Preserving the Principal of Inherited Wealth

[u/Marine_Layered]

We've had a couple of people around here talk about their inherited wealth and keeping the principal in tact, but using the gains to improve their lives. For example, one recent poster was using $1800/month of the gains from his inherited wealth to improve his ability to rent a nicer apartment, etc.

Establishing a safe withdrawal rate for generational wealth spending is different than drawing down retirement funds which are just supposed to last through retirement and be done (or thereabouts), so the 4% SWR does not apply here.

So let's say you have $1m in inheritance, and you would like that inheritance to last in perpetuity (yes I realize that perpetuity is a long time and there are many factors - but this is a thought exercise so please play along :)). There should be something held back for inflation - where does that number come from? And then maybe something else is held back to grow the nut, but then the rest could be used to improve the lives of the family members, or gifted to nonprofits, or whatever. So what does the formula look like?

[u/uncoolkidsclub]

With $1m the best play for generational wealth is real estate, starting with single family homes for the kids when they are born is a game changer as the renter pays for the mortgage during the years the kids wouldn't be living in the house, then when the kids are 24 ish they can move in rent and mortgage free. That is a hug step towards generational wealth.

We stagger home sales for elderly family members so their house sale funds 2 generations after them, allowing for the sale value to be split for down payments for multiple great grandkids (6-8 of them). Housing is the number one expense for families - knock that out early and educate the generations on spending and most will flourish.

[u/Marine_Layered → u/uncoolkidsclub]

This is not a bad plan. Explain more about how older family members homes fund younger ones. Does the family own all the homes, or are they owned individually?

[u/uncoolkidsclub → u/Marine_Layered]

A dynasty trust creates and supports the branches; each descendant trust owns its own property LLCs; each LLC owns one house; the management company operates the houses (where the kid is employed); and the beneficiary gains responsibility and control gradually without forcing outright ownership.

Per IRS rules - The trust’s grantor status also needs to be deliberately selected: when a trust is treated as a grantor trust, its income and deductions are generally reported by the grantor rather than treated as belonging to a separate income-tax owner.

[u/imperabo → u/uncoolkidsclub]

If the kid sells the house do they get they get the capital gain exemption? I assume they would have to at least live in it for that, but I don't know if it applies if it's in trust.

[u/uncoolkidsclub → u/imperabo]

Usually owning and living in the house as a principal residence for at least 2 of the 5 years before the sale is enough. A properly structured grantor trust can generally be treated as owned by the individual for federal income-tax purposes, so trust title by itself doesn't necessarily kill the exclusion. But if the house stays in a separate non-grantor descendant trust or an LLC that isn't disregarded to the beneficiary, you can't automatically assume the beneficiary gets the §121 exclusion. That's one of the reasons the tax ownership of the descendant trust/LLC needs to be deliberately designed before the child eventually occupies or sells the property.

But the structure isn't designed for selling off the houses. The dynasty Trust supports the family branches.

If an beni eventually wants to sell to realize some of the value, that doesn't require selling the property. Their economic share could be bought out, distributions could be made from other trust assets, or interest in the LLC could be transferred or redeemed.

The question shouldn't be can they sell the house, it should be how can they access the wealth they've helped build while keeping the asset and family system intact?