preserve family financial wealth.
  5. A family can successfully preserve human capital over a long period of time.
  6. Successful long-term preservation of wealth requires a system of governance (joint decision-making) that results in slightly more positive decisions than negative ones, over a period of at least one hundred years.
  7. Family governance must be reenergized in each generation in order to overcome entropy.
  8. The dark concept, "shirtsleeves to shirtsleeves in three generations" is recognized in many cultures. The first generation generates the wealth (creativity), the second generation preserves it (stasis), and the third generation dissipates it (entropy).
  9. Wealth preservation is a dynamic process, not a static process.
  10. Long-term wealth preservation (100 years or more) contemplates at least four generations.
  11. In family wealth preservation time horizons: "short term" is twenty years; "mid-term" is fifty years; and "long term" is one hundred years.
  12. Whether or not they own or control an operating company, a wealthy family is a family business.
  13. The fundamental issues of wealth preservation are not quantitative. They are qualitative issues of human and intellectual capital.
  14. Most families fail to tell the family stories that bind them together and make them unique.
  15. Most families fail to understand that preservation of wealth over a long time horizon is very hard work with high risks of failure and reward.
  16. A family should form a written family compact among its members that expresses their shared vision and values. Each successive generation should reexamine, reaffirm, and readopt that family compact.
  17. To enhance its human capital, a family should:
    1. Stretch the capacities of each family member to achieve his or her maximum well being.
    2. Insure that every member's basic requirements for food, clothing and shelter are met, including emergency care.
    3. Insure that every member attains his or her highest educational limit and his or her highest role in family governance.
    4. Emphasize the dignity of work as a basic requirement of individual self-worth, and help each family member find the work that enhances self-worth and individual happiness.
    5. Encourage geographical diversification of family members throughout the world.
    6. Encourage, recognize and practice family spiritual values as contained in the family compact, as expressed in family governance and family philanthropy.
    7. Enhance family intellectual capital -- the collective knowledge of all family members.
    8. Provide clear information on all family governance matters and seek feedback.
    9. Provide incentives for the family's highest achievers to take leadership roles in family governance.
    10. Provide tools to younger members to learn family stories and prepare for later roles in family governance.
    11. Stretch the intellectual capacity of each family member to achieve his or her highest level of learning.
    12. Diversify intellectual capital by encouraging study of world cultures and languages.
  18. Suggestions for preparing a family compact.
    1. Include rules for conducting family meetings.
    2. For the first meeting, ask each family member to prepare a detailed personal resume describing the personal talents, aptitudes and training that he or she can make available to family enhancement and family governance.
    3. Ask each family member to write down the ten values most crucial to the family's long-term success.
    4. Ask each member to imagine him or her looking back from age 105; write down what he or she would tell immediate family members had been most important.
    5. Ask each member to write a description of the family twenty years hence.
    6. Ask a small committee to write a brief family history.
    7. Create a representative family government.
  19. Consider these family rituals to be instituted and observed:
    1. Coming of age.
    2. Creation of a new family "elder."
    3. Arrival of a new member by birth, marriage, etc.
    4. Death of a family member.
    5. Introduction of new outsider members—non-family advisors, mentors, etc.
  20. The family should keep "balance sheets" and "income statements" on human capital and intellectual capital.
  21. The family should allocate financial investments to creation and growth of human and intellectual capital.
  22. The family should leverage family capital growth through a family bank that makes appropriate loans that may be too high risk for commercial lenders, but low risk to the family because the proceeds would be used to preserve family wealth by financing enhancement of human and intellectual capital. Such loans would bear reasonable interest and require repayment.
  23. Family governance should keep close tabs on family advisors, protectors, mentors, fiduciaries, etc.
  24. The family should teach and mentor its members on the roles and responsibilities of excellent beneficiaries.
  25. The family should monitor all fiduciaries of family wealth regarding their administration, investment and distribution of family wealth.
  26. Philanthropy is the family's social capital. It is a means for family members, isolated by wealth, to connect with larger issues of the world and find a place in it.
  27. Family philanthropy involves the giving of human and intellectual capital as well as financial capital.
  28. The family should periodically evaluate each member's progress towards the family vision as contained in the family compact. The evaluation should ask:
    1. Is the person free or dependent?
    2. Is the person self-aware?
    3. Has the person sought and searched for a vocation? If so, is he or she pursuing it? If not, why not?
    4. Does the person perceive the difference between work as calling and work as wages?
    5. Does the person have a mentor in pursuing a calling? If not, does he or she have the skills to find a mentor?
    6. Does the person have the humility to apprentice in order to become proficient in a calling?
    7. Does the person understand the difference between hubris and humility, and the consequences of each towards personal happiness?
    8. Does this person have friends? Who is he or she towards those friends?
    9. Can this person express love?
    10. Can this person express compassion for himself or herself and others?
    11. Can this person express gratitude?
    12. Can this person express joy and humor?
    13. Does this person have a view of what is true, good, beautiful, just and right?
    14. Can this person balance justice with mercy?
    15. Does this person perceive the difference between courage and bullying?
    16. Does this person take active roles in the larger civil society? In stewarding and giving to others?
    17. In which of the above areas is this person competent, and in which are areas of growth required?
  29. As to family financial capital, a periodic inquiry might ask:
    1. Does he or she have an excellent facility for choosing advisors and mentors?
    2. Does the person understand risk and reward?
    3. Does the person understand stewardship in the context of preserving family wealth?
    4. Does the person understand the reciprocal obligations of drawing on and investing in family financial capital?
    5. Does she or he work to instill financial knowledge in the next generation?
    6. Does the person participate in family governance by undertaking life-long learning about dynamic wealth preservation?
    7. Does the person actively seek competence and eventual excellence as a beneficiary, limited partner, shareholder or owner, as a member of family boards (for profit and non-profit), and in other financial relationships with the family?
  30. Does the family engage in periodic peer review of its fiduciaries?
  31. Has the family considered creation of a private trust company to handle its fiduciary requirements?
  32. Uncles and aunts can be important guides and mentors to younger family members, at times accomplishing what parents cannot.
  33. True mentoring is the mentor's expression of wisdom through intuition in guiding another towards greater self-awareness and the pursuit of happiness. Mentoring is neither teaching, nor coaching, nor being a best friend, nor being an elder. Mentoring is about asking questions, not giving answers. Successful mentoring is dialogue in which both parties learn something essential. Ideally, a trustee will function as mentor to the beneficiaries.
  34. Elders tell and retell the family stories. Elders remind the family of its history, its values and its vision. They advise on matters in family disputes. Where necessary, elders function as the judicial branch of the family. They deal with family disputes, resolve them, and if necessary, enforce their decisions.
  35. Creating perpetual ("dynasty") trusts should be undertaken only after sober consideration of its non-tax implications on future generations.