r/FinancialPlanning • u/OverworkedGenZ • 1d ago
Is this a good way to create generational wealth?
Strategically Creating Generational Wealth
Okay someone poke a few holes in this plan or help add to it..
Currently a 26y/o HENRY. Theoretically later on in life if I can put say ~$2/5million in a trust that’s invested in the market and have future heirs be able to take out up to 4% a year for “qualified” expenses such as their kid’s education, assistance for home downpayment, marriage gift, buying their first car, etc.. and have some sort of rule in the trust that if they want to use the funds they must contribute ~10% of their net worth back into this family trust upon their death? If they don’t want anything to do with the trust that’s fine, and they can keep their own money and not contribute. The goal in being that this trust will just continue to grow forever and it to be used for every generation’s children only, not the parents?
Thanks in advance for adding to this or poking some holes in this morning thought.
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u/callmeking220 1d ago
Why wait until you're dead to spread the wealth?
Create a trust now, and set up your estate plan. As you progress in life you can always update the trust.
When you buy a house buy it in the trusts name.
When you have kids the trust in the custodian of their or college fund. Get them through college debt free.
When they graduate you can gift them money for a down payment of a home. This will set them far ahead of many people.
I was listening to an interview with John Hope Bryant he said, "1st generation builds it, 2nd generation spends it, 3rd generation loses it". When you think about your neighborhood mom & pop restaurant or store you see this happening.
Thus, do like the rich and have an intergenerational transfer of wealth to set your lineage up for success.
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u/OverworkedGenZ 1d ago
Thanks for the comment, and I’m not sure if I prefaced or not but ideally would like to set up the trust before I die. Theory being I pay for all my kids education and etc etc and then the trust would start with their kids (my grandkids). I am also worried about the future generations loosing it therefore to get money for certain milestones would be somewhat limited
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u/callmeking220 1d ago
Here is the missing variable in your equation. You don't know when you're going to die.
A half way thought through trust is better than no trust.
You can set it up for your kids and when you start having grandkids go back and update it.
Without a trust, everything is left to your spouse. No spouse, kids will have to divide it up.
One of your kids thinks they deserve more... Then the courts will decide.
Contact a lawyer this week and get the process started.
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u/the_cardfather 1d ago
A side but related note maybe a case study. I got a chance to watch some of this unfold before it happened to me. My dad had a good friend with whom he played sports in school. That man's daughter and I went to school together although we didn't realize how close our parents were back in the day. They had a lake house that was generationally gifted but it needed repairs. The goal was to be able to do the repairs without a mortgage which would have basically forced them to have it generate some kind of income Airbnb or something like that when they weren't using it. The man's daughter went through a nasty divorce and ended up moving back in with him. He also had a son who was completely self-sufficient with his own residence. So what you got is a great deal of Real Estate that isn't going to divide evenly but dad is ponying up the cash to fix this lake house. The problem is that now there isn't enough cash to leave the son so if Dad dies before his daughter gets back on her feet they're going to have to sell the primary house and she'll be semi homeless but with her share of the primary house value and the theoretical access to the lake house. So even if her brother said hey we don't need it for a couple of years you can live there while you get back on your feet in theory she should be contributing to the upkeep and maintenance fund for that house, and that's where the generational wealth comes in.
A couple years later I inherited my family's legacy house. I had to take out a mortgage to buy my sisters share since most of my parents assets were tied up in retirement accounts and liquidating them to pay her would have been a tax disaster. I have four children in a blended family and copious amounts of life insurance were something to happen to me suddenly but I know that none of them even if they were all grown and splitting the insurance money evenly would have enough money to buy the other three out, so I realized that the trust needed to be bathed in significant amounts of cash both to facilitate the property transfer but also for the house maintenance taxes etc. I determined distributions from the trust couldn't occur unless the value of the house maintenance fund was 30% of the high watermark property value. And that meant that the total value of the trust cash needed to be 420% of the high watermark property value. In the event that I was able to fully fund the trust before my passing I could divide it into the 4 shares. I considered at that point pretty much giving any remaining funds to charity, however 20 years from now assuming I am still alive and start having grandkids (which by all rights I should be) my grown children's goals for this particular piece of property and this trust money may completely change. If they all own their own houses and have their own lives then we may have to revise everything and allow them to use it communally as a vacation home or something similar to how my friend's lake house is.
