Converting Wealth into Well-Being: ‘Shirtsleeves to Shirtsleeves in Three Generations’

Some years ago, I spoke about behavioral finance at a conference for wealthy families, mostly family business owners. Subsequently, I listened to a session in which family members shared their experiences, including how they turned wealth into well-being as they passed it down from generation to generation.

A medical researcher, a member of a family turned wealthy by her father’s major invention, implored fellow members to enhance their children's well-being by helping them gain meaningful vocations, as she had, rather than pressure them to join the family business. “Don’t turn your wealth into golden handcuffs,” she said.

An owner of a thriving financial company spoke about his daughter, a young woman uninterested in his business or in college. Earlier that day, a presentation on art as an investment sparked an idea that brought tears to his eyes.

His daughter was passionate about art, and he realized he could help her build a meaningful vocation by establishing an art gallery she would manage, an endeavor that would enhance her well-being and his own, even though it would likely diminish his wealth.

The proverb “shirtsleeves to shirtsleeves in three generations" describes a sequence, often condemned as a curse, in which family wealth is built by the first generation, diminished by the second and dissipated by the third. I argue, however, that families may do well when they convert wealth into well-being, even if wealth is dissipated along the way.

I know from many conversations with advisers that my view is uncommon. Many advisers have noted that families that had wealth in the millions of dollars decades ago could have been billionaires today if they had done nothing more than invest their millions in an index fund. But I hope to foster discussions among advisers and between them and their clients about a more holistic relationship between wealth and well-being.

Transferring Wealth: Poor, Middle-Class and Top 5% Families

Raising children is expensive, especially relative to the incomes and wealth of poor and middle-class parents. They transfer wealth to their children mostly by raising them. By necessity, they transfer little wealth to their children or grandchildren. Middle-class families, especially upper-middle-class ones, are usually able to transfer modest wealth to their children and grandchildren.

We can divide the top 5% families into two groups: professionals and business owners. Professionals include physicians, dentists, lawyers, engineers, and managers. Businesses are commonly considered “dull-normal," a term used by the authors of “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy." These include welding and paving contractors, scrap metal dealers, and pest control services.

The top 5% of wealthy professionals can transfer their financial wealth to their children, but not their university degrees. In contrast, the top 5% of wealthy business owners can transfer both their financial wealth and their businesses to their children.

Many wealthy business owners are eager to see their children take over their businesses, and many of their children are eager to do so. But some children of business owners do not wish to take over their parents’ businesses, and some business owners prefer to see their children take a path different from theirs, especially by becoming professionals.

Victor, a successful roofing and excavation contractor as well as a scrap metal dealer, is among these business owners. He hopes his children will achieve a higher standard of well-being than he has, and he aspires for them to become physicians, lawyers or other professionals. The authors of “The Millionaire Next Door” say that Victor “does not realize that being well-educated has certain economic drawbacks.” But Victor might well understand that his children's wealth would likely be lower than his, while their well-being would likely be higher.¹

Transferring Wealth: Top 1% Wealthy Families

The top 1% of wealthy families do not fear the costs of child care, college tuition, a house or even a trust fund, but they fear their children growing up aimless. Great wealth can extinguish all desire for financial independence and accomplishments because it contains magic erasers of failures in school, work, marriage and investments.

These fears are often well-founded. An adult son in a top 1% wealthy family, an intelligent man with an MBA from a top school, quit one job after another. At some point, something would happen at each job that those who had to work for an income would learn to tolerate, but he would say, “I don’t want to deal with this.” Eventually, he had to say, “I don’t have a career.”²

Donors promoting education, medicine or the alleviation of poverty commonly place conditions on the use of their donations, perhaps specifying that donations be used to support high school students rather than college students, or that donations be used for Alzheimer's research rather than cancer research. The same is true in trusts whose creators might specify that funds be used for education, professional training, maintaining employment, starting a business, reaching certain ages, getting married or having children.

Creators of trusts likely believe that the conditions they set are helpful, enhancing the well-being of their family members. But these beliefs are often wrong. Responding to an article about transferring wealth to future generations, a 58-year-old woman wrote that she and her siblings knew their parents had created seven separate trusts for them but did not know the trusts’ “byzantine details.”

They are now paying thousands in legal fees to comprehend the trusts’ details and expect to pay substantial accounting fees for years to come. Moreover, the trusts forced her to serve as a co-trustee with her brothers and a stepbrother who does not speak to two of his siblings. “What a poor plan my parents made,” she wrote.

Generational Wealth: Turning Inheritance into Life Well-Being (Not a Curse)

Families across the wealth spectrum aspire to pass something of value to the next generation. For poor and middle-class families, that value is conveyed primarily through care, love and education. For top 5% families, it includes financial support that expands children’s educational and career opportunities. For top 1% families, it often includes trusts designed to transfer wealth even for generations yet unborn. But the central lesson across these groups is the same: Wealth is a means, not an end.

The fear of the shirtsleeves-to-shirtsleeves curse is often misplaced. Dissipation of wealth is not a failure if wealth is converted into life well-being, meaningful vocations, enriching experiences, stronger relationships, and purposeful lives.

Attempts to maintain or expand wealth through rigid trusts can undermine well-being, generating family conflicts, administrative burdens and constraints that clash with the evolving lives of future generations.

In contrast, transfers that grant children and grandchildren autonomy to pursue their own paths to meaning, even when these seem frivolous or unproductive to others, can enhance well-being. Going from shirtsleeves to shirtsleeves in three generations can be a sign that wealth has done its work.