Guarding Generational Wealth: Trust Strategies to Keep Family Fortunes Intact
- Gustaf Rounick, CFP®, ChFC®
- Aug 1
- 9 min read
Updated: 3 hours ago
The Three-Generation Challenge
The old proverb “shirtsleeves to shirtsleeves in three generations” still rings true. RBC Wealth Management notes that most families who lose their fortune do so because rising generations inherit wealth but not the perspective that created it [1]. Academic work suggests that as many as 70 percent of estates are depleted by the second generation and 90 percent by the third [2].
The Great Wealth Transfer
Roughly $84 trillion is projected to change hands in the United States between now and 2045, with the bulk of the transfer expected to occur from Baby Boomers to younger heirs [3]. This unprecedented flow raises the stakes: successful stewardship today may determine whether children and grandchildren benefit or start over.
Begin with Purpose
Families that keep capital intact tend to start with a shared mission. A written family vision clarifies why the wealth exists—whether to fund entrepreneurial ventures, support philanthropy, or simply provide security. Putting the “why” in writing gives future heirs a yard-stick against which to measure every decision.
Make Learning a Family Habit
Technical skill matters, but an attitude of stewardship matters more. Truist’s generational-wealth study found the most significant “opportunity gap” lies between families that say financial education is essential and those that actually practice it [4]. Reading account statements together, inviting teens to meetings with the family’s advisor, or asking young adults to co-author the annual budget turns theory into experience.
Communicate Early and Often
Silence breeds suspicion. Periodic family meetings—formal gatherings with an agenda and minutes—let everyone hear the same facts at the same time, reducing rumor and resentment. Open dialogue also reveals shifting goals, such as a desire to invest sustainably or expand philanthropic giving, before those objectives conflict with existing plans.
Tax-Efficient Trusts: Why They Matter
Trusts are legal “containers” that enable families to manage, protect, and transfer wealth with greater control than a simple will. When drafted thoughtfully, they can reduce or even eliminate federal estate, gift, and generation-skipping taxes, shield assets from creditors and divorce, and keep family matters private.
The Current $15 Million Exclusion
The One Big Beautiful Bill Act (“OBBBA”), signed on July 4, 2025, made permanent a unified federal estate, gift, and generation-skipping transfer (GST) tax exemption of $15 million per person ($30 million per married couple), indexed for inflation beginning in 2026 [7]. Anything above that threshold is taxed at a flat 40 percent federal rate, before any state-level estate taxes [11].
The Marital Deduction in Context
In addition to the basic exclusion, U.S. law provides an unlimited marital deduction: assets left outright to a U.S. citizen spouse are exempt from estate and gift tax [8]. This defers—rather than eliminates—tax, because the inherited property is pulled into the survivor’s taxable estate at the second death. Proper trust planning can preserve the deduction while allowing each spouse to utilize their respective $15 million exclusion.
QTIP Trusts—Income for a Spouse, Control for the Family
A qualified terminable interest property (QTIP) trust gives the surviving spouse all of the trust’s income for life (and, if desired, distributions of principal for health, education, maintenance, or support) while allowing the first spouse to decide who ultimately receives the remaining assets. Because a QTIP qualifies for the marital deduction, no estate tax is due at the first death—even though the principal is restricted-yet the family, not the surviving spouse, controls where the money goes after the second death [9].
How a QTIP Preserves Flexibility
QTIPs are frequently paired with “formula clauses” that let the executor decide how much passes into the QTIP (qualifying for the marital deduction) and how much stays outside that deduction, often in a credit-shelter trust, once the exact estate value is known. If family circumstances or tax laws change, the executor can adjust the allocation without requiring court approval.
Credit-Shelter (Bypass) Trusts—Using Both Exclusions
A credit-shelter trust—also called an exemption or bypass trust—soaks up the deceased spouse’s $15 million exclusion so that those assets (plus any future appreciation) never re-enter the tax system at the survivor’s death. The surviving spouse can receive income and, under certain standards, principal, but the trust assets are outside both spouses’ taxable estates [10].
Dynasty Trusts—Locking In Benefits for Generations
Some states allow trusts to last hundreds of years or even indefinitely. A dynasty trust combines the estate-tax shelter of a bypass trust with creditor and divorce protection for each generation. By allocating GST exemption to the trust, transfers to grandchildren and more remote descendants also avoid the 40 percent GST tax [11][12].
Spousal Lifetime Access Trusts—Gift Today, Access Tomorrow
A spousal lifetime access trust (SLAT) allows one spouse to make an irrevocable gift that utilizes part of the $15 million exclusion, while providing indirect access to the assets through the beneficiary-spouse. If both spouses create SLATs, they must differ meaningfully to avoid the “reciprocal-trust doctrine,” which could unwind the plan.
