We recently covered passing on IRAs and 529 plans to future generations. This week we continue to discuss managing wealth across generations.
Are your kids going to be “trust fund babies?” I always thought a trust was this complicated, legal thing that only applied if you were über wealthy.
As I’ve learned more, it turns out that trusts can simplify passing assets on to the next generation, regardless of how much wealth you have. Full disclosure, I don’t have a trust set up for my family (yet).
Read on to see if your family could benefit from setting up a trust.
🧠 What you need to know
A trust is a legal structure that may make it easier to transfer your assets to your beneficiaries with control over how and when the assets are transferred. Generally speaking, they cost a few thousand dollars to set up.
Anyone is eligible to set up a trust. There isn’t any income or wealth requirement.
There are two main types: revocable and irrevocable. As the name suggests, revocable trusts are more flexible. They can be altered or dissolved during your lifetime.
Irrevocable trusts, on the other hand, are a bit more of a one-way road.
Putting you in control
There is a lot of overlap between what a will can do versus a trust. One of the key advantages of a trust is the ability to set specific rules for how assets are distributed to beneficiaries without needing probate court approval.
For example, you could specify that your children receive 25% of their inheritance at age 25, 50% at 30, and the remainder at 35, or you might tie distributions to milestones like graduating college or purchasing a first home. You could even require beneficiaries to stay employed in order to receive their trust assets.
The specific rules you can include may vary depending on state laws and the type of trust you establish.
Revocable vs. Irrevocable
Taxes: Irrevocable trusts allow you to minimize or avoid estate taxes, while revocable trusts don’t carry such a benefit.
Asset protection: Once assets are placed in an irrevocable trust, they are generally protected from creditors and legal claims. In other words, let’s say you are sued. They can’t touch the irrevocable trust assets, provided the trust was set up well before any potential creditor issues.
Asset allocation: In revocable trusts, you typically retain the ability to change asset allocation. For irrevocable trusts, it’s a lot more complicated. The trustee typically has to approve the changes, and you could even have to involve the beneficiaries and may need court approval. The grantor usually relinquishes control over the assets once they are placed in the trust.
Choosing a trustee: A trustee manages the distribution of the assets to beneficiaries. You can serve as the trustee for revocable trusts, while it’s often advisable to select an independent trustee for irrevocable trusts to ensure the trust’s validity for tax purposes. Naming a co-trustee or successor trustee can also be beneficial.
These are just the basics. You’ll want to hire an expert like an estate attorney and consult with a tax advisor to help set up the right trust structure for you.
🤝 How can Mezzi help?
Mezzi is here to help you and your family build generational wealth.
Collaborate with family members
Invite family members, share assets, and collaborate so you're all on the same page.
How are trust assets performing?
Use Mezzi to track returns on trust assets to make sure your planned generational wealth transfer is on track.
What’s yours and what’s for beneficiaries?
Mezzi’s Account Tags help you analyze each family member’s assets as one portfolio or separate portfolios.
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