Setting up a trust fund is fraught with potential pitfalls that can undermine the benefits such a wealth structure is intended to provide if the correct advice is not taken.

One of the major mistakes is underestimating the complexity of trusts, not realising the various types and finding oneself listening to the wrong advice. It is vital to have the right advice provided by professionals who have first-hand experience in setting up and administering trusts. In addition, we always recommend independent legal advice from a trust tax specialist who has knowledge of your home jurisdiction.

If your personal wealth is equivalent $4 million USD or more Alpha Wealth can provide financial benefits to you and help chose the best course of action. Our clients benefit from our sophisticated bespoke and client focussed approach and if it can help you, we will save you far more than the fees charged.

Over the years, we have observed numerous instances where trust settlers, despite their best efforts, have inadvertently created complications that could have been avoided with careful foresight and appropriate advice. Listening to the wrong advice will lead to poor results, either with structures that are too conservative and which do not achieve the best efficiency, or that are faulty and do not achieve their aims or create tax or family disputes later on and not being guided fairly or with integrity. If you find yourself in this position or are looking to set up a trust fund, we are always pleased to assist you.

At Alpha we believe in protecting your wealth for generations and making sure you have the best possible advice in creating your optimal private wealth structures.

Defining the Trust’s Objective 

One of the most fundamental missteps is establishing a trust fund or trust without a clearly articulated purpose. Parents, business individuals and companies must consider precisely what they aim to achieve, whether it is to cover educational costs, provide for an inheritance, protect assets, benefit from international tax systems, or offer a long-term financial safety net. A defined objective is essential not only for selecting the most appropriate trust structure but also for ensuring the terms are suitably aligned to the trust’s underlying purpose. Without such clarity, the risk of a misaligned arrangement that fails to meet future needs increases significantly. 

Selecting the Appropriate Trust Structure 

The landscape of trust structures in the UK is varied, with each offering different benefits and limitations. Trusts can be broadly categorized into four main types: Living Trusts, Testamentary Trusts, Revocable Trusts, and Irrevocable Trusts.

1. Living Trusts: A trust created during the settlor’s lifetime to manage their assets. It allows for easy asset management and can help avoid probate upon the settlor’s death.

2. Testamentary Trusts: A trust established through a will, taking effect only after the settlor’s death. It’s often used to manage assets for beneficiaries, such as minors.

3. Revocable Trusts: A trust where the settlor retains the right to modify or revoke the trust during their lifetime. It provides flexibility in managing assets but may offer limited asset protection.

4. Irrevocable Trusts: A trust that cannot be altered or revoked once established, without the beneficiaries’ consent. It offers strong asset protection and can help reduce estate taxes.

In addition, other common trusts are:

Bare Trusts:  A bare trust is a simple form of trust where the beneficiary has an immediate and absolute right to the assets and income held in the trust. In a bare trust, the trustee holds the assets on behalf of the beneficiary, but the trustee has no discretion over how the assets are managed or distributed; the trustee’s role is purely administrative. This access to the trust can be given at a specified age. 

Discretionary Trusts: A discretionary trust is a type of trust where the trustees have the authority to decide how to distribute the trust’s income and assets among a group of potential beneficiaries. Unlike bare trusts, discretionary trusts provide significant flexibility in terms of how and when beneficiaries receive funds, as there are no fixed entitlements. Allowing trustees considerable latitude in distributing assets, which can be advantageous in adapting to shifting circumstances. The trustees may be guided by a settlers letter of wishes which can be very detailed.

Interest in Possession Trusts: An interest in possession trust is a type of trust where a beneficiary (referred to as the “life tenant” or “income beneficiary”) has a legal right to receive income generated by the trust assets or to use the assets themselves, immediately from the time the trust is established. The trustees are responsible for managing the trust assets, but the income beneficiary is entitled to benefit from the trust during their lifetime.