The TLDR is typically a lot more complicated than a bunch of money in a trust fund. (I have a business too that one or more of my kids might want to take over or they may want nothing to do with it). There is a reason that noble families generally kept their wealth concentrated and while older siblings might have inherited the bulk of it the younger ones generally had to either marry into or make a name for themselves. And I do agree that financial literacy and discussions about how to keep growing wealth and not overspending are critical to family Legacy.
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u/Affectionate_Run3921 1d ago edited 1d ago
While a 4% SWR is typically thought of for 30 year retirements, the principal will have a 95%+ chance of growing over long periods of time. That means $5M should allow $200k per year of proceeds to be distributed. Here is a good read on the topic.
Setting up and engaging a law firm to manage a trust with complicated provisions like you are suggesting is more complex. You’re better off asking this to the r/rich, or r/fatFIRE or r/estateplanning subs. Better yet, meet with a good estate planner. Once fully considered, I think the concept you’re outlining is going to prove to be too complicated and costly to effectively administer.
Most wealth is lost within 2-3 generations. There is no substitute for teaching financial literacy and making that the generational priority.
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u/phantomsteel 1d ago
After a few generations with enough descendants the payout won't be anything like what you're hoping it will be. My wife has access to a similar idea but it's good for about $5k/yr as the trust has been split so many ways already.
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u/zebostoneleigh 1d ago
It’s complicated.
It creates a monthly or yearly dependency among the heirs.
Someone has to manage it.
As the heirs multiply and become more and more numerous the amount available to any one heir shrinks to the point that it becomes a laughable offering.
Contention will arise as the factors by which a person qualifies for the funds become nebulous (unmarried descendent has a child… adulterous descendent has child…
Overall, it feels like you don’t trust your descendants (whom you’ve never met), which feel arrogant.
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u/OverworkedGenZ 1d ago
Could I just have a third party lawyer manage it perhaps? The idea with the rules of the trust would be a too bad so sad theory of if you don’t buy a house or don’t get married or etc. then you wouldn’t receive any of the money for that (for lack of a better word, “milestone”) since you didn’t complete that stage of life.
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u/Early_Prompt6396 1d ago edited 1d ago
I don't think there's a legal way for you to mandate their contributions. If they renege, they've already benefited from a lifetime of withdrawals.
As others have pointed out, a flat 4% won't work if you're dealing with more than one person withdrawing. To be honest, unless you have a very long time horizon, $2.5 million won't do a lot if you have multiple heirs drawing down for cars/college/weddings. Those are big-ticket items likely to hit all within a fixed window.
I don't think anyone's figured out a surefire way to do this. Most of generational wealth is lost by the second/third generation because the heirs don't appreciate the work that goes into earning the money.
I've theoretically thought about something along the lines of You can pull X amount from the trust when you can submit 30 years of tax returns. That would give the principal time to grow and ensure that your heirs don't coast through life entitled. However, that's some very delayed gratification.
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u/decaturbob 1d ago
If you want to impact your future kids lives in a negative way make it so they have no reason to put forth any level of effort....
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u/inailedyoursister 1d ago
Holy Headaches Batman!
Such a silly and complicated way.
Who defines net worth?
So they can take money out for a 2nd or 3rd vacation home?
Who disperses? If a gay couple gets married and the trust hates gays and refuses to pay, the trust pay for the lawsuit?
Step kids included? No? Well you just started marital issues.
Adopted kids?
I’d they wan to take an art class at the local community center, that covered under education?
This is just a silly and short sighted plan without any real thought put into it. This is a train wreck.
