Common Mistakes When Transferring Wealth
We spend a lifetime building wealth through hard work, smart investing, and thoughtful planning. But transferring that wealth to the next generation can be surprisingly complex. Without careful planning, even well-intentioned families can face unnecessary taxes, legal disputes, and damaged relationships.
At SKY Investment Group, we’ve guided families through the complex realities of wealth transfer for years, helping them turn careful planning into lasting impact. In this guide, we’ll explore the most common and costly wealth transfer mistakes people make and how to avoid them.
What We’ll Cover:
1. Leaving the Estate Tax Exemption on the Table
Every U.S. citizen has a lifetime estate and gift tax exemption, which is an amount you can pass to heirs free of federal estate tax. Many families do not take full advantage of this exemption, often leaving potentially significant tax savings behind.
- For 2025, the exemption remains at $13.99 million per individual (roughly $27.98 million for married couples).
- Starting January 1, 2026, that exemption jumps to $15 million per individual (or $30 million for married couples) and will be indexed for inflation in subsequent years.
- Unlike the prior law, the “Big Beautiful Bill” eliminates the scheduled “sunset” that would have reduced the exemption sharply. In other words, the $15 million (inflation-adjusted) threshold is now permanent unless future legislation changes it.
Another important point is that the generation-skipping transfer (GST) tax exemption increases in step with the estate and gift tax exemption. This means the same higher exemption amount also applies to assets passed directly to grandchildren or other “skip” beneficiaries, which can allow families to transfer wealth across multiple generations more efficiently.
What to do:
- Use lifetime gifting strategically to reduce taxable estate size.
- Leverage federal portability: married couples can combine exemptions if planned correctly.
- Stay informed about changing exemption amounts (they can be adjusted by Congress).
Bottom line: Thoughtful planning can mean the difference between preserving wealth for your heirs and potentially losing a large portion to taxes. Many families benefit from spreading gifts over several years, taking advantage of both annual exclusions and lifetime exemptions to build an efficient, flexible transfer strategy.
2. Overlooking Trusts as a Tool for Protection and Control
Trusts aren’t just for the ultra-wealthy. They’re one of the most effective tools for protecting assets, minimizing taxes, and ensuring wealth is distributed according to your intentions. Without a trust, your estate may face probate, delays, and unintended outcomes. Assets passed outright to heirs may be vulnerable to creditors, divorce settlements, or financial mismanagement.
A well-structured trust can allow you to control how and when beneficiaries receive their inheritance. For example, you can schedule distributions at specific ages or tie them to milestones like education, homeownership, or career achievements. This can help protect heirs from external claims and, just as importantly, from the risks of receiving a large sum without financial guardrails.
Key advantages of trusts:
- Avoid probate and maintain family privacy
- Protect assets from creditors, lawsuits, and divorce settlements
- Mitigate estate taxes and preserve wealth for future generations
- Provide structured, staggered distributions rather than lump sums
- Support beneficiaries who may not be ready to manage wealth responsibly
There are many types of trusts, but most fall into two broad categories. Revocable trusts allow you to maintain flexibility and control during your lifetime, while irrevocable trusts can offer stronger asset protection and tax benefits.
Tip: Work with a qualified estate planning attorney to determine the right trust structure for your goals and your family’s unique needs. Our financial advisors coordinate closely with your attorney and tax professional to ensure your investment, tax, and estate strategies all work together toward one cohesive plan.
3. Ignoring the Complexities of Blended Families
Blended families add a layer of complexity to estate planning. If you have children from a previous marriage, a new spouse, or stepchildren, simply leaving assets “to the family” can create unintended conflict.
Without clear legal structures, assets can end up with unintended beneficiaries, leaving some family members feeling overlooked or shortchanged. This is especially common when estate plans aren’t updated after major life events like a new marriage or divorce, which can change how blended families are structured.
How to address this:
- Use trusts to ensure children and spouses are provided for as intended.
- Clearly document wishes to avoid ambiguity.
- Consider appointing a neutral trustee to reduce conflicts.