As one can ascertain just from this extremely brief explanation, trust law is highly complex and it is so important to have good legal counsel involved within the Trust team. Alpha works with some of the finest Barristers in the UK and guides you every step of the way. Without the experience and professional advice given by consultants such as Alpha, it is easy for problems to occur.

A frequent mistake is opting for a trust structure ill-suited to the family’s, individual’s or company’s specific needs, which can result in unintended tax consequences and restrict the flexibility needed to adjust to future life events. What can be sold as a suit of armour to protect your wealth, if not correctly advised can be a strait jacket or even worse, a coffin. It is therefore imperative to fully comprehend the legal and financial nuances of each trust type. Hence why Alpha strongly believes for any structure we implement, independent legal tax advice will be provided which is essential in such matters. To do otherwise could be deemed irresponsible.

The Choice of Trustees 

Appointing the right trustees is of paramount importance, as they bear the responsibility of managing the trust’s assets and acting in the best interests of the beneficiaries. It is a common error to choose trustees based on your personal connections. Family members or close friends are often not always the right choice. One must consider their financial knowledge, experience in such matters, integrity and their understanding of what it means. This approach can lead to conflicts of interest, particularly if other beneficiaries question the trustee’s impartiality. Ideally, trustees should be selected for their acumen, integrity, experience in such matters and a demonstrated commitment to fiduciary responsibilities. 

Ignoring Tax and Tax Implications in Relation to Trusts.

It is of the utmost importance to have specialist independent tax advisers review and approve any structure. There are liabilities arising from income tax, capital gains tax, and inheritance tax which can affect trusts and beneficiaries. Often it is very complex and one must know they have the best possible tax advice . As to overlook such considerations can lead to unexpected tax bills that can erode the trust’s value and have major consequences on your overall wealth. A comprehensive tax strategy, developed in consultation with such a specialist, is essential to reduce potential liabilities and preserve the trust’s assets. Alpha has access to a wide range of top international tax specialists who can advise on all aspects of tax relevant to your trust structure. 

Failing to Properly Fund the Trust 

Another common oversight is neglecting to transfer the intended assets into the trust after its creation. A trust deed without assets amounts to little more than a legal formality devoid of substance. Clients should ensure that the trust is adequately funded with the intended assets—whether that is property, investments, or other financial instruments—so that it can fulfil its intended purpose. 

Failing to Regularly Review the Trust 

Life is inherently unpredictable, and significant events—such as changes in financial circumstances, family dynamics, or legislation—can render an initially well-structured trust unsuitable over time. Regular reviews and, if necessary, updates to the trust document are crucial to ensure it remains fit for purpose and continues to meet the evolving needs of the family. We aim to keep all the structures we design as flexible as possible to ensure that any changes can be accommodated. We can also help you structure legacy trusts that are no longer efficiently achieving the current purposes.

The Importance of Professional Advice 

Trusts are complex and in manty cases will be use to protect the greater part of a family’s wealth, which has been established over decades or generations. Perhaps the most critical misstep is undertaking the trust’s establishment without professional guidance, or seeking the wrong advice and not being guided with the required expert knowledge. This can include advice which is too cautious (because the adviser is not sufficiently expert to know the limits of what can be achieved) or advice that leads to restructure structures that quickly become unfit for purpose. 

The legal, financial, and tax-related complexities associated with trusts necessitate expert advice to navigate the intricacies and ensure compliance with all relevant regulations. Engaging with advisers who are confident enough in their work to welcome expert second opinion from leading specialists ensures that the trust is not only properly structured but also tailored to the clients unique situation and future aspirations. 

In Summary

Establishing a trust fund can be advisable solution, but one that demands a considered approach and an understanding of the myriad complexities involved. By avoiding these common errors clients can create a resilient and adaptable trust that achieves its intended purpose and delivers lasting benefits. At Alpha Wealth, we dedicate ourselves to providing the expertise required to help you through the intricacies of trust creation and management. For those looking to establish a trust, we offer the clarity and confidence needed to secure a robust structure that is fit for the next generation and generations to come.