Estate Planning Strategies That Backfire: Abusive Tax Shelters and Costly Mistakes

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Who this page is for: California families above the $15 million single or $30 million married federal exemption, and anyone being pitched a tax strategy by a promoter, adviser or online course. Several entries (basis, Prop 13, ING trusts, Form 709) bite at every estate size.

What are the biggest estate planning mistakes high-net-worth families make?

The costliest high-net-worth estate planning mistakes are deathbed family partnerships, structures the IRS has listed as tax shelters, gifts made after a sale is effectively done, and California-specific traps like ING trusts and LLC transfers of real estate, each of which has lost in court or been shut down by statute (Fields, 2024; Treas. Reg. § 1.6011-15; R&TC § 17082).

Most estate tax planning techniques work when they’re done early, documented, and run the way the paperwork says. For the social-media versions of these pitches, see money myths and buy, borrow, die.

Where each strategy sits on the spectrum

A listed transaction is one the IRS has identified as a tax avoidance transaction; participants and advisers have to disclose it, and the assessment period stays open until they do (IRC § 6501(c)(10); Treas. Reg. § 1.6011-4). A transaction of interest or proposed listing is one the IRS has flagged without, or before, final listing. These designations are “solely disclosure requirements,” as one court put it in 2026; they don’t decide the tax result (Ryan, LLC v. IRS, N.D. Tex. 2026). A court loss on bad facts is a legitimate technique that failed because of how it was done. A California trap works under federal law but fails or costs more here.

1. Deathbed and “checkbook” family partnerships

The pitch: move investments into a family limited partnership, give or bequeath interests, and value them at a steep discount because a limited partner can’t control or sell. In Estate of Fields the appraisal took 15% off for lack of control and 25% for lack of marketability.

What went wrong: the partnerships were formed at the end of life or used like a personal checking account. Mr. Strangi moved over 98% of his wealth into his partnership and kept only $762 in liquid assets, as the court counted them. The partnership paid his expenses after he died (417 F.3d at 477 to 478). In Estate of Powell the partnership was funded on August 8, 2008, and Mrs. Powell died on August 15. In Estate of Moore, five days after the partnership received part ownership of the farm, it was sold, and the court found Mr. Moore had at least an implied agreement to keep enjoying the property (T.C. Memo. 2020-40, at *37). In Fields, about $17 million moved in shortly before death.

What killed it: IRC § 2036(a) pulls transferred property back into the estate when the decedent kept its enjoyment or, with others, the right to decide who gets it. The bona fide sale exception needs “a legitimate and significant nontax reason” and proportionate interests (Estate of Bongard, 124 T.C. 95, 118 (2005)). Powell (148 T.C. 392 (2017)) held that the power to dissolve the partnership together with the other partners was enough under § 2036(a)(2). Fields (T.C. Memo. 2024-90) included $17,062,631 against the $10,877,000 the estate reported, imposed a 20% negligence penalty, and the Fifth Circuit affirmed (No. 25-60403, 2026).

Do this instead: form the entity years ahead, for a reason you could explain to a lender, keep enough assets outside to live on, and run it like a business. See family limited partnerships in California.

Where it sits: court loss on bad facts. The technique is legal. These facts weren’t.

2. Charitable remainder annuity trust plus a single premium immediate annuity

The pitch: put appreciated business interests into a charitable remainder annuity trust, have the trust sell them and buy an annuity, and report the payments as mostly tax-free annuity income.

What went wrong: a CRAT’s payments are taxed to you by tier, ordinary income and capital gain first (IRC § 664(b)). The pitch misapplies §§ 72 and 664 to claim the payments are taxable “only to the extent of the income portion of the SPIA annuity payment” (IR-2026-82).

What killed it: final regulations, T.D. 10051, made the arrangement and substantially similar ones a listed transaction effective July 9, 2026 (Treas. Reg. § 1.6011-15). The charity named as remainder beneficiary isn’t treated as a participant.

Do this instead: a properly run CRT still works. The trust itself pays no income tax on the sale (IRC § 664(c)), and you pay tax as the payments come out. See charitable remainder trusts in California.

Where it sits: listed transaction.

3. Syndicated conservation easements

The pitch: buy into a land partnership that donates a conservation easement and get a deduction several times your investment.

What killed it: Treasury issued final regulations in October 2024 identifying these deals as listed transactions (IR-2024-259; Treas. Reg. § 1.6011-9). For partnership contributions after December 29, 2022, the deduction is denied when it exceeds 2.5 times the partners’ relevant basis (IRC § 170(h)(7)).

Do this instead: a real easement on land you own, appraised honestly. The full history, numbers and cases are on our syndicated conservation easement page.

Where it sits: listed transaction.