Irrevocable Life-Insurance Trusts—Funding Future Tax Bills
Life-insurance proceeds are generally income-tax-free but are includable in the insured’s estate unless the policy is owned outside that estate. An irrevocable life-insurance trust (ILIT) keeps death benefits out of both spouses’ estates. It provides liquidity to pay estate taxes on hard-to-sell assets, such as real estate or a family business [13].
Charitable Split-Interest Trusts—Tax Benefits and Philanthropy
Charitable remainder trusts and charitable lead trusts can remove appreciating assets from the estate, create an income stream for the family, and generate an immediate charitable deduction. They work best for highly appreciated stock or real estate, where the family wishes to support charity eventually but still needs cash flow.
Choosing Where to Site Your Trust
States such as South Dakota, Nevada, Delaware, and Tennessee offer favorable trust laws: no state income tax on trust income, long or perpetual durations, directed-trust statutes, and robust asset-protection features. Situs selection can materially improve after-tax growth and administrative flexibility.
Illustrative Savings Calculation
Imagine a married couple with a $40 million estate.
No Trust Planning – Spouse A leaves everything outright to Spouse B. No tax is due at A’s death because of the marital deduction. At B’s later death, the estate is still $40 million. B’s $15 million exclusion shelters the first $15 million; the remaining $25 million is taxed at 40 percent, producing a $10 million federal estate-tax bill.
Credit-Shelter + QTIP Strategy – At A’s death, $15 million (equal to A’s exclusion) funds a credit-shelter trust. The remaining $25 million is allocated to a QTIP trust and qualifies for the marital deduction. No tax is paid. At B’s death, only the QTIP’s $25 million is included in B’s estate. B’s own $15 million exclusion offsets part of that amount, leaving $10 million subject to tax. The resulting tax is $4 million to $6 million LESS than the no-trust approach. Any growth on the $15 million credit-shelter trust is entirely outside the estate, so the real savings are often much larger. This example ignores state estate taxes and assumes a flat 40 percent federal rate [11].
Putting It All Together
A well-drafted plan often layers several trusts: a credit-shelter trust to use the first exclusion, a QTIP for flexibility and spouse protection, a dynasty “GST-exempt” trust for long-term growth, and an ILIT for estate-tax liquidity. The right mix depends on net worth, family dynamics, residency, and charitable intent.
Govern Like a Business
Families who endure, treat governance as seriously as a public company does. The Financial Times reports that constitutions, family councils, and boards with independent voices reduce conflict and keep strategy on track [15]. A simple charter that spells out how members join the council, vote on investments, and resolve disputes can be drafted long before wealth reaches the billions.
Plan for Liquidity and Control
An illiquid legacy—say, a family business or real estate partnership—can force heirs to sell at the wrong time just to pay estate tax. Techniques such as life-insurance funding, recapitalizations that shift value into non-voting interests, or outright partial sales ahead of a taxable event can provide cash without dismantling the core asset base.
Review and Adapt
Marriage, divorce, birth, death, and changes in tax law demand periodic reviews. A standing tradition—a biennial estate-plan audit or a quarterly trustee letter—keeps documents and intentions synchronized. Families who treat planning as an ongoing process, not a binder on a shelf, are best positioned for the unknown.
Conclusion
Preserving wealth beyond three generations is less about secret trusts and more about purpose, preparation, and participation. By grounding a plan in shared values, educating heirs early, communicating continuously, and refreshing structures as laws evolve, today’s families can replace the old proverb with a new one: “prosperity to prosperity, from one generation to the next.”
Next Step: Start Your Family’s Plan Today
The strategies in this guide show what’s possible; the right mix for your family depends on your goals, assets, and state laws. If you’re ready to see how a credit-shelter or QTIP trust could fit into your estate plan, schedule a confidential, no-obligation conversation.
Founder & Lead Financial Advisor,
People also ask:
Question: What does “generational wealth preservation” mean?
Answer: Generational wealth preservation is the practice of protecting and growing family assets so children, grandchildren, and even further heirs receive meaningful benefits instead of starting from scratch every generation. It blends investment management, estate-tax planning, and family governance so money, values, and knowledge all endure.
Question: How do tax-efficient trusts help lower estate taxes?
Answer: A tax-efficient trust shifts ownership of assets out of an individual’s taxable estate and into a legal entity with its own taxpayer status. Because the trust, not the person, owns future growth, that appreciation can pass to heirs free of estate tax while still being available for a spouse or descendants under the trust’s rules.
Question: What are the core estate-planning strategies everyone should consider?
