Can a Trust Fund Be Used to Build Generational Wealth?
Setting up a trust fund for a child is a great way to establish financial security, give them an early financial boost and teach them financial literacy. Done right, it can also be the first step to building generational wealth.
So, you’re thinking about setting up a trust fund.
You’ve got a new little one in the family – perhaps a child or a grandchild, perhaps even a nephew or niece. College is expensive, the cost of living keeps rising, and you (rightly) don’t want the little one to suffer the same financial challenges you and so many other people have had to face.
With around 34 million people in America below the poverty line in 2019 (around 10% of the population), money is a very real concern for many people.
There are plenty of reasons for it – uneven distribution of resources, lack of financial education, unemployment, health issues…
A trust fund is one of the ways to set your family up for financial success. To help them in their early adult years – and possibly well beyond.
As an added bonus, setting up a trust fund is another way to build generational wealth. This is the time to be thinking of your family in the long-term, not just in the here and now.
This is the time to think about what kind of legacy you’re going to leave behind.
How to Set Up a Trust Fund
Before you can set up a trust fund, you need to figure out which type of trust you want.
Trust funds require a little more planning than other options – like custodial accounts. They can be easy or complicated, but they typically require a lawyer to help set them up.
Here are some things to consider.
What is a Trust Fund?
A trust fund is a legal entity that contains any assets (monetary funds, investments like stocks and bonds, property and so forth) to be granted to someone else at a predetermined time.
Basically, a trust is an inheritance for the person of your choice (the beneficiary).
Depending on a few factors, such as the purpose of the trust and the size of it, a trust can be used to build generational wealth for the family.
Types of Trust Funds
Surprisingly, there are multiple types of trust funds.
Revocable: Revocable trust funds can be changed at any time but may be fairly complicated to set up.
Irrevocable: Irrevocable trust funds, however, cannot be changed once established, except in extenuating circumstances.
Living trust: A living trust is a trust given to the beneficiary while the grantor (that’s you) is still alive.
Testamentary trust: A testamentary trust is included in your last will and testament, so you (unfortunately) won’t be around to see your loved one receive it.
Education trust: This trust is meant for academic/formal educational purposes only.
Spendthrift trust: The spendthrift trust is a little different because the beneficiary doesn’t always receive the entire trust. They may not even have direct access to it at all. Instead, the trustee (the one who manages the trust fund) calls the shots in deciding how the assets should be used for the beneficiary. This trust is most common in cases where the beneficiary is, for some reason, unable to make responsible decisions with their inheritance.
Before you set up a trust fund, you should decide which type you want to go with – generally, a financial advisor or firm can help with this.
If you’re not sure where to start, you can always consult a financial advisor. Ask around or Google “trust fund companies” or “trust fund financial services” to find one in your area.
Costs of Setting Up a Trust Fund
So, how much does it cost to set up a trust fund? Unfortunately, there’s no one-size-fits-all answer.
Nearly every type of trust fund will come with attorney fees. These range from a few hundred dollars to several thousand dollars.
The simplest trusts – those that only involve liquid assets like money – are the cheapest, easiest option to set up. A trust that includes property, stocks or other non-liquid assets will be more expensive.
A reputable financial advisor will be able to answer any questions you have about setting up a trust. But if they don’t ease your worries or if they act cagey when you bring up costs, it may be better to find someone else to work with or to bring in an attorney.
Having someone with legal expertise on your side will do wonders in keeping your stress levels down and handling the fine details for you.
Who is Involved in Setting Up a Trust?
Normally, there are four main people involved in setting up a trust fund: grantor, attorney, trustee, and beneficiary (or beneficiaries).
Put simply,
The grantor is the person who transfers over the assets… Again, this would be you.
The attorney is responsible for creating what is called a full trust instrument. This is essentially the deed of the trust that covers all the terms, conditions and assets involved.
The trustee is the person who manages the assets. This is especially necessary when considering a testamentary trust or when you want minimal involvement. A trustee is also helpful when you’re creating a large trust since they help administer the trust (think the executor of a will). Choose someone reliable and trustworthy.
The beneficiary is, of course, the person you’re leaving the trust fund to. Son, daughter, grandchild, niece, nephew – you name it. Technically, they don’t even have to be related to you.
Steps to Set Up a Trust
Decide what type of trust you want to establish. This might be a good time to find an attorney.
Name your beneficiary – or beneficiaries.
Make and register a trust document.
Sign and notarize the agreement form.
Create an account for the trust.
Transfer any assets over to the account.
Reasons to Establish a Trust Fund for a Child
When it comes to financial security and securing your family’s future, you really can never plan or do too much – as long as you protect your own best interests.
