Key Takeaways:
- Many estate plans are outdated, improperly executed, or non-existent.
- Trusts can protect family assets and support responsible inheritance.
- Open communication with heirs about roles and expectations can reduce future conflicts and confusion.
According to a survey from LegalShield, nearly 60% of U.S. adults don't have a will — even though 90% acknowledge they need one. Even among those with estate planning documents in place, 22% have never updated them. They may have missing or incorrect beneficiaries or improperly titled assets, diminishing the legal protection those documents were designed to protect from probate.
These numbers tell us that a significant number of families are unprepared to transfer wealth effectively or protect it for future generations. Many beneficiaries also mistakenly believe that what they inherit will be taxed as income — a common misconception that can add unnecessary confusion to the process.
For families looking to preserve wealth while empowering heirs to manage their inheritance responsibly, trusts can offer long-term benefits when implemented with care and updated regularly. In this article, we'll examine several potential trust structures and provide guidance to help your family achieve its wealth preservation goals.
Why Trusts Matter for Generational Wealth
A well-structured trust can:
- Safeguard assets from creditors, lawsuits, and potential divorces
- Provide a framework for responsible access to funds
- Support heirs with varying levels of financial maturity
- Maintain family intentions across multiple generations
- Reduce the administrative burden on surviving family members
But the real value lies in thoughtful design and consistent maintenance. Setting up a trust isn't a one-time activity; you must revisit and update it periodically to reflect changes in your growing family, financial circumstances, and state laws.
Here are a few different trust structures that can help you achieve your goals:
Dynasty Trusts
A dynasty trust can last multiple generations — potentially hundreds of years in some cases. These trusts keep inherited assets outside of each heir's taxable estate, reducing exposure to estate taxes over time. They can also be structured to distribute income or principal according to specific rules, helping beneficiaries avoid overspending or becoming financially dependent on the trust.
These trusts help preserve the value of large estates across generations by shielding inherited assets from estate taxes, creditors, or future divorces. They also allow grantors to express family values through distribution requirements — like completing college or maintaining employment.
Because a dynasty trust can span decades, it's crucial to choose a trustee (or succession of trustees) with clear oversight protocols.
Spendthrift Trusts
For families concerned about a beneficiary's spending habits or personal stability, a spendthrift trust adds another layer of protection. These trusts restrict a beneficiary's ability to access or assign their interest in the trust to others, preventing them from squandering the funds or using them as collateral for personal loans.
Spendthrift provisions can stand alone or be added to a broader irrevocable trust. They are especially helpful when a beneficiary struggles with addiction, financial discipline, or legal troubles.
This type of trust requires a trustee who can exercise discretion over distributions, so it's usually best handled by a neutral third party rather than an heir.
Irrevocable Trusts
An irrevocable trust permanently transfers ownership of assets out of the grantor's estate. Once established, the grantor no longer has control over the assets and changes generally require court approval or beneficiary consent.
Though less flexible than revocable living trusts, irrevocable trusts are often used to reduce estate tax exposure, protect assets from lawsuits or future claims, or facilitate Medicaid planning or other eligibility-based programs.
They can also hold life insurance policies, real estate, or business interests, helping families plan for liquidity and facilitate a smooth transition across generations.
Addressing Common Estate Planning Pitfalls
Even when a trust is in place, several issues can undermine its effectiveness:
- Improper titling of assets: Assets must be formally retitled into the name of the trust. A mismatch between legal documents and account ownership may derail the estate plan.
- Beneficiary adjustments: Make sure the beneficiary designations on accounts like life insurance and retirement are aligned with the beneficiary on the trust. Mismatches are common and can undermine your estate plan.
- Outdated documents: Wills and trusts prepared a decade ago most likely do not reflect your family's current situation. Review and update the plan after life events like marriage, divorce, births, deaths, disability, or significant changes in assets.
- Lack of preparedness: Set to take place over the next two decades, the Baby Boomer generation's "Great Wealth Transfer" will move an estimated $84 trillion to spouses, dependents, and charities. Most heirs have no idea how much they will inherit, or even where to find estate documents in the event of a parent's death or incapacity. At a minimum, connect heirs with the estate attorney who has the documents.
- Lack of communication: In many cases, family conflicts arise not from a lack of resources but from a lack of communication. Parents who explain their estate decisions ahead of time, such as why they selected a particular child to be an executor or trustee or how real estate will be divided, help reduce confusion and resentment. Including a written letter of intent with estate documents provides additional context beyond the legal language.
- Naming multiple co-executors: Many parents name two or more adult children as co-executors or trustees to be "fair". In reality, this creates gridlock when siblings can't agree on next steps. If you believe putting one sibling in charge will breed conflict, consider naming an independent trustee — like a corporate trustee service — instead.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
