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The process of building generational wealth can often be a long, lawyer-filled process. If you’re the first member of your family to set up wealth protection initiatives, you’ve likely realized that all of your prior planning could be worthless if you don’t create a trust to compliment your will.
What is a Trust?
A trust fund or a “trust” is an estate planning tool that assigns a legal entity to hold the property or assets of a person or business. The person who creates a trust is the “trustor,” while the legal entity who holds the asset is either the trustee (asset holder) or beneficiary (asset receiver).
A properly funded trust will hold a wide variety of assets, such as real estate property, money, a business, stocks and bonds, gold, jewelry, and other estate or business-specific assets.
A trust is often seen as a tool to protect the wealth of the rich or to provide for their heirs. But trusts aren’t just vehicles that fuel a trust fund baby’s spending; they can set up generational wealth for just about anyone. You can even use a trust fund to fund your retirement or a charity.
How to Set Up a Trust: Ownership and Estate Planning
Trust funds are often used by individuals who wish to assign assets to a trustee or beneficiary on behalf of the trustor.
If you want to set up your trust to build generational wealth, here’s how.
Revocable Trust vs. Irrevocable Trust: Which is Better?
Both a revocable trust and irrevocable trust can be used as a tool to build generational wealth, but an irrevocable trust is the better of the two. Let’s compare both options to see why.
Revocable Trust
In a revocable trust, the trustor would designate themselves as the trustee and retain control and ownership over their assets. A trustor may do this to avoid probate, a legal process that takes up time and money. During probate, your legal affairs are left open to the public.
Besides avoiding probate, a revocable trust gives the trustor the right to end the arrangement at any time. This option may benefit families who want to change beneficiaries at some point.
Keep in mind that you won’t receive any tax incentives, and you’ll be held liable for any taxes due on the trust income if you stay on as the trustor. Some employers will create trustor (or grantor) trusts to identify assets to back future liabilities for employee retirement benefits.
Irrevocable Trust
An irrevocable trust transfers full ownership and control to a trustee or beneficiary permanently. It can’t be revoked, and the trustor no longer holds rights over their assets. With an irrevocable trust, your assets can’t be claimed by creditors, making them a great estate planning option.
Irrevocable trusts often hold assets for the benefit of family members, usually children or grandchildren, because they provide tax-planning and estate-planning advantages.
If the trust utilizes a trustee, the trustee will manage the assets in the trust and ensure they go towards the documented purpose. For example, if a trustor wanted the money to go towards education, the trustee would direct these funds into college expenses or tuition fees.
Estate Planning Trusts for Children and Future Generations
Trust funds can help parents and grandparents provide for their families after they pass away while also taking care of their own tax and estate planning needs.
Here’s what we mean.
1. Estate Planning Trusts Can Protect Minors and New Adults
Children under 18 shouldn’t be in charge of a large inheritance, but adults who have just turned 18 won’t suddenly know how to manage money. If you set up a trust with a trustee, they can ensure your children don’t spend everything they inherited or that they spend the money wisely.
2. Estate Planning Trusts Can Separate Shares Between Children
The last thing you want is your children fighting over their “earned shares.” You should set up a trust that divides trust money into separate shares for each child. However, it’s not always a good idea to separate these shares 50/50 if one child needs more money for education.
3. Estate Planning Can Protect Your Irresponsible Family Members
We’re all responsible with money when we’re children or young adults, but we’re supposed to grow out of it eventually. Unfortunately, some of your family members will still have money issues well into their senior years, so set up a trust that issues a trustee for these individuals.
