The Five Trustee Mistakes That Could Cost Vulnerable Beneficiaries Everything

Following my recent blog about the BBC story where a mother went to prison for stealing her daughters' inheritance, I’ve received dozens of messages from worried trustees. The most common question: "How do I make sure I don’t make the same mistakes?"

After working with trustees in similar situations, I’ve identified five critical mistakes that can destroy families, trigger legal action, and in extreme cases, lead to criminal charges. The good news? All of them are completely preventable with proper understanding and systems.

Mistake 1: Mixing Trust Money with Personal Finances

The Error: Using the same bank account, credit cards, or financial systems for both trust money and personal money.

Why It Happens: It seems easier to manage everything in one place, especially for smaller trust amounts. Many trustees think, "I’ll just keep track mentally" or "It’s only temporary."

The Catastrophic Consequences:

• Legal Breach: This is an immediate and serious breach of trust that can result in personal liability

• Criminal Risk: As the BBC case showed, courts may view this as theft, regardless of intentions

• Impossible Accounting: You cannot prove you acted properly when finances are mixed

• Tax Complications: HMRC cannot determine what income/gains belong to the trust versus the trustee

• Beneficiary Loss: Even honest mistakes can result in permanent loss of trust assets

The Katherine Hill Example: She put trust money in her personal account with shared debit cards. Within a year, £50,000 was gone through "lifestyle spending." The court saw this as theft, not poor accounting.

How to Avoid:

• Open separate bank accounts specifically for the trust

• Never use trust debit/credit cards for personal expenses

• Maintain completely separate record-keeping systems

• If you accidentally mix funds, separate them immediately and document the correction

Mistake 2: Failing to Understand Vulnerable Person Elections

The Error: Not knowing about or failing to implement vulnerable person tax elections that could save thousands in tax.

Why It Happens: Most trustees aren’t aware these elections exist, or they assume their accountant will handle everything automatically.

The Catastrophic Consequences:

• Tax Overpayment: Discretionary trusts pay tax at 45% on income and 28% on capital gains

• Beneficiary Impact: Higher taxes mean less money available for the vulnerable person’s needs

• Missed Deadlines: Elections must be made annually and by specific deadlines

• Permanent Loss: You cannot retrospectively claim elections you’ve missed

Real Example: I recently met a trustee who had been paying 45% tax on trust income for three years. With proper elections, the tax rate would have been 20%. The unnecessary tax bill? Over £15,000. Money that should have been supporting a disabled beneficiary.

How to Avoid:

• Understand that vulnerable person elections can reduce tax to the beneficiary’s personal rate

• Learn the annual deadline requirements (usually 31 January following the tax year)

• Seek professional advice to ensure elections are made properly

• Keep detailed records of all tax elections and their impact

Mistake 3: Ignoring Benefits Impact

The Error: Making trust distributions without understanding how they affect the beneficiary’s state benefits.

Why It Happens: Trustees focus on maximising trust income/growth without considering that distributions might reduce means-tested benefits pound-for-pound.

The Catastrophic Consequences:

• Benefits Loss: Trust income often reduces benefits like Universal Credit, ESA, or PIP

• Net Loss: The beneficiary might actually be worse off after receiving trust money

• Benefit Investigations: Unexpected income can trigger benefit reviews and potential overpayment claims

• Family Stress: Beneficiaries may blame trustees for "causing problems" with their benefits

Real Example: A trustee gave their disabled nephew £200 monthly from his trust. His Universal Credit was reduced by £200 monthly. The trust distribution achieved nothing except administrative hassle and family tension.

How to Avoid:

• Research which benefits the beneficiary receives and how they’re affected by trust income

• Consider making capital distributions instead of income where appropriate

• Understand the difference between "income" and "capital" for benefits purposes

• Time distributions strategically to minimise benefit impacts

• Seek advice from benefits specialists, not just financial advisors

Mistake 4: Poor Record Keeping and Documentation

The Error: Inadequate documentation of decisions, transactions, and reasoning.

Why It Happens: Record keeping feels administrative and boring. Many trustees keep minimal records, thinking "I’ll remember" or "nothing will go wrong."

