Generational Wealth Strategies: Setting Up a Trust Fund

Many parents hope to offer a financial headstart to their children and even sometimes their grandchildren. From college savings to personal inheritances, parents often strive to establish generational wealth. However, generational wealth isn’t just about leaving an inheritance—it’s about leaving a legacy. 

Effective financial planning is crucial to establishing generational wealth. Money is an important part of legacy planning.

One way you can plan your legacy and pass on wealth is by setting up a trust fund. In this article, we will break down these few essential questions: 

What Is a Trust Account?

A trust account is a legal arrangement that allows you to transfer personal assets such as money, real estate, investments, and personal property to loved ones or organizations. A major benefit of trusts is that they can be administered without having to go through the probate process. This will save your beneficiaries from spending money and time going through probate court after your passing. 

Setting up a trust is not hard if you understand how a trust fund works. There are three key parties: the grantor, the trustee, and the beneficiary. 

  • The grantor or “settlor” sets up the trust fund. 
  • The trustee is given stewardship over the assets in the trust with the legal obligation to administer assets as outlined in the arrangement. 
  • The beneficiaries are the individual(s) or organization that receive the assets. 

You can set up a trust for yourself, or you can hire an attorney to do it with you. Setting up your own trust is less costly than hiring an attorney, but you need to have some critical knowledge first so you know what you’re doing.  If you think you might like to set up your own trust, we recommend a course provided by an attorney that will walk you through the process. Contact McFie Insurance to access this resource.

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How Do Trust Funds Work?

Trust accounts will work a little bit differently depending on the type of account. Irrevocable trusts and living revocable trusts are the two main types of trust accounts to understand.

Irrevocable Trust

Once you establish an irrevocable trust, the assets are no longer under your control. You cannot make further changes once the agreement has been settled. However, one major benefit of the irrevocable trusts is that the grantor will no longer be taxed in the estate in the trust if the grantor dies at least 3 years after transferring the assets to the trust. In addition, the grantor will be relieved of tax liability for additional income generated by the assets.

Revocable Living Trust

With a revocable trust, the grantor keeps control over the assets and the beneficiaries named in the trust. However, the grantor will not be exempt from income and estate taxes. Once the grantor passes on, the revocable trust can turn into an irrevocable trust and be distributed as outlined.

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How Do Trust Funds Pay Out?

Trust funds pay out in a number of different ways depending on terms of distribution. At the time of set up, the grantor can design requirements which beneficiaries must satisfy before receiving the assets from the trust. The grantor may distribute their assets to several different beneficiaires if they choose.

Setting up a trust that distributes assets to your children and grandchildren can be the seed for generational wealth. The grantor/settlor of the trust can name the terms of distribution for the assets in the trust. For example, the settlor may decide that the generational wealth can only be used for college tuition, weddings, or down payments on a home. The trustee will be responsible for delivering and distributing the assets within the trust.

What Are Other Strategies for Building Generational Wealth? 

A trust can only protect the assets you already have. If you want to build generational wealth, you will need to find ways to grow your wealth. 

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Whole Life Insurance 

One method for building generational wealth is whole life insurance. Part of building wealth is avoiding unnecessary taxes, fees, penalties, and hedging against inflation. Whole life insurance does an exceptional job of doing this. 

Whole life insurance can offset estate taxes when a legacy is passed on from one generation to the next. With a well crafted whole life insurance policy your policy will build cash value in addition to providing a death benefit. You can use the cash value during your life to build wealth and the death benefit can perpetuate generational wealth when you give to the beneficiaries at time of your passing. 

Personal Finance Knowledge 

Besides growing your wealth, you should make sure your beneficiaries know how to manage the generational wealth. Many individuals either assume that their children or grandchildren will know how to manage their inheritance, or they neglect to educate them about how to handle money. However, large amounts of generational wealth can quickly disappear without the proper training, personal finance knowledge and of course, values. The best form of generational wealth is to share your values with your children. If you want the value of your generational wealth to last into the 2nd or 3rd generation, pass on your values, and your personal finance knowledge to your children.

As you increase your own knowledge and share your values and personal finance knowledge with your children, please use all of the resources we offer to help you grow your knowledge and your wealth. If you need information or a connection relating to your finances, contact us directly, many times we can make a connection or supply the information you need.

At McFie Insurance we specialize in designing and selling life insurance that provides protection and helps people grow their wealth. So we can definitely help you with all your life insurance needs. Schedule an appointment here if you need to get life insurance.

Generational wealth is a long term vision that should be worked on little by little every day.

The Bottom Line

Generational wealth can make the world a better place. Planning ahead is critical for leaving the most possible, in the best way possible, to the best people possible.  Kicking the can down the road is a bad way to perpetuate generational wealth  but with the right plan, the right products, and the right tools you can equip your posterity to carry on your legacy for many years to come.

Ben McFieBen T. McFie

There's a lot of confusion around finance; there's so much to know and it's frustrating when you don't know enough to make the best financial decisions. I like to bring clarity to financial matters so people can make good financial decisions that will help them live wealthier more fulfilling lives.

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