Preserving Generational Wealth: What to Know About Family Trusts

InspireHer: Plancorp Women’s Initiative | Family Finances | Wealth Transfer | Family Planning

 Susan Jones By: Susan Jones

Families that have worked hard to build wealth want to share that success with their children, grandchildren, and beyond. When it comes to building that kind of generational wealth, a family trust is a great place to start. 

Family trusts are a key tool for managing wealth carefully over multiple generations and passing that wealth down to beneficiaries according to your wishes. You can set up a trust to specify how your assets are managed, who has access to them, and what timelines and conditions must be met. Depending on your needs, you can create trusts to take care of a spouse who outlives the other, or trusts that steward assets for minor children until they become adults. On top of that flexibility, trusts also can insulate assets from creditors and reduce estate taxes.

Given those characteristics, trusts tend to be appropriate for families with large estates or a complicated mix of assets. Here’s a closer look at how family trusts work, and how to create one that’s right for your family’s needs.

What is a Family Trust?

Trusts are legal vehicles that hold and distribute assets according to specific conditions. There are three important parties in a trust: the grantor, the trustee, and the beneficiary. The grantor establishes the trust and transfers assets into it, which could include cash accounts, stocks and bonds, real estate, business interests, or valuable antiques and collectables. The trustee manages those assets on behalf of the beneficiary, who receives financial benefit from the trust. 

In a family trust, the grantor and beneficiaries typically are related. Grantors might be parents or grandparents, while beneficiaries might be children, grandchildren, siblings, cousins, or any other family member.

There are several types of family trusts, but here are four of the most common.

Revocable Trust

Revocable trusts are a type of living trust — trusts created during the grantor’s lifetime — that allow the grantor to change or cancel provisions in the original trust documents. Income earned by assets within the trust is distributed to the grantor during their lifetime, and then those assets are transferred to the beneficiaries upon the grantor’s death. Revocable trusts don’t provide the grantor with any immediate tax advantages, because assets are included as part of the grantor’s estate and are subject to estate taxes.

Irrevocable Trust

The terms of an irrevocable trust generally can’t be changed once established, though state law may provide the ability to change trust terms in some circumstances. When a grantor sets up an irrevocable trust, they effectively transfer all ownership of assets funding the trust and no longer have any legal right to them. However, this arrangement comes with estate tax benefits: Irrevocable trusts immediately remove assets from the grantor’s taxable estate.

Spouse Limited Access Trust

A SLAT is an irrevocable trust where one spouse, known as the donor spouse, gifts assets to the other spouse, known the beneficiary spouse. The gift is generally not taxable because the grantor uses the federal gift and estate tax exclusion when making the gift, currently $12.06 million per individual. By naming a spouse as a beneficiary, the donor retains indirect access to the trust assets, which can provide a “safety net” for donors hesitant to give away assets. SLATs can be designed to benefit children and other future generations, too, and can be designed to be shielded from future estate taxes as well. Any post-gift appreciation will take place inside the trust and will be excluded from the taxable estate of both spouses. Individuals may want to take advantage of these trusts soon, as the estate and gift tax exemption is due to reset to $5 million (or close to $7 million when adjusted for inflation) in 2026.

Marital Trust

A marital trust is an irrevocable trust that allows the grantor to transfer assets to a surviving spouse tax-free and control the ultimate distribution of the trust assets. The surviving spouse can access the assets in the trust or simply receive income from them. At the surviving spouse’s death, the assets are includible in his or her gross estate for estate tax purposes but then pass to children or other beneficiaries according to the trust agreement. Often used in a revocable trust, a marital trust can be instrumental in deferring estate taxes payable, ensuring that the married couple takes full advantage of the $24.12 million estate and generation-skipping transfer tax exemptions.

Setting Up a Family Trust

To set up a trust, you’ll need to meet with an estate planning attorney. However, you might want to talk to your financial advisor before you engage an attorney, because advisors can help determine what type of trust is appropriate for your family’s circumstances. For example: 

  • Individuals with assets well below the estate tax exemptions (both the current and reduced amount slated for 2026) might choose a simple revocable trust that helps them avoid probate. 
  • Individuals whose assets exceed the estate tax exemption might be better served by an irrevocable trust with provisions to avoid estate and generation-skipping transfer taxes. 
  • A family with a child who has special needs can set up a trust designed to give that child access to government benefits while providing additional financial support. 

Financial advisors also have visibility into your overall financial situation, family makeup, and values. Those insights are important to help you make key decisions about naming a trustee, designating assets for inclusion in the trust, and establishing provisions that specify how beneficiaries will receive those assets. 

Planning for those decisions ahead of time can help you cut down on legal expenses. You’ll approach the estate planning attorney already armed with the information they’ll need to help you set up your trust documents. 

When preparing trust documents, be sure to allow for flexibility to account for potential changes in family situation or tax law. For example, if a child is born with special needs, you may want to include provisions that allow you to transfer a portion of the original trust to a new vehicle that is more appropriate for supporting the child’s well-being.

Maintaining and Reviewing Your Family Trust

Estate plan implementation and regular review are as important as the initial estate plan set-up. Again, a financial advisor is an important partner in this process. Advisors can work with trustees to make sure distributions are made on time, and they can monitor changes in the law, suggesting tweaks to the trust as necessary. 

You might also want your financial advisor to help educate beneficiaries about the contents and workings of the trust you choose. When grantors are comfortable doing so, financial advisors can facilitate conversations with beneficiaries about the details of a trust, what to expect, and why certain decisions were made. These conversations can help avoid confusion and difficult dynamics down the road, especially when there are complicated assets like a family business or home involved. 

This combination of thoughtful planning, collaboration with your financial advisor and attorney, and open communication among family members can help ensure you create a family trust that helps you preserve and grow generational wealth. 

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This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

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For over twenty years, Susan has passionately provided wealth management services to individuals, families, fiduciaries, private foundations and their related entities with a focus on sophisticated income, gift and estate tax consulting and compliance, proactive executive compensation planning and succession planning. Susan understands the many facets involved in creating a successful multi-generational family legacy and uses a forward-looking approach to help clients grow and preserve assets, reduce taxes and realize both their financial and non-financial goals. Susan’s experience includes practicing law in the tax and estate planning. More »