- Communicate openly with family members about your intentions.
Clarity today prevents painful disputes tomorrow.
4. Avoiding Discussions with Heirs About Future Plans
Many families avoid talking about inheritance because it feels uncomfortable. But silence can lead to misunderstandings, resentment, or legal disputes after your passing.
Benefits of clear communication:
- Prevents surprises that can fracture families.
- Gives heirs time to emotionally and financially prepare.
- Allows you to explain your reasoning, not just the numbers.
- Helps identify potential issues early.
This doesn’t mean revealing every detail of your net worth. It means setting expectations, sharing your values, and ensuring your loved ones understand the why behind your plan.
5. Underestimating the Impact of Estate and Inheritance Taxes
Even with careful planning, heirs may face various taxes: federal estate tax, state estate tax, and sometimes income tax on certain assets (like retirement accounts).
Strategies That Can Mitigate Tax Burdens
- Use trusts to minimize the taxable estate.
As mentioned above, strategically transferring assets into certain types of trusts can remove them from your taxable estate while still allowing you to set conditions on their use. - Explore charitable giving strategies.
Gifts to qualified charities can reduce the size of your taxable estate and generate income tax deductions during your lifetime. Tools like charitable remainder trusts or donor-advised funds allow you to support causes you care about while also achieving meaningful tax savings. - Consider life insurance to provide liquidity.
Estate taxes are often due in cash within a relatively short time after death. Life insurance can create immediate liquidity, so heirs do not need to sell assets quickly or at a discount just to cover taxes. This can be especially important for estates with real estate or illiquid investments. - Coordinate with tax and legal advisors.
Tax rules are complex and often change. A coordinated approach with estate attorneys, financial planners, and tax professionals helps ensure strategies work together, rather than in isolation, and that no key opportunities are overlooked.
6. Failing to Establish or Update Your Will
A will is the cornerstone of any estate plan. Without one, state intestacy laws decide who inherits your property, and those rules may not match your wishes.
Even if you have a will, an outdated document can be just as problematic. Marriage, divorce, births, deaths, and moves between states can all affect your plan.
Best practices:
- Create a legally valid will, even if your estate is modest.
- Review and update every 3–5 years or after major life events.
- Coordinate your will with other estate planning documents.
A current will ensures your voice guides the process (not the courts).
7. Neglecting Beneficiary Designations
Certain assets, such as retirement accounts, life insurance policies, and annuities, transfer through beneficiary designations, not through your will.
If those designations are outdated or inconsistent for those specific assets the beneficiary form will generally override the terms of your will or trust. It’s not uncommon for ex-spouses or deceased beneficiaries to still be listed.
How to avoid this mistake:
- Review designations annually.
- Ensure they align with your will and trust structure.
- Name contingent beneficiaries as backups.
8. Choosing the Wrong Executor or Trustee
The executor or trustee plays a critical role in administering your estate or trust. Choosing someone simply because they’re your oldest child or closest friend may not be wise.
Qualities to look for:
- Integrity and trustworthiness.
- Financial literacy or willingness to work with professionals.
- Ability to act impartially and handle complex situations.
- Availability and willingness to serve.
In some cases, appointing a professional fiduciary may be the best choice to minimize family friction and ensure objective management.
9. Misunderstanding Trust Funding and Management
Creating a trust is only the first step, but funding it properly is essential. Many people set up trusts but fail to transfer ownership of assets into them, leaving the trust ineffective.
Common oversights:
- Not retitling real estate, bank accounts, or investment accounts.
- Forgetting to assign business interests or intellectual property.
- Leaving beneficiary designations outdated instead of naming the trust
- Failing to update newly acquired assets.
Example Scenario
A couple set up a revocable living trust to avoid probate and simplify the transfer of their home and investment accounts to their children. However, they never retitled the house or moved the accounts into the trust. When they passed away, the assets had to go through probate anyway, delaying distributions and adding legal costs the trust was meant to prevent.
10. Overlooking State-Specific Laws and Tax Rules
State laws vary widely in how they treat estate taxes, inheritance taxes, and property transfers.