A trust fund is, after all, essentially a transfer of wealth from one person to another. In other words, it’s a way to help build generational wealth – at least for one generation.
For some, it’s a legacy or a statement. A way of saying, “I am here” or “I was here.” For others, it’s simply a way to give their loved one a head start.
There’s really no reason why it can’t be for both.
Whether they’re sentimental, pragmatic or otherwise, your reasons for setting up a trust fund for a loved one are your own. That said, here are some of the biggest reasons why you may want to consider it.
Build Generational Wealth
As you’re probably aware by now, generational wealth is that of value that you leave for your descendants to be passed down to their descendants and so on.
Generational wealth may be as straightforward as half a million dollars in cash. It may be a small family-owned business your father or grandfather started that you’re now handing down to your son or daughter.
Basically, generational wealth is what you leave behind and what they, with any luck, continue to cherish and grow for future generations.
Say, for example, you establish a trust fund to be granted upon your death. In this trust, you may have:
Property
Business
Stocks and bonds
Mutual funds
Cash
Once your beneficiary receives the trust, and provided you’ve taught them well how to use it, they can turn around and use it to build something even greater for the family.
What was once a small family business may become a franchise.
That $100,000 could be reinvested in stocks, bonds and other securities to grow into $300,000 over the years. Some of that can continue to grow, while a percentage can be taken out and invested elsewhere for a greater return.
Generational wealth isn’t a game for impatient people or those who seek instant gratification. It’s for those who can plan and wait and perhaps tolerate a little bit of risk.
And generational wealth isn’t created with only a trust fund, at least not usually. But it’s a really solid start.
Teach Financial Literacy
Too few people understand personal finance. Budgeting and spending, sure. But things like saving and investing become a little trickier to understand and implement in day-to-day life, especially with minimum wage and high costs of living.
But just because it’s hard doesn’t mean it shouldn’t be done.
Those who are educated in personal finance tend to have better money management habits later in life. They also are more likely to have money in savings, invest and plan for retirement. They’re also less likely to get into major debt or make poor financial choices.
If you want to set up a trust fund for the purpose of building generational wealth, you need to make sure your beneficiary understands the basics of personal finance. Otherwise, they may just spend everything you’ve worked so hard for without considering the long-term consequences.
But with that, a trust fund is a great way to teach your loved one (or ones) about money. For instance, you can talk about it and help your beneficiary make plans on how to spend, save or invest it.
Whatever you decide to do, don’t miss the opportunity to teach the youth about the importance of money. It may not matter to them much right now, but it’ll matter to them later.
Give Your Loved One a Head Start
Even if you don’t care about building generational wealth, a trust is still a wonderful gift to leave a descendant. Depending on how much you leave them and any stipulations you may have put on the trust, your beneficiary could use their inheritance for a number of things, including:
Personal dream achievement (travel, opening a business, etc.)
College education
Family planning
Retirement planning
Protect Your Assets or Estate
Having a trust fund means you and you alone get to decide how – and when – you want to distribute your assets. You can even set conditions about how your beneficiary receives the trust. If, for instance, you want them to have the assets over a set period of time, rather than all at once, you can make this happen.
Depending on the case, a trust fund can result in lower gift and estate taxes. This can be great since nobody wants to deal with taxes.
Creating a trust also means you may be able to avoid probate. What is probate, you ask? Put simply, probate is the process of proving a legal document – like a will – to verify who gets what and under what circumstances. Probate can cost as little as 3% and as much as 10% of all your assets.
(As a note, probate can be beneficial depending on whether or not there are likely to be large claims made against you. Check out this post for more information on probate and when it’s beneficial – and when it’s not)
Another benefit of having a trust fund is that it makes things significantly less complicated when it comes to divvying out your estate. It keeps your affairs private and only allows those who are involved in.
Besides that, a trust ensures that not only are you leaving your personal estate with the one (or ones) you want to have it, but you’re also preventing family members from coming out of the woodwork to try to contest your decision. A contested estate can take months, if not years, to distribute. Avoid the drama with a trust, a will and other legal entities.
Finally, a trust fund makes distributing your estate much easier and faster. And it provides more security for you and your family. Rather than leaving your assets up to the courts or random people coming in for their piece of the pie (as they say), you know everything’s settled well in advance.
Bottom Line
A trust can be useful, but it isn’t always the answer. Take some time to think about it or, if you’re on the fence, consult a financial advisor on the matter. Whether you decide to set up a trust or not should be based on what feels right for you and your family. If a trust isn’t for you, remember there are other ways to leave a legacy and build up generational wealth.