How to Arrange a Living Trust the Right Way

As we mentioned earlier, it’s better to create a revocable living trust while you’re alive. In the case of an irrevocable trust, it’s often advisable to prioritize life insurance trusts. By placing most of your assets in a revocable living trust, you not only retain control but also have the flexibility to make any changes or arrangements in the future without any issues.

A Revocable Trust During Life and an Irrevocable Trust After Passing

If all the property is given to the children, they have the right to dispose of it as they see fit. Leaving aside the question of whether the children are capable of managing wealth, even if they are financially savvy, what about their spouses? There are numerous cases of legal disputes arising from marital property distribution, so proper estate planning is essential. The Chinese saying, “Wealth does not last beyond three generations” has persisted for generations. However, this saying has proven true only because the Chinese tradition often involves unconditionally transferring rights to individuals without adequate supervision, management, and filtering mechanisms. As a result, wealth truly does typically begin to decline after three or four generations, leading to the widespread phenomenon of “wealth not lasting beyond three generations” among the Chinese.

However, in the United States, it is common for familial wealth to last for eight, nine, or even ten generations. The reason for this lies in the prevalence of trusts in the United States. Trusts primarily serve the purpose of wealth transfer, and family businesses particularly benefit from this method. A trust ensures that one’s descendants can enjoy the family wealth and prevents the “wealth not lasting beyond three generations” phenomenon. During one’s lifetime, a revocable trust can be established, with a provision that automatically converts it into an irrevocable trust when both parents are no longer alive. This way, even when the parents are gone, the wealth can still be managed according to their wishes.

What is the ‘HEMS’ Withdrawal Method?

The essence of a trust is that “I” entrust the money to a trust company, which has full authority to manage and arrange it, for example by making investments. Later, the money is distributed to the next generation according to “my” wishes. How do my descendants access the money from the trust? There’s a common method known as HEMS, where H stands for Health, for health-related reasons; E for Education, for educational purposes; M for Maintenance, covering ongoing costs; and S for Support, ensuring basic living expenses. It is reported that when Hong Kong’s “Most Beautiful Miss Hong Kong,” Michele Monique Reis, married into a wealthy family in 2008, her parents-in-law had already entrusted over $40 billion of their wealth to a trust. Michele still receives $2 million Hong Kong dollars as pocket money each month, which is far better than the average person’s situation. It must be said that her parents-in-law had great foresight. By placing the wealth in an irrevocable trust, they ensured that it no longer belongs to the children. In the future, if the children go through divorce or legal troubles, these assets won’t be affected. This means that the future generations will inherit this immense wealth, which they can’t spend recklessly, can’t be sued for, and can’t be separated from. It will be passed down for generations.

How to Create a Dynasty Trust?

If you want to ensure that an irrevocable trust lasts longer, passing down wealth through generations, you might consider creating a dynasty trust. For example, in California, after the parents pass away, an irrevocable trust can last for 90 years. In neighboring Nevada, it can extend up to 720 years. However, in Delaware or Wyoming, an irrevocable trust can last indefinitely. When you create an irrevocable trust in these states, it is referred to as a dynasty trust. But please note that not every state allows this, and regulations vary from state to state. When your wealth accumulates to a certain stage, you might consider whether you must distribute all the assets to your children or if you can leave them in an irrevocable trust to support your family and future generations over lifetimes. Take the Rockefellers as an example. Their wealth has now passed down to the fifth and sixth generations, with over 500 descendants receiving an annual distribution of $3-4 hundred thousand from the Rockefellers’ charitable foundation and trusts.

In summary, after one’s passing, the transformation of a revocable living trust into an irrevocable trust may incur slightly higher income taxes, but in the long run it not only eliminates estate tax issues but also allows the wealth to stay within the family for generations. The children can’t spend it all, and it’s protected from legal disputes like divorces. That’s why we recommend creating a revocable trust during one’s lifetime, which can later be converted into an irrevocable trust after one’s passing.

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