O lder Americans will bequeath trillions of hard-earned dollars to their descendants in the coming decades. Sadly, much of this money will be wasted -- estates often pay unnecessarily high taxes when assets are transferred, and heirs often don’t handle their newfound wealth responsibly.

Financial adviser Paul Merriman, age 61, has devised a multigenerational strategy -- what he calls a “500-year plan” -- that addresses both concerns. You can set up a plan with as little as $100,000.* Merriman tells us how it works...

A Gift That Keeps Giving

Rather than hand my children the money that I have worked a lifetime to accumulate, I will give them something similar to a pension. After my death, they will receive ongoing financial support from my estate based on my instructions. When my children pass away, the remainder of my estate will be used to support charities that I believe in. (If I had chosen to leave the bulk of my money to future generations rather than charities, I would have created dynasty trusts.) Your attorney can help you do this. Personal and financial advantages to my strategy...

Peace of mind. I don’t have to worry about my children’s financial futures because they’ll have annual incomes from my estate.

Asset protection. A child won’t be able to squander his/her inheritance, nor could he lose it because of a costly lawsuit or divorce.

Charitable legacy. My memory will remain alive because my children and, later, my favorite charities will receive annual gifts in my name, not just a lump sum after my death. Thanks to the long-term growth that my investment plan should provide, my money will do far more good hundreds of years from now than it would in the near future.

A Charitable Remainder Trust

My estate plan relies mainly on a type of financial entity called a charitable remainder trust (CRT). When an appreciated asset is put in a CRT, it can be sold without paying tax. The CRT pays the beneficiary income for life, and the remainder goes to the charity upon his death.

With the help of an attorney, I created four CRTs, one for each of my children. After I’m gone, these trusts will be funded with money from my estate and each year, 5% of the trusts’ value will be distributed to my children. Since the money is invested for growth, the amount in the trusts and the size of the payouts should increase over time, even after withdrawals and inflation (see table). When my children pass away, the 5% annual payments -- in cash and/or securities -- will go to charities that I have selected.

CRTs provide two major tax benefits. They generate a deduction for estate tax purposes, and the money grows tax-free. Only distributions to my heirs will be taxed -- at regular income tax rates.

Community foundations -- nonprofit organizations designed to facilitate charitable giving -- have attorneys on staff to draft CRTs for free. Otherwise, setting one up costs $500 to $1,500.

After my children pass away, the community foundation I have chosen will take control of my trusts and make the 5% distributions to the charities. (If one of my charities goes out of business after I’m gone, the foundation will replace it with a charity that has a similar goal.)

To learn more about community foundations or to locate one in your area, contact the Council on Foundations (202-466-6512, www.cof.org ).

The 500-year Portfolio

Investments, whether in mutual funds or variable annuities, should be for the long haul -- centuries, not decades. If your investment doesn’t continue to earn a good deal of money after you’re gone, it will be eaten away by inflation, administrative expenses (up to 1% of assets/year) and payments to heirs and charities. On the other hand, if your investment plan is too risky, it could be crippled by market downturns.

The best strategy is used by most pension funds -- invest 60% in a diversified stock portfolio and the rest in bonds. The trustee will rebalance allocations annually. Even after accounting for inflation and 5% annual withdrawals, my portfolio’s value should double within 30 years of my death. Though I’m not tremendously wealthy, my estate will have a significant impact on the future.

Choose mutual funds with low expenses and good, consistent long-term performance. (Model portfolios are available at my Web site, www.fundadvice.com ).

Providing for Grandchildren

I have a separate estate plan to provide for my grandson. Minors who inherit significant amounts from their grandparents typically gain full control of the money on their 18th or 21st birthdays, depending on state law. However, money received at such a tender age often is squandered, and large inheritances can rob young people of a solid work ethic.

You can provide for a child at any age, but rather than give my grandson, Aaron, a pile of money when he reaches 21, I decided to give him the likely guarantee of a comfortable retirement. With the uncertain state of Social Security and fewer employers offering old-fashioned, reliable pension plans, this should be a gift that he will appreciate one day -- and it cost me only $11,000.

How it works: When Aaron was born, I made a one-time gift of $10,000 to an irrevocable trust with Aaron as beneficiary and his parents as trustees. (Setting up this trust cost me about $1,000 in attorney’s fees.) The money in the trust is invested in a low-cost variable annuity, a type of investment account that lets assets compound tax-deferred (so a tax return doesn’t need to be filed each year). Firms that offer no-load, low-expense variable annuities include Charles Schwab (866-855-9102, www.schwab.com ), Fidelity (800-343-3548, www.fidelity.com ), T. Rowe Price (800-225-5132, www.troweprice.com ) and The Vanguard Group (800-523-7731, www.vanguard.com ). For maximum growth, I selected a variable annuity that invests entirely in stocks -- through mutual fund–like “subaccounts.”

Starting at age 65, Aaron will receive annual payments of 7% of the trust’s value. Historically, the equity investments I have selected have produced an average annual return of 11.2%. Assuming that return, my $10,000 should be worth about $10 million by the time Aaron reaches age 65. That means that his first annual 7% payment should be about $700,000. When adjusted for inflation, that’s $131,000 in today’s dollars, enough to set the stage for a comfortable retirement. When Aaron dies, the remaining funds will be given to a charitable organization that Aaron will select.

*If your estate will be worth less than six figures, this plan probably isn’t worth the time, effort and attorneys’ fees.