Trusts aren’t just for the rich. Now more than ever, middle-class investors need to protect and preserve their wealth, too.
It’s a story as old as the Prodigal Son.
When you inherit your wealth instead of earning it, you are much more likely to waste it.
If the New Testament isn’t new enough for you, modern examples of cautionary tales abound. From Cornelius Vanderbilt to Frank Woolworth, numerous entrepreneurs amassed incredible fortunes that were squandered, or partly squandered, by descendants. According to research done by the Williams Group, 70 percent of families lose their wealth by the second generation, and 90 percent will lose it by the third generation.
While few of us count ourselves among the Gilded Age elite, their lessons apply — albeit on a smaller scale — to an increasing number of American families.
The Great Wealth Transfer
Over the last five decades, American workers, primarily in the Baby Boomer generation, have collectively accumulated an unprecedented amount of wealth. This buildup began in the late 20th century as employers moved away from pensions toward defined-contribution plans and personal responsibility. The American economy cooperated with this paradigm shift, delivering dependable, long-term growth for investors.
As the Boomer generation ages, an estimated $72.6 trillion is expected to change hands in the next two decades, with this mass inheritance benefiting mostly the Millennials.
This event has a name, the Great Wealth Transfer.
Vanderbilt and Woolworth didn’t amass their wealth with dreams that they would one day finance the lavish parties, five-figure shopping sprees, and gambling habits of careless children and grandchildren. Similarly, all of us need to think about what our legacy will be and how we can protect our assets in a way that creates positive change for our loved ones and the world.
And the most surefire way to do that is with a trust.
Trusts aren’t just for the super-rich
Now more than ever, Americans must embrace estate planning. Unfortunately, few have.
Even though the Covid-19 pandemic forced us all to come to terms with the fragility of life, a minority of us are legally and financially prepared for death. According to Caring.com’s 2022 Wills and Estate Planning Survey, only one in three Americans has a will, and even fewer report having a trust.
A trust is a legal arrangement in which a person transfers legal title or assets to another party, who manages them for one or more beneficiaries. Trusts can be created for a wide variety of reasons, but personal trusts are generally created to engage someone to manage your assets according to terms you specify and to ultimately distribute your assets to the beneficiaries you have named. A trust can continue operating after your death.
A trust protects family assets, as they transfer from one generation to the next. While many think of trusts as a vehicle for those with high net worth, even middle-class families with modest, six-figure estates can benefit from one.
With a trust, your estate can avoid probate, and you can reduce your family’s future tax liability. There are too many benefits to list in this article.
Underserved families, vulnerable estates
It’s difficult to know just how many families are underserved in the area of trusts and estate planning.
Trust instruments are private documents, and that privacy is the foundation for many of their advantages. But it also makes the trust industry difficult to track and monitor. In the United States, trusts do not need to be registered with the government, so there is no real way of knowing how many American families have a trust, and, more important, how many don’t.
Even finding estimates is difficult.
One statistical peek into the world of trusts comes from the Federal Reserve’s Survey of Consumer Finances. According to the survey, about a quarter of Americans report having inherited money, but only 1.3 percent inherited that money through a trust.
The reason that so many families that could benefit from a trust don’t have one are numerous. One reason has to do with a lack of education and awareness. Additionally, some professional wealth managers are disinclined to suggest a trust to clients, worried that a trust would take assets from their management portfolio.
Nonetheless, the time has come for trusts.
Find inspiration
For inspiration on how to love your children unconditionally, look no further than the Prodigal Son.
But for inspiration on how to set your children up for success and create a legacy guided by principles, look no further than the story of John D. Rockefeller and his only son, John D. Rockefeller Jr. During his life, Rockefeller Sr. was the richest man in the world. In 1917, he gave his son $460 million, or about $10 billion in today’s money. Before his death, John Jr. established trusts for his children and grandchildren. Six generations and 70 heirs later, the family fortune is still valued at an estimated $8.4 billion, and those heirs have contributed to almost countless charitable causes.
If you are retired or nearing retirement, talk to your adviser about whether establishing a trust is right for you. You worked hard to earn your money. A trust is a way you can make sure your heirs treat your wealth and your legacy with the respect it deserves.