Some states have no estate tax, while others impose their own, separate from federal law. Residency rules can also affect how assets are taxed. For example in Connecticut and Massachusetts, only the amount above the exemption is taxed. New Hampshire has no state estate tax. Below is a snapshot of tax rules of certain close by states. This is provided for informational purposes only.
State
Estate Tax?
Tax Rate / Notes
Yes
Yes
No
No
Yes
What to consider:
- Know your state’s estate and inheritance tax laws.
- Review whether moving or establishing residency elsewhere could impact your plan.
- Ensure your documents comply with local law. Out-of-state templates often miss nuances.
11. Underestimating Medicaid & Long-Term Care Implications
Long-term care can quickly deplete an estate. Many families are unaware that gifting assets can affect Medicaid eligibility. Medicaid has a look-back period (typically five years in most states) during which any gifts or transfers of assets for less than fair market value can delay or reduce eligibility for coverage. The idea is to prevent people from giving away assets just to qualify for government assistance.
Strategies to consider:
- Use irrevocable trusts to protect assets while preserving eligibility.
- Consider long-term care insurance to reduce financial risk.
- Start planning early. Last-minute transfers can trigger penalties.
12. Overlooking Generation-Skipping Transfer (GST) Tax
The GST is designed to prevent families from avoiding estate taxes by skipping a generation (e.g., leaving assets directly to grandchildren).
This tax can even apply unintentionally, such as when a child predeceases a parent and their share passes directly to grandchildren, effectively skipping a generation.
Ways to mitigate GST tax exposure:
- Understand when GST tax applies and how exemptions work.
- Use GST-exempt trusts for multigenerational wealth planning.
- Coordinate with professionals to structure transfers strategically.
Even families with moderate estates can be affected, so don’t overlook this area.
13. Failing to Plan for Digital Assets
In today’s digital world, many estates aren’t just physical and financial; they’re also digital. That includes everything from online bank accounts and cryptocurrency to social media and cloud storage.
Without clear instructions, heirs may not be able to access or manage these assets.
Best practices:
- Create an inventory of digital accounts and assets.
- Securely store passwords and provide legal authorization.
- Include digital asset instructions in your estate plan. Under the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), fiduciaries need explicit legal authorization to access or manage these accounts.
14. Not Planning for Life’s ‘What Ifs’
Life can bring unexpected turns, and preparing for them ensures your loved ones are supported no matter what happens. What if you become incapacitated? What if a beneficiary dies first? Taking these steps isn’t about expecting the worst. It’s about providing clarity, comfort, and protection for the people you care about most.
How to cover contingencies:
- Include powers of attorney and healthcare directives.
- Name contingent beneficiaries and backup fiduciaries.
- Address simultaneous death scenarios in legal documents.
Planning Today Protects Tomorrow
Planning for a wealth transfer involves securing your family’s future, preserving harmony, and ensuring your legacy endures.
Common mistakes, from neglecting tax exemptions to overlooking digital assets, can lead to unnecessary costs, legal disputes, and heartache. But with proactive, comprehensive planning, these pitfalls are entirely avoidable.
Whether your estate is modest or substantial, the principles are the same:
- Plan early.
- Communicate clearly.
- Review regularly.
- Work with experienced professionals.
At SKY IG, we help ensure all the moving parts of your wealth transfer strategy work together seamlessly, creating a cohesive and tax-informed plan tailored to you.
This article is for informational purposes only and is not meant to constitute tax, legal or financial advice. SKY Investment Group LLC (“SKY”) is an SEC registered investment advisor. Being registered with the SEC does not imply any specific level of skill or training. SKY is neither a certified public accounting firm nor a law firm and does not provide tax or legal advice, respectively, to clients; such services are provided through select third parties unaffiliated with SKY. Tax and estate planning strategies are unique to each client’s circumstances and success cannot be guaranteed. Please contact a tax or legal professional for advice in such matters. Investing involves the risk of loss, including the risk of loss of the entire investment. Diversification does not ensure a profit or protect against a loss.