Answer: Most plans start with a will, powers of attorney, and advance health directives. From there, families often add revocable living trusts for probate avoidance, irrevocable trusts for tax minimization, beneficiary designations that dovetail with the trust language, and scheduled reviews whenever laws or family circumstances change.
Question: How does a QTIP trust work?
Answer: A QTIP (Qualified Terminable Interest Property) trust gives the surviving spouse all trust income for life—qualifying for the unlimited marital deduction—while letting the first spouse decide who receives the principal at the second death. It protects children from disinheritance and keeps long-term control in the first spouse’s chosen hands.
Question: Why is marital-deduction planning important?
Answer: The unlimited marital deduction postpones estate tax until the second spouse dies, but postponement is not elimination. Proper planning divides assets so each spouse uses their own estate-tax exclusion, preventing a large “catch-up” tax bill later.
Question: What is a credit-shelter (bypass) trust?
Answer: A credit-shelter trust is funded with assets equal to the deceased spouse’s estate-tax exclusion—currently $15 million. Those assets (and all future growth) bypass the survivor’s estate yet can still support the survivor under the trust’s terms.
Question: How long can a dynasty trust last?
Answer: In states like South Dakota, Nevada, and Delaware, a dynasty trust can be perpetual. That means assets can compound for many generations without incurring additional estate or generation-skipping transfer taxes.
Question: What is a Spousal Lifetime Access Trust (SLAT)?
Answer: A SLAT is an irrevocable trust one spouse sets up for the benefit of the other during life. It removes assets from both estates while keeping indirect access through the beneficiary-spouse if cash-flow needs arise.
Question: How does the $15 million estate-tax exemption affect my plan?
Answer: Each U.S. citizen now has a $15 million lifetime exclusion for estate, gift, and GST taxes. Using trusts—bypass, QTIP, dynasty, SLATs—lets you “lock in” that exemption today so future appreciation escapes the 40 percent federal estate-tax rate.
Question: What is GST tax avoidance?
Answer: Allocating generation-skipping transfer (GST) exemption to a trust shelters transfers to grandchildren and later heirs from the 40 percent GST tax. Dynasty trusts are a common vehicle because they can span multiple generations.
Question: What is the best way to handle a family wealth transfer?
Answer: Start early. Combine formal documents (trusts, wills) with informal practices (family meetings, financial education). Clarify goals, choose fiduciaries, and fund trusts in stages so heirs grow into responsibility.
Question: How do asset-protection trusts work?
Answer: Asset-protection trusts place property beyond the reach of personal creditors and divorce claims while still allowing the family to benefit. Some states permit self-settled versions that protect assets even when the grantor is also a beneficiary.
Question: What is legacy planning?
Answer: Legacy planning goes beyond money, incorporating philanthropic goals, ethical wills, and family mission statements so heirs inherit purpose and values alongside assets.
Question: Why does high-net-worth estate planning differ from average plans?
Answer: Larger estates face higher tax exposure and public scrutiny. Advanced trusts, life-insurance funding, and multi-state situs selection become critical to reduce tax, preserve privacy, and manage complex asset mixes like businesses or private equity.
Question: How can I avoid estate taxes entirely?
Answer: You can’t eliminate all taxes for every scenario, but you can reduce or postpone them through lifetime gifts, charitable split-interest trusts, credit-shelter and dynasty trusts, and strategic use of the $15 million exclusion.
Question: What is OBBBA estate planning?
Answer: OBBBA refers to planning under the One Big Beautiful Bill Act of 2025, which set the $15 million exclusion and indexed it for inflation. Plans drafted before 2025 should be reviewed to ensure formula clauses reference the new limits.
Question: How do I protect wealth across multiple generations?
Answer: Layer strategies—credit-shelter for the first exclusion, QTIP for spouse protection, dynasty trusts for long-term growth, SLATs for flexibility, and review documents every few years. Combine these legal tools with ongoing education so heirs can steward what they receive.
Question: Why should I care about probate avoidance?
Answer: Probate can take months, cost money, and make your estate inventory apublic record. Revocable living trusts and proper beneficiary designations transfer assets privately, quickly, and often more cheaply than a court-supervised process.
Important Disclosure
Westlight Wealth, LLC (“Westlight”) is an investment adviser registered with the State of California. Registration does not imply a certain level of skill or training. This material is for educational purposes only and is not intended as investment, legal, or tax advice. Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. Consult your attorney, tax professional, or advisor regarding your specific circumstances.
Works Cited
[2] https://jamesgrubman.com/wp-content/uploads/2022/06/2022-06-There-is-no-70-rule-JGrubman-IFOJ.pdf
[5] https://www.feldmanlawgroup.com/blog/2025/january/irs-announces-2025-gift-and-estate-tax-exemption/