The Catastrophic Consequences:

• Legal Vulnerability: Cannot prove you acted properly if challenged

• Family Disputes: Poor records fuel suspicion and conflict among family members

• Regulatory Problems: HMRC investigations become impossible to defend

• Personal Liability: Trustees can be held personally liable for losses they cannot adequately explain

• Relationship Breakdown: Beneficiaries lose trust when they cannot see clear accounting

What You Must Document:

• Every financial transaction with supporting documentation

• All decisions made and the reasoning behind them

• Meeting minutes if there are multiple trustees

• Communications with beneficiaries or their representatives

• Professional advice received and how it was implemented

• Annual reviews of trust performance and beneficiary needs

How to Avoid:

• Establish simple but comprehensive record-keeping systems from day one

• Keep receipts, bank statements, and investment reports organised

• Document decisions in writing, even if you’re the sole trustee

• Regular reviews (at least annually) with formal documentation

• Store records securely but accessibly

Mistake 5: Not Seeking Professional Advice When Needed

The Error: Trying to handle complex trust matters without appropriate professional guidance.

Why It Happens: Advice costs money, and many trustees feel they should be able to "figure it out" themselves. Some worry about appearing incompetent.

The Catastrophic Consequences:

• Legal Breaches: Making decisions that violate trust law or tax regulations

• Investment Losses: Poor investment decisions due to lack of expertise

• Missed Opportunities: Not maximising benefits for the vulnerable person

• Personal Liability: Trustees can be held personally responsible for losses caused by their decisions

• Family Destruction: As the BBC case showed, well-intentioned mistakes can destroy families

When Professional Advice Is Essential:

• Setting up proper trust administration systems

• Making significant investment decisions

• Understanding and implementing tax elections

• Dealing with benefits interactions

• Resolving disputes between beneficiaries or family members

• Planning for changing circumstances (beneficiary needs, trustee succession)

Types of Professionals You May Need:

• Trust lawyers: For legal compliance and dispute resolution

• Financial planners: For investment strategy and ongoing financial management

• Accountants: For tax compliance and planning

• Benefits advisors: For understanding state benefit interactions

Red Flags That You Need Help Immediately

Contact professionals if:

• You’ve mixed trust and personal finances at any point

• You’re unsure about tax obligations or haven’t filed trust tax returns

• The beneficiary is questioning your decisions or requesting detailed accounts

• You’re facing major investment decisions or significant distributions

• Family relationships are becoming strained over trust matters

• You feel overwhelmed or out of your depth

The Emotional Reality

Being a trustee is often emotionally challenging. You’re making decisions about someone else’s money for someone else’s benefit, often during difficult family circumstances.

The legal responsibilities can feel overwhelming, especially when you never asked for the role. But remember: seeking help isn’t admitting failure. It’s fulfilling your duty to act in the beneficiary’s best interests.

Moving Forward

If you’re reading this as a new trustee, congratulations on taking your responsibilities seriously. If you’re an established trustee worried about past mistakes, it’s never too late to improve your systems and seek guidance.

The five mistakes outlined above have destroyed more families and wasted more trust money than market crashes or economic downturns ever could. But they’re all avoidable with proper understanding, systems, and professional support.

Your role as trustee is to protect and enhance the financial security of someone who may be unable to do so themselves. That’s both a privilege and a responsibility.

Don’t let poor systems or false economy turn that privilege into a nightmare for everyone involved.

Taking Action

Every trustee should:

1. Audit your current systems against the five mistakes outlined above

2. Implement proper separation of trust and personal finances immediately

3. Establish comprehensive record-keeping from today forward

4. Research the beneficiary’s circumstances including benefits and tax situation

5. Seek professional advice for any areas where you’re uncertain

   
   

The beneficiary is counting on you to get this right. Their financial security, and often their entire future, depends on your decisions.

Make sure those decisions are informed, documented, and made in their best interests.

If you’re currently serving as a trustee or have been asked to take on this role, professional guidance isn’t an optional extra—it’s an essential tool for fulfilling your legal duties. The cost of advice is always less than the cost of mistakes.

The Financial Conduct Authority does not regulate Trusts.

The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser.

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