Lessons From the Ultra-Wealthy: Avoid These Common Trust Mistakes

Trusts are a cornerstone of wealth management for the ultra-wealthy, providing asset protection, tax efficiency, and a structured way to pass down wealth. Let’s look at some potential missteps you can avoid to safeguard your legacy.

Failing to Clearly Define Trust Terms

One of the biggest mistakes in trust planning is vague or overly complex terms. Without clear language, beneficiaries and trustees may interpret provisions differently, leading to disputes and potential litigation. It can also lead to misappropriation of assets, potentially leading to estate taxes, gift taxes, income taxes, or generation-skipping taxes. Trust documents should leave no room for ambiguity—make it easy to understand exactly what you want to happen with specific assets.

This also allows you to be as complex as you want. According to C. Jay Rhoden of Legacy Legal Solutions, ”Another advantage a trust has over just having a will is the level of control they offer you when it comes to distributing assets to your heirs.”

Choosing the Wrong Trustee

Every family has complexities and differing personalities. A well-structured trust might fail if the wrong trustee is in charge.

Some families opt for a relative or close friend. Others appoint a corporate trustee. The best trustees balance professional knowledge with the ability to navigate complex family dynamics.

In short, even though it is a political topic, make sure you pick the right person.

Not Updating the Trust Over Time

Many families create trusts but fail to revisit them as laws, assets, and family situations change. Births, deaths, divorces, and new legislation happen all the time. It’s extra work to make updates each time a major life event happens, but you’ll want to make sure those changes happen (since those life events might have driven changes in your trust). Your trust may also be impacted by evolving tax rules that shift over time.

Keep in mind that updating your trust might involve some extra steps. For example, according to Suze Orman, “If you want to make changes to an irrevocable trust, it will generally require the consent of the beneficiaries of that trust, and you have to have court approval, one or the other or both.”

Not Preparing Your Beneficiaries

You have to make sure your beneficiaries are prepared for their roles. Without knowing what they’ll be tasked with or given, they might not plan their wealth appropriately. More specifically, be clear about how your beneficiaries could and should shield their distributions from tax based on how you planned your estate.

You could incorporate financial literacy programs, mentorship, and phased distributions into your trust planning to help beneficiaries develop responsible money management habits.

Failing to Consider Tax Implications

One of the biggest errors is failing to fund the trust properly. If assets aren’t correctly transferred to the trust, they may not benefit from the intended tax advantages. This can result in the estate or assets being subject to higher taxes, like estate or probate taxes. You can also trigger different tax rules based on the type of trust you set up.

Another mistake is not taking full advantage of tax deductions and exemptions. Trusts can be taxed at higher rates than individuals, so manage income distributions and deductions. Also, some trusts may qualify for charitable deductions if a portion of the assets is allocated to charity. All this means there are delicate rules to be careful of, or else you may encounter unwanted taxes.

The Bottom Line

Trusts are powerful tools for preserving wealth, but poor planning can leave you and your family at risk. You have to think through the impact on your beneficiaries, tax complications, and contract language as you work through setting up or revising your trust.