It’s one thing to create generational wealth, but you also have to be able to protect the wealth that you have worked so hard to build.
What if there was a way to do both at the same time?
In this article we’re going to show you how you can build and protect your generational wealth through trust funds and end generational poverty.
A trust fund is a legal document that you set up to put your assets into an account for the benefit of someone else (your family) and the account is held and managed by a third party.
Using trust funds can help close the widening wealth gap while also helping you minimize what you pay in taxes and prevents the mishandling of your wealth.
Types of Trusts
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There are different types of trust funds, but they can be separated into 2 categories – revocable and irrevocable.
A revocable trust is a trust created by an individual that can be changed over time while the person who created it, is still alive.
An irrevocable trust is a trust that once set up, cannot be changed without the permission of those who are listed as beneficiaries.
Both types of trusts are strong ways to control how your money is handled when you die or if you can no longer make decisions for yourself.
However an irrevocable trust offers more tax advantages.
How can a trust fund be used for generational wealth?
Trust funds are ideal for generational wealth, because you can put any valuable asset into a trust and transfer it from your name to be used to benefit others. We’re talking about money, stocks, art, property, bonds, or even a business.
However, you shouldn’t transfer things like your retirement accounts and qualified annuities.
Those types of transfers to the fund would be seen as a withdrawal and are subject to the income tax rate you would pay that year.
A trust fund should be set up by a qualified estate planning attorney.
Please don’t take the cheap route and use online tools to set one up. It will cost you more in the long run.
In addition to what you can put in it, there are 3 main ways a trust fund allows you to protect generational wealth?
1. Asset Protection
A trust can protect your assets from creditors and keep your information private.
You may think this information would be covered by your will. However, a will becomes public record once you die and has to go through probate.
Probate is the process of making sure what was stated in your will gets carried out accordingly.
Without a trust, anyone can use this now public record to look up how much you owned and can fight for part of your wealth.
This contesting can be a headache for your family and can hold up or even reduce the amount of money you wanted to leave to your loved ones.
Additionally, without a trust, creditors can come after your estate and be paid before your family. Thereby reducing the wealth that is passed down to your family.
2. Lower Taxes
The next way a trust allows you to create and protect generational wealth is by lowering your taxes. Tax exemption is probably the main reason why people set up trusts. Specifically an irrevocable trust.
When you move your assets into a trust, the assets are no longer yours. Since you no longer own these assets, you don’t have to pay income tax on any money made from them.
If you are in a high income tax bracket, you can use the trust to remove assets from your networth and possibly qualify for a lower tax bracket.
As an added bonus if your attorney planned properly, those assets can also be exempt from estate and gift taxes.
If you want to take these trust advantages a step further, you can use a type of irrevocable trust that the he ultra rich 1 percenters use called a Dynastic trust.
A Dynastic trusts allows multiple generations to benefit from the tax advantages of keeping assets in a trust.
Usually a trust is created for your direct beneficiaries like your kids, but a dynastic trust keeps those assets in there and pays out in increments so that it keeps growing and helping future generations.
Each generation then gets a chance to grow the previous generation’s money and then leave it to the next generation, which then continues to grow it.
Trusts like these help the rich avoid certain taxes like the Generation Skipping Tax along with rules that are meant to redistribute wealth and stop the growth of assets for going on forever.
Dynastic trusts are actually one of the factors that contribute to the widening wealth gap in America.
Did you know that since 1982, America’s 3 richest families have been able to use dynastic trusts to increase their wealth by over 5 thousand percent?!
3. Stream Of Income
A trust can help with generational wealth is by giving your beneficiaries a steady stream of income and ownership of valuable assets.
You may have heard of the term “trust fund baby” and think of it as a negative.
However, you might be surprised that many of the children that benefit from trusts actually use their money responsibly and don’t just use the money to live a life of luxury.
If you feel your child would be irresponsible with the wealth that you worked so hard to create, you can use a trust fund to put restrictions on the of money your child receives.
What is also cool is that a trust doesn’t affect your children’s financial aid or supplemental income given to those with special needs like SSI.
If you open a custodial account at a bank like a UTMA the funds in it would be considered part of their income and can affect these payments.
Although this may be a subject we all want to avoid, it is also something we have to recognize should be done as part of being responsible with your wealth.
Now, we’re sure you’ve seen it in the news what happens when a celebrity doesn’t have a will. Mayhem also happens when an important relative passes.
Confusion and money can make a family turn on each other exactly at a time when they be helping each other.
If you think about trusts as a way to protect your hard earned money, shield it from taxes and give it as a income to support those you care about you can see that they are not just for the ultra rich.
Trusts should be used by anyone who wants clarity around their money and wants it distributed based on their wishes.
Do you agree that everyone can benefit from setting up a trust fund? Type yes or no in the comments section
How do you start one and how much does it cost?
When it comes to setting up a trust one of the drawbacks is the upfront costs. Like we said earlier you should definitely use an attorney. Specifically one who handles estate planning.
It costs at a minimum $1000 to set up a trust so plan for that.
You get what you pay for, so make sure you find a good estate planning lawyer who is knowledgeable about setting up trusts and knows how to make them as tax efficient as possible.
Do not take the cheaper route of doing it yourself online. It will only end up costing you more in the end.
What you can do on your own is familiarize yourself with the different types of trust funds available to you and have some idea of the things you want the fund to handle based on your individual needs and goals.
When you are finally ready to sit down with a lawyer, you aren’t wasting time and getting charged for an intro lesson and you can jump right into the planning process.
Trust funds are something we are thinking about as part of our generational wealth strategy that we thought you would also like to know more about.
If you like to learn more of the ways we are building and protecting generational wealth, check out our generational wealth playlist that we’ve linked at the end of the video above.
Remember, you are spending the time to increase your financial literacy and as a result can create wealth that can benefit you and your family for generations as well.
Don’t you want to make sure your effort and sacrifices are not made in vain? If you are concerned with generational wealth, you should look into establishing a trust fund.
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Nadia is a Financial Independence Coach from New York City. She holds a B.A from Columbia University and worked 13+ years in Investment Banking and Financial Services. She is an entrepreneur, investor, and partner at Wealth Twins LLC. She reached Financial Independence in her 30’s and is passionate about showing others how to achieve the same.