Does Your Trust Protect Against Inflation?

Inflation is at 7%. Can you protect your wealth in a trust?

Protect Your Net Worth Against Inflation And Other Preventable Losses

Inflation is on a lot of people’s minds right now. And that’s not surprising. The annual inflation rate for the United States is 7% for the 12 months that ended December 2021. That’s the highest since June 1982. 

A properly drafted trust (in conjunction with smart asset allocation) can protect your family against inflation. Here’s how.

First, you need to know what inflation is. It is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in the economy.  For the sake of yourself and your family, it makes sense to hold assets that increase in value at least as fast as inflation. And to protect them against other avoidable losses.
 
If you are earning 4% in a savings account, the 7% inflation rate is actually making you 3% poorer each year. So, a savings account is not a great idea during inflationary times. However, there are some assets that are better hedges against inflation.

Assets that are better hedges against inflation.

Real Estate and Stocks

One asset that typically holds its value during inflationary times is real estate. The other is stocks.

Precious Metals

Precious metals such as gold and silver are well-known hedges against inflation. 

Business

Well-run businesses tend to hold their value despite inflation. If you own a business, think about how you can keep the business in the family. The business can be like a “Golden Goose” for future generations. Of course, it needs to be run properly. And that entails proper family governance so the family can make decisions based on keeping the business going.

Invest In Yourself

Maybe it makes sense to advance your career so that you have a greater earning power in the future.

Cash Loses Value With Inflation

One thing that makes less sense during inflationary times is to hold cash. And that’s where I get to my main point …

The Benefit of a Dynasty Trust

If you currently own assets that are hedged against inflation, then keep them in a trust for the sake of your future beneficiaries. And don’t let your heirs convert assets to cash after you pass away. It’s natural for heirs to want to liquidate everything and get a check. I hate to say it, but as soon as you pass away, they will be thinking about what they can buy with your money. Given their choice, many heirs will quickly spend through the money you spent a lifetime to accumulate. You would do them more good by holding inflation-hedged assets in a trust for their benefit and not allowing your kids to liquidate everything. right away
 
This is where having a properly drafted trust (with discretionary or dynasty provisions) comes into play. You can’t have just any old revocable trust. It needs to have certain provisions.
  • It should not provide for an outright distribution upon your death. Instead, the trustee should be given discretion to make distributions as appropriate. 
  • Since you are not giving outright distributions to the beneficiaries, there’s going to be friction between the beneficiaries and the trustee. The beneficiaries will want to get money, and the trustee is going to have to hold firm and say “no”sometimes. Because there’s going to be friction between the beneficiaries and the trustee, you should include a mechanism for solving those disputes without going to court. Your wealth can be depleted much faster than inflation if people end up fighting in court.
  • And since your trust will provide for discretionary distributions, you need a way to have the income taxed to the beneficiaries (at their lower tax bracket) and not at the high income tax bracket applicable to trusts.
  • Depending on your net worth, you may need to include generation skipping tax provisions.
  • If you hope to have the trust last for multiple generations, then you need to implement a system of family governance. That is a way that your family will make decisions after you are gone. This typically consists of a Code of Honor and a Family Constitution. 

Summary.

This was by no means an exhaustive discussion of the topic of inflation. The main point is that your wealth can quickly get depleted by your heirs. If they are given cash, that will lose value due to inflation. If they mismanage their inheritance or make poor decisions, it can get squandered in many other ways. This can all be prevented with proper planning.
 
We are helping other families navigate these rough waters right now. If you want to protect your family from inflation and other preventable losses, schedule a Strategy Session using the link below. 

ABOUT THE AUTHOR

Founding attorney Paul Deloughery has been an attorney since 1998, became a Certified Family Wealth Advisor. He is also the founder of Sudden Wealth Protection Law.

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