I'm an Estate Planner: 7 Costly Trust and Tax Mistakes Even the Ultra-Wealthy Make
The ultra-wealthy have access to all the best resources when it comes to estate planning, but they're not immune from making missteps. In fact, sometimes their overconfidence can cause them to make costly mistakes.
MoneyLion spoke with A. Michael Wargon, partner at Day Pitney and a Florida Bar-certified wills, trusts and estates lawyer, about the recurring and often overlooked estate planning mistakes the ultra-wealthy make. Here, he shares what they are — and the lessons anyone can take away from them.
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1. Overplanning to a Fault
You can rarely be too prepared, but you can overcomplicate things. Sometimes clients use a sledgehammer to swat a mosquito.
One common issue is over-gifting — clients transfer so much wealth that they jeopardize their own financial security and liquidity. Another is getting locked into structures like grantor trusts, where the ongoing income tax burden becomes unsustainable. Additionally, gifting highly appreciated assets can backfire if the client ultimately doesn’t have a taxable estate, because those assets lose the step-up in basis at death.
In those cases, simpler planning would have produced a better tax outcome.
2. Not Timing Decisions Properly
Timing is critical in advanced planning strategies. For example, attempting to time the funding of Grantor Retained Annuity Trusts (GRATs) based on market conditions can lead to missed opportunities or poor outcomes.
Another common mistake is leaving low-basis assets in irrevocable grantor trusts without considering a swap for higher-basis assets prior to death. Failing to act at the right time can result in significant, avoidable tax consequences.
3. Relying Too Much on AI and DIY Trust Templates
Artificial intelligence (AI) is a tool, like anything else. The issue is that AI is only as good as the questions being asked and knowing what questions to ask requires experience and judgment.
Clients sometimes come in saying they “need” a specific type of trust they read about or generated through AI. My response is always the same: A trust is just a tool. The real question is what problem you’re trying to solve. Without that context, AI can lead people to overly rigid or inappropriate solutions.
4. Making Dangerous Assumptions About Family Dynamics
Family dynamics are often the biggest risk to a successful plan. It’s critical to understand personalities and capabilities when assigning roles like trustee or executor. Not everyone is suited for these responsibilities, regardless of how intelligent or successful they may be in other areas.
Poor choices can create friction, resentment or even litigation among family members. A technically sound plan can still fail if the human element isn’t handled carefully.
5. Choosing the Wrong Fiduciary
[When choosing a fiduciary, wealthy families] should focus on temperament, capability and overall family dynamics. Naming one child over another can create tension, especially if it’s perceived as favoritism.
In some cases, appointing a corporate or professional fiduciary is the better choice to maintain neutrality. Additionally, the complexity and size of the estate matter — if the responsibilities exceed a family member’s skill set or willingness, it’s better to bring in professionals.
6. Not Communicating Their Plans
Wealth can be as much a burden as a benefit if heirs are unprepared. If beneficiaries don’t understand the structure of a plan or the reasoning behind it, they may become frustrated and make decisions that undermine it.
Transparency — at least at a high level — helps set expectations, reduce conflict and prepare the next generation to manage wealth responsibly.
7. Failing To Consider Estate Planning Risks
Complexity is a major one. More complex structures often mean higher administrative costs, greater risk of errors and the need for ongoing oversight. While complexity can sometimes produce tax benefits, those benefits need to be weighed against the practical realities of maintaining the plan.
There’s also an educational component — clients need to understand how to operate within the structures they’ve created. For example, if I have a new investment opportunity with a lot of upside, where should that investment be made? In my name or in my trust? Without that understanding, even the most efficient plans will be rendered useless.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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