Can I use a trust to protect against inflation?

The question of whether a trust can shield your assets from the eroding effects of inflation is complex, but the answer is a qualified yes, depending on how the trust is structured and the assets it holds. While a trust itself isn’t a magic bullet against rising prices, it can be a powerful tool when combined with strategic investment choices and careful planning. Approximately 3.2% was the average annual inflation rate in the US over the last century, and recent years have seen spikes well above that, making inflation protection more critical than ever. Trusts offer a framework for managing and potentially growing assets in a way that outpaces inflation, but requires proactive measures.

What assets are best to hold in a trust to fight inflation?

Not all assets are created equal when it comes to battling inflation. Traditional fixed-income investments, like bonds, can lose purchasing power when inflation rises. Instead, consider assets with a historical tendency to maintain or increase value during inflationary periods. Real estate, for example, often appreciates with inflation, providing both rental income and potential capital gains. Commodities, like gold and silver, are also frequently seen as inflation hedges. Equities, particularly those of companies with pricing power, can also offer some protection as businesses can pass on increased costs to consumers. A well-diversified portfolio within the trust, focused on these types of assets, is key. For example, “roughly 60% of the average investor’s portfolio should be in stocks, 30% in bonds, and 10% in alternatives, like real estate”.

How does a trust’s structure impact inflation protection?

The *type* of trust matters significantly. A revocable living trust, while excellent for probate avoidance, doesn’t inherently offer inflation protection. It’s essentially a pass-through entity. However, an *irrevocable* trust, particularly one designed for specific purposes like asset protection or long-term wealth preservation, can provide more opportunities. An irrevocable trust allows for tax-advantaged growth and can shield assets from creditors, freeing up more funds to invest in inflation-resistant assets. Furthermore, the trust document can dictate specific investment strategies, ensuring the assets are managed with inflation in mind. “Approximately 55% of Americans do not have an updated estate plan, which can hinder their ability to proactively address financial challenges like inflation”. A trust allows you to set parameters for these situations.

I recall a client, old Mr. Abernathy, who learned this lesson the hard way.

Mr. Abernathy, a retired teacher, had a sizable inheritance but kept it in a simple savings account, thinking it was safe. He had a basic will but no trust. When inflation surged a few years ago, the real value of his savings dwindled rapidly. He was devastated, realizing his life savings weren’t enough to cover his rising healthcare costs. He came to me in a panic, but unfortunately, there was very little we could do to recoup the lost purchasing power. Had he established an irrevocable trust years earlier, invested in a diversified portfolio of inflation-resistant assets, and actively managed it, he could have preserved his wealth and secured his future. It was a painful lesson about the importance of proactive financial planning.

But there was also the Reynolds family, a heartwarming story of foresight.

The Reynolds family, anticipating future inflation, established an irrevocable trust for their children’s education. Within the trust, we invested in a mix of real estate investment trusts (REITs), inflation-protected securities (TIPS), and a diversified stock portfolio. Years later, when inflation hit, the trust’s assets not only maintained their value but actually grew, comfortably covering the children’s college expenses. The family felt immense relief and gratitude, knowing their financial planning had protected their children’s future. It demonstrated the power of a well-structured trust, coupled with strategic investment choices, to safeguard wealth against the eroding effects of inflation. A proactive approach allows families to feel secure and to focus on what truly matters.


Who Is Ted Cook at Point Loma Estate Planning Law, APC.:

Point Loma Estate Planning Law, APC.

2305 Historic Decatur Rd Suite 100, San Diego CA. 92106

(619) 550-7437

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