• Ashok M, CFA

Protecting Wealth through Trusts : In Trust we trust

Updated: Apr 26, 2019

The Chinese have an expression. Wealth does not pass three generations. It is rare the wealth of a family can last three generations.

Protecting Wealth through Trusts : In Trust we trust

An illustration

Mike ‘Mish’ Shedlock, in his blog Global Economic Analysis describes the three generations as follows. Meaning: It's rare the wealth of a family can last for three generations (the 2nd may see the value of hard work, the 3rd, forget it).

The Wealth Creation generation strives to create wealth by working hard and saving their wealth through investments. The Wealth Preservation generation does not have to experience hard times. However, there is general unease in the family, as the second generation gain independence. The pressures of wanting to keep up with the lifestyles of their wealthier friends, coupled with economic uncertainty results in the family wealth no longer showing any big increases.

The Wealth Destruction generation finally inherit the family wealth and it is split various ways. They fail to create neither a savings ethic nor income flow. Wealth is completely wiped off from the family.

Time to start again.

The science behind loss of wealth

The Soviet economist Nikolai Kondratiev (also written Kondratieff) was the first to bring observations of economic cycles to international attention in his book The Major Economic Cycles (1925). Kondratiev identified three phases in the cycle: expansion, stagnation, recession. It is claimed that the period of the wave ranges from forty to sixty years; the cycles consist of alternating intervals between high sectoral growth and intervals of relatively slow growth.

How does a Trust protect wealth from economic cycles?

Protecting wealth through Trusts can extend, if not escape, the duration of such cycles. Trust is basically the isolation of one's properties in favour of somebody. It aims to limit the operation of the laws of inheritance in preference to the creator of the Trust.

Therefore, if charity for the society at large is one's interest over the narrow interest of offspring, then one must offload assets into a Trust at the earliest as soon as one crystallizes upon such intentions.

Trusts are bankruptcy remote, and away from the powerful hands of tax authorities and governments.

Take the case of an old lady whose children no longer take care of her, and she is looked after by a long-time friend. In good intention the old lady wants her friend to 'inherit' her wealth. In the absence of a written document (Will), her wealth is distributed to her children (by the court after her death). A written document would have served to hand down home-made justice.

A brief look into nature of Trusts

An exhaustive list of Trusts is beyond the scope of this post. Let us look at two types of Trusts here.

A Blind Trust is one in which the beneficiaries are unaware of the existence of a Trust in their favour - lest their behaviour changes with the knowledge of such a Trust.

A Family Trust aims to strike intergenerational equity - or equal standard of living across generations. The consumption pattern of current family members is not at the cost of future generations. At the same time excess capital in favour of future generation is not accumulated at the cost of current generation. What is core capital and what is excess capital must be calculated. Excess capital accounts for retirement expenses of the current generation. In certain family Trusts the document even specifies the model of car that each member can aspire to!

A person may have great love for his grandchildren - as opposed to his children. But laws of inheritance give preference to first heirs. To circumvent this the person creates a Trust or a Will to fulfil his desire.

The road ahead

Trusts have various benefits. The purpose of this post is to highlight saving wealth through operations of Trusts. It has been observed that wealth does not exceed beyond three generations. In the absence of a Trust or Will, disputes arise and may lead to the squandering of wealth. Economic cycles, such as Kondratiev cycles, lead to the dilution of wealth, at a macro level.

A Trust backed by prudent financial planning does protect wealth for future generations.

#trusts #privateclient

16 views0 comments

© 2019 by CapAdvisors Financial Services

  • Ashok CFA - CapAdvisors
  • White LinkedIn Icon