Quora Answer: What Kind of Trust Fund Would be Best for Building Family Wealth?

The following is my answer to a Quora question: “What kind of trust fund would be best for building family wealth?”

If you intend to build your family wealth, I am assuming that this is a multi-generational trust fund.  There are a few things to consider then.

Firstly, you need to be cognisant of the tax regime where the trust fund is registered.  Where I am, in Singapore, there is no inheritance and capital gains tax.  That is not true in most places in the world.  One of the purposes of a revocable or testamentary trust is to mitigate your tax exposure.

Secondly, you need to consider your heirs, or beneficiaries.  You have to be honest and realistic about their qualities and characteristics, so that the trust fund is not exploited.  This means finding the right sort of people to be trustees and putting in place the right sort of safeguards.

Thirdly, your trust fund must consider the type of liquidity it needs to maintain so that it can be drawn down by the beneficiaries, and be diversified enough such that a collapse in one area of the market or in one category of financial instruments does not render the trust fund insolvent.  This means having a portfolio spread between traditional equity and debt instruments and property.  If your trustees are competent, they may have the mandate of investing directly in equity stakes of companies, instead of through an index or mutual fund.

Finally, make sure that your trustees are paid well.  Managing a trust fund is hard work, and people who are not adequately compensated do not tend to work well.  Tie their compensation to the performance of the trust fund.  Also, have in place a succession plan for the trustees.  The fund is meant to outlive even them.