Why You Need a Trust to Pass on Generational Wealth

• A trust is the best way to pass on assets without the hassle of involving the legal (probate court) system.
• Consult with an estate attorney about whether you need a trust and how to properly organize it.
• A trust has many advantages for passing on wealth over using a will.
• A trust is for everyone to utilize, not just the rich.

One of the more notable quotes by Benjamin Franklin is, “If you fail to plan, you plan to fail.” This is more apparent in planning to pass on generational wealth.

In many cases, the best way to plan for passing on generational wealth is through a trust. As a quick note, there are many different types of trusts with different purposes. Consult with an attorney about what is best for you and your family's situation. However, the type of trust referred to in this article is the living or revocable trust.

Transferring Wealth to the Next Generation

Speaking of Benjamin Franklin, he said, “Nothing can be said to be certain, except death and taxes.” This remains true with inheritance taxes and the probate process. So first, we need to understand probate.

Every time someone dies, the passing on of their possessions must go through probate court. This is where a judge decides whether your will is valid (assuming you have one) and appoints an executor of your estate to make sure that your estate assets are protected and transferred. 

In general, there are three scenarios regarding passing on assets. 

Scenario #1

This scenario pertains to if you have no will, or if there is an error in your will. In this case, your estate assets will be passed on according to the laws of whatever state you live in—usually to your closest relative. 

This is the worst-case scenario because it takes no tax planning into account, and other individuals or charities you plan to give to would miss out. So at a minimum, you must have a valid will to have any control over your assets after you die.

Scenario #2

You have a will in place that will go through the probate process. This is usually sufficient for many people. With little to pass on or few people to entrust their possessions to, a will covers their bases. But, the will must be updated regularly to be effective. 

A will is an excellent first step, but it isn’t enough if you are trying to pass on generational wealth.

A will is commonly contested in probate, which means it won’t always go the way you planned. So if you want the best control over your assets after you die, you’ll want to set up a trust.

Scenario #3

You set up a living trust to handle all of your assets. A living trust is an entity that holds your assets and must follow your wishes to use those assets during your life and after you’ve become incapacitated or passed away.

This greater control over your assets is important to pass on generational wealth.

The Importance of a Trust When Passing on Generational Wealth

Creating a living trust has many benefits over simply having a will. These three benefits allow you to better disburse your wealth to the next generation in the best way possible. 

Skip Probate Court

Every will must go through probate for your estate to be cleared. This can take months or even years to complete. During that time, there can be challenges and alterations to your will.

A living trust does not go through probate. It is enacted upon your death almost seamlessly, so you don’t have to go through the probate process.

Tax Benefits

There are many potential tax benefits to using a trust instead of a will to pass on your money. The way money is distributed will determine how it is taxed. You have more options for distributing money in a trust, so naturally, you can get more creative on your tax plan. Talk to a licensed estate attorney to discuss the tax benefits of creating a living trust.

Protect Your Wealth

You can set parameters to protect your wealth with trust until your beneficiaries are mature enough to handle it. One of the most common ways generational wealth is squandered is being put in the hands of those who aren’t prepared for it. A trust can protect your assets until your children are old enough to handle them should you pass away unexpectedly.

There are many advantages to using a trust over a will, and it should be part of your estate planning for passing on generational wealth.

A Trust is For Everyone, Not Just the Rich

A trust is for everyone to utilize. A trust is a pretty standard document that estate attorneys set up frequently. To create a living trust you can probably expect to spend between $2,000 and $3,000—which is pretty average for dealing with an attorney.

You can put any assets into a trust like cash, stock portfolios, and real estate are all fair game. In addition, anything you have ownership over can be transferred to a trust.

While large trusts can have a professional, full-time executor in place, it is not necessary, depending on your situation. You can ask a trusted family member or close friend to act as executor. Your close friends and family, or even a beneficiary of the estate, will often be very willing to help with this process of appointing your executor.

The Money Wrap Up

A trust has many benefits over using a will when passing on generational wealth. If you’re building generational wealth, you need to talk to an estate attorney about how it can benefit you and your heirs.