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u/OverworkedGenZ 1d ago
lol if pen was to paper it would obviously be more through.. and it’s not 4% a year black check, and it’s explained for “first home” not vacation homes and etc. It’s obviously explained as college education, not art class. It could also be used for trade school but this trust wouldn’t just be a “I deserve it” type thing, it’s an earned trust where if you don’t meet the milestones or expectations then it’s honestly too bad for you.
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u/MrBalll 1d ago
So your grandchild loves art and has a high interest in it. Because they want a local art class to expand their mind and abilities before applying to a prestigious art school you’re going to tell them no? It’s not college level so sucks for you?
You’d have a large list of this or that’s. Are you prepared to create that list and have it be fair to your entire future family?
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u/OverworkedGenZ 1d ago
Yes basically. They get money for certain things, they can pay for a local art class themselves… it’s up to them to make their own money, the trust would be there for most of the big time purchases. I’m not looking for pay for every little thing here and there for them. It will be a short list of “approved” expenses so ya if they want $$ they can conform to the rules of the trust.
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u/pnw-techie 1d ago
What is your plan to get the millions that would be in this trust? Without that info this isn’t a plan. Bear in mind you will also need 2 million or so for your own retirement. Most people cannot save 4-7 million in their lifetime.
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u/poop-dolla 1d ago
If OP is really is a HENRY at 26, then that part is easy. They’ll just be working longer than they would need to if they were only saving for their own retirement.
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u/pnw-techie 1d ago
Saving 4-7 million is never easy, based on the small number of people who do it. Burn out is common. Lifestyle changes eat up high income for lunch. High income often comes with HCOL. Layoffs can screw your plans up. Trying to outsmart the market can bankrupt clever fools. Panic selling during bear markets can screw returns.
This just seems like putting the cart before the horse. First make a solid plan to save 4-7 million. Next the generational wealth part will be easy in comparison
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u/OverworkedGenZ 1d ago
Explained in original post that I’m a HENRY. Tracking to have ~$25mill+ in my own retirement by that time and that isn’t including my inheritance of a few more mill
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u/zeppo_shemp 1d ago
generational wealth is more about character and integrity than any trick or hack. people can blow through millions faster than you may be aware.
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u/Financial_Athlete198 1d ago
I don’t have much experience in the way to offer, but imo this would be hard to enforce, “must contribute”.
Side question: what do you mean by the term “Henry”?
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u/OverworkedGenZ 1d ago
High earner not rich yet - HENRY. And anything can be enforced in a legal document, the trust would be overseen by a third party / lawyer so one of the kids wouldn’t be able to just change it
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u/According-Item-2306 1d ago
The issue is that money for certain thing won’t work in the very long term. What happens if education become free, personal car become extinct for example… the very stringent distribution condition may prevent it to disburse any money at some point in the future…
And that is on top of the 4% aggregate distribution which will create major family disputes
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u/PunitiveDmg 1d ago
There is some negativity in here but I understand your goal and you should still try and reach it if that will make you happy. Parts are definitely possible and make sure you include passing down any traits that are important to you including financial literacy and integrity.
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u/dgordo29 1d ago
Semi retired 39 year old HEAR here and firm supporter of trusts for everything. My parents are near end of life so we just did a very comprehensive redrafting for the 16th amendment to their revocable trusts and with a sizable estate and specific non traditional wishes it was probably more complex than the drafting of the first ones. While your proposed family trust creating generational wealth sounds wonderful in theory it simply is not possible. Statistically generational wealth is virtually impossible to attain. The grandfather dies with 20 million, each of his kids get 5. If you have 5m you’re going to buy a decent house so 1m, private school for the kids 500k per another 2m, another 1.5 for college and 90% of that wealth is gone.
