How trust funds work to pass on wealth

  • Dynastic wealth is a problem in America, according to Warren Buffett, when families pass money from one generation to the next.
  • The transmission of wealth to the next generation usually begins with a trust, a legal relationship created to hold someone’s money.
  • Transfer taxes are set up to help Prevent dynastic accumulation of inherited wealth, but wealthy families can pass money on without being subject to estate taxes.

The gap between rich and poor in America has widened – and dynastic wealth that has been lamented by Warren Buffett, may be a factor.

Dynastic wealth arises when families pass money on from one generation to the next. It’s a cyclical process: each generation can grow the money from the previous generation and leave it to the next generation, who then continues to grow it.

This pattern of keeping wealth within the family explains why the wealth of America’s three richest families – the Waltons, the Kochs, and the Marses – has grown 5,868% since 1982, to total 348, according to the left-wing Institute for Policy, Billionaire Bonanza study report totaled $ 7 billion.

But how is this generational wealth continuously transmitted? It usually starts with a confidence.

A trust is created to hold money for third parties

A trust is a legal relationship “designed to hold assets,” Alicia Waltenberger, director of wealth planning strategies at TIAA, told Business Insider. There are different types of trusts, but all essentially consist of three parties:

  1. The Grantor / Trustor – the person who creates the trust.
  2. The trustee – the person responsible for managing the trust assets in accordance with the trust terms.
  3. The beneficiary – the person or organization benefiting from the trust assets.

“”A trust is formed when the grantor transfers legal ownership of an asset to the trustee that is to be held in favor of the beneficiary“Said Waltenberger. Trusts can be revocable, in which they can be changed, or irrevocable, in which they cannot be changed.

A lifetime trust refers to trusts that are set up to take effect once they are created. A testamentary foundation is established, which becomes effective after the grantor’s death.

“The trust fund refers to the assets that the trustee holds in trust on behalf of the beneficiary,” said Michael Rosen-Prinz, a partner in the McDermott, Will & Emery retail practice group who works with Ultra High Net. Worth customers, Business Insider said. “When people mockingly speak of ‘escrow babies’, they are often referring to beneficiaries who receive assets from a trust without having earned that money or even having to manage it while in the trust.”

rich child family

“Trust babies” are those who receive assets from a trust.

Tristan Fewings / Getty Images

Continue reading: People assume that escrow babies are spoiled 20-year-olds born with silver spoons – but they’re not always who you think they are

Why set up a foundation at all?

The purposes of a trust can vary, but according to Rosen-Prinz, many people set up trusts to ensure that their children and offspring are looked after after death.

“Parents often want to give their children enough money to do something, but not enough money for their children to get away with doing nothing,” he said. “Trusts can be created with provisions that restrict how much money is distributed to beneficiaries or require that the beneficiaries be employed or otherwise active and engaged in society in order to receive distributions.”

“Some common purposes of trust planning are tax planning (delaying or reducing estate taxes), asset transfer planning (as a means of transferring assets to beneficiaries), estate avoidance, protection planning (beneficiaries with special needs, protection from creditors or ex-spouses, etc.), and donations for charitable causes, “said Waltenberger.

Estate taxes and other transfer taxes such as gift taxes and generation skipping transfer (GST) taxes are intended to prevent dynastic accumulation of inherited wealth by imposing a tax rate of 40%, said Rosen-Prinz. When this tax rate is applied to transferable assets, it “in a way distributes the wealth of the very rich”.

However, the rich can avoid taxation by taking advantage of tax exemptions.

Wealthy families can pass money on through a tax-free GST trust

One way that wealthy families can transfer assets from one generation to the next is through a GST trust, according to Waltenberger – a trust that skips the transfer of taxes.

“With that kind of trust, wealth can be transferred from one generation to the next with no inheritance tax,” she said.

The beneficiary in this case is known as the “skipping person” – “someone who is more than 37.5 years younger than the founder,” said Waltenberger. “This can be anyone, not necessarily a relative, but it is usually a trust established for the benefit of a grandson.”

The GST tax is separate from the federal estate and gift tax – it is levied on the transfer of assets to the skipping person.

However, according to Waltenberger, a GST trust can be exempt from GST tax if it is worth $ 11.4 million or less. If the assets exceed this amount, the GST of 40% will be introduced.

rich children

A GST trust often transfers assets to a grandchild.

Tristan Fewings / Getty Images

“By applying the GST exemption, assets in the family can be passed on over several generations without estate taxes being levied on each subsequent death,” said Waltenberger.

She added: “In my experience, many families set up GST trust planning by establishing lifelong trusts for the benefit of their children that will allow their child, and possibly their child’s offspring, to benefit from trust throughout the child’s life and then upon death of the child and to allow the assets to be passed on to the grandchildren in a lifelong trust for their benefit. This cycle can continue as long as state law so provides and / or assets remain in the trust. “

Continue reading: Inequality in the US is getting worse, and Warren Buffett’s lamented “dynastic wealth” may be one of the reasons

Waltenberger described a hypothetical scenario to illustrate their point of view:

Jane sets up a life foundation for the benefit of her son Adam. Adam’s Trust is funded with $ 2.5 million. The trust is structured so that Adam uses the trust assets to meet his lifetime needs, but also to keep the trust assets out of the hands of potential creditors and keep the assets in the family.

When Adam died, the balance of trust rose to $ 7 million. Since Jane applied her GST exemption to this trust, the $ 7 million trust will then be passed on to Adam’s children completely free of estate tax.

Wealthy families can set up multi-generation dynasty trusts

According to Rosen-Prinz, families can use the relatively uncomplicated estate planning to create a fortune with several generations that only transfers taxes when it is first financed, instead of leaving the fortune to children when they die or giving it away over the course of a lifetime.

A dynasty trust is a long-term, irrevocable trust that can last for many generations and in which distributions can be made to beneficiaries without incurring further transfer taxes. According to Rosen-Prinz, there is usually no estate or gift tax on a distribution from a trust.

rich young people millennial gene x

Dynasty trusts can exist for many generations.

Jason McCawley / Getty Images

“”A dynasty trust usually means a trust that has kept its wealth trustworthy for several generations and does not distribute the wealth directly to the beneficiaries at any given time, “he said. To function efficiently, a dynasty trust generally needs to be trusted by the Be GST exempt, he added.

However, there can be a number of disadvantages.

“For small sums of money, the effort to maintain trust sometimes overshadows the tax advantage,” said Rosen-Prinz. “Some people dislike the idea of ​​holding money in trust for long periods of time, or they may have had bad experiences in the past with overly restrictive trusts preventing them from holding assets in trust.”

He added, “Given the relatively high inheritance tax exemption of $ 11.4 million per person, most Americans don’t have to worry about ever paying inheritance taxes, whether or not they use trusts. But even for Families With Enough Wealth By using trusts, all they really need to worry about is the potential taxes required to bring the wealth into the trust. There are many sophisticated estate planning transactions involved in funding these trusts effectively. “

Comments are closed.