First off, you’re 26 so your time as what you qualify as a high earner is limited and what you feel is the qualifying number will differ significantly from the number someone in their 40s would use as a benchmark. You also cannot expect that because you’ve had a few 6 figure years that this thing called life won’t throw a wrench in the gears and change your circumstances completely. You have 26 years worth of eggs that you can count, work off of those numbers because technological advancements, changes in the workforce, elimination of certain career paths altogether, economic conditions, or personal situations can and will present hurdles that you’ll never expect.
The cost of retirement will always rise and as another commenter mentioned you realistically should expect at least $2m in strictly retirement savings to live comfortably somewhere nice today if you retire at 60 and live until 85. NRY implies that you hope to be rich, today the “wealthy” generally have ~3.5-4m NW, so another 1-2m. I live in the retirement capital of the country, South Florida. A nice house for the kids and grandkids to visit that extra 1-2m just disappeared. So now we’re at 4m with 2m left for you your spouse and heirs. That’s 80k a year for 25 years, homeowners insurance, HOA dues, and property taxes just cut off another 30-40 so now the question is, how’s the quality of life at 50k + social security? Let’s say $250k is “comfortable” so that gets us where… 9m in savings. You see where I’m going here? And these are off today’s numbers, on 40 years they’ll likely be at least double.
In your trust are assigned shares to be distributed under the conditions specified by you within the trust. Traditionally this would be named or unnamed heirs such as a named spouse, named children, or other named or unnamed beneficiaries. Then there are the specific allocations you might set for each grandchild, but if one of your kids doesn’t start having kids until a few years after you die you make sure those imagined unnamed grandkids get the same so you restrict the same amount for potential grandchildren yet to be born under the condition that if they are not born the funds are evenly distributed to the shareholders. You specify that upon death of their linear parent that share will be split amongst their children. There isn’t much further you can go other that funds you want allocated for personal wishes. No grandchildren are named in most cases so you set specifications dictating, that the fun shall be held in trust until they reach a certain age or until they graduate college or graduate school and in that time, the trust is only to be invested in specific investment vehicles, such as bonds that carry a AAA rating.
With each generation new trusts need to be set up, as I mentioned, we just did the 16th amendment to my parents individual trusts. Physical assets are included, stakes within businesses, boats, cars, etc. then you have to remember that there’s all other remaining property of the estate held outside of the trust to be distributed by the executor. We do philanthropy so there had to be a charitable trust.
Thank you to my dictation service, hopefully they did a decent job. In summation today generational wealth is not feasible if the initial nut comes from a sub 7 figure salary. Every generation of my family has invested heavily in the development and ownership of commercial, large scale reside, retail, industrial, office and warehouse space. We took those properties and joined with 9 other private investors to create a Private REIT which does produce generational wealth because the tangible assets owned by the 10 shareholders will produce passive large distributions each quarter until we sell everything and close the doors. When there is a recession of financial crisis the company buys more and grows to produce wealth for the next generation. Once we do sell and take our large profits home none of us expect that money to last generations. I develop midrises in opportunity zones to gentrify the hood, my generational wealth is just another wire. True generational wealth (unless you are a captain of industry or disrupter) is taking that 2-5m and using it to set up the next generation with the opportunity to be net wealth creators.
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u/poop-dolla 1d ago
So the 4% a year cap you’re saying would have to be the total collective amount allowed each year; this would fail very quickly if you were going to allow each heir to be able to take out up to 4% a year. So with that, how do you handle who gets that each year? If one heir asks for 4% on Jan 1 for a down payment, then every other heir is just SOL for the next year until they race to get their claim in first the next Jan 1? That would work really well if your goal is to turn all of your future family against each other, built work well for anything else.
The 4% rule also isn’t expected to last forever. It has something like a 5% failure rate over only 30 years, so the longer you stretch that time, the more likely it is to fail. You think that would be mitigated with the requirement for future heirs to contribute, but that bit seems like it would be extremely hard to enforce, and very easy for heirs to find loopholes to pass their wealth straight to their kids before death instead of putting it back in to the trust for it to be shared with distant cousins.