4. Micro-captive insurance

The pitch: form your own small insurance company, have your businesses deduct premiums paid to it, and let it elect to be taxed only on its investment income.

What went wrong: in Avrahami v. Commissioner, 149 T.C. 144 (2017), the family’s businesses deducted insurance premiums of $1,090,000 for 2009 and $1,170,000 for 2010, mostly paid to a captive owned by Mrs. Avrahami. No claims were filed against the captive’s direct policies in either year. The Tax Court held the payments weren’t insurance premiums and weren’t deductible.

What killed it: the IRS says it “has prevailed in all micro-captive Tax Court and appellate court cases decided on their merits since 2017” (IRS, 2024). Treasury finalized listed-transaction and transaction-of-interest rules in January 2025 (T.D. 10029). In March 2026 a federal court in Tennessee upheld the whole 2025 rule (CIC Services, LLC v. IRS, No. 3:25-cv-00146 (E.D. Tenn. Mar. 5, 2026)). In April 2026 a federal court in Texas vacated the listed-transaction rule, Treas. Reg. § 1.6011-10, and upheld the transaction-of-interest rule, § 1.6011-11 (Drake Plastics Ltd. Co. v. IRS, No. 4:25-cv-02570 (S.D. Tex. Apr. 15, 2026)). A third court upheld § 1.6011-11 in June 2026 (Ryan, LLC v. IRS, No. 3:25-cv-00078 (N.D. Tex.)). Both sides have appealed Drake Plastics to the Fifth Circuit: the companies on May 4, 2026, and the government by cross-appeal on June 15, 2026 (No. 26-20219). The listed-transaction question is still open.

Do this instead: buy the coverage your business needs from a commercial carrier, or use a captive only for real, priced, claims-paying risk with independent actuaries.

Where it sits: transaction of interest, with court losses on the merits.

5. Monetized installment sales

The pitch: sell to an intermediary for a long-term note, let the intermediary resell to your real buyer for cash, and borrow nearly the full price right away while deferring your gain until the note’s balloon payment.

What went wrong: the IRS says the intermediary “is interposed between the seller and the buyer for no purpose other than Federal income tax avoidance” (REG-109348-22, 2023).

What killed it: in August 2023 the IRS proposed regulations that would identify these transactions as listed transactions. We found no final rule as of October 2026. The proposal tells you how the IRS will argue an audit.

Do this instead: a real installment sale to a real buyer, where you carry the risk of the note (IRC § 453), or a charitable remainder trust if you’re charitably inclined. See installment sales of a business.

Where it sits: proposed listed transaction.

6. “Pure,” constitutional and “section 643” trusts

The pitch: put your business or rental income into a “non-grantor, irrevocable, complex, discretionary, spendthrift trust” and the income stops being taxable to anyone.

What went wrong: IRS Chief Counsel reviewed the promoters’ materials and concluded the structure “mistakenly interprets § 643” and “does not provide the claimed benefit” (AM 2023-006). The IRS’s own guidance is blunter: “Income that is earned by one person cannot be assigned to another for federal income tax purposes.”

Do this instead: if you want a non-grantor trust, use a real one, with an independent trustee and real distributions, and expect it to pay tax at trust rates. See our pure trust page.

Where it sits: IRS guidance against it, with sham-trust risk.

7. Offshore self-settled trusts for Californians

The pitch: move money into a Cook Islands or similar trust for yourself, and a California judgment can’t reach it.

What went wrong: in FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999), the settlors said their foreign trustee wouldn’t repatriate the money, so they couldn’t comply with the court’s order. The Ninth Circuit affirmed civil contempt and said that in the asset protection trust context the burden of proving impossibility “will be particularly high” (179 F.3d at 1241).

What killed it in California: a creditor can reach the most a trustee could pay you from a trust you set up for yourself (Prob. Code § 15304(b)). A transfer made with intent to hinder creditors can be undone, and keeping control and being sued beforehand count as evidence of intent (Civ. Code § 3439.04). In bankruptcy, a trustee can reach transfers to a self-settled trust made within 10 years (11 U.S.C. § 548(e)).

Do this instead: insurance, California’s own exemptions, and entities formed long before any claim. See asset protection in California.

Where it sits: court loss and a California trap.

8. ING trusts after SB 131

The pitch: before a big sale, put the asset in a Nevada or Delaware incomplete-gift non-grantor trust so California can’t tax the gain.

What killed it: for tax years beginning on or after January 1, 2023, California includes an ING trust’s income in the grantor’s income as if it were a grantor trust (R&TC § 17082(a)). The law came from SB 131 (Stats. 2023, ch. 55), according to the Franchise Tax Board. There’s a narrow exception for trusts that elect resident status and distribute 90% or more of their distributable net income to charity (§ 17082(c)).

Do this instead: if you’re leaving California, plan the move itself. If you’re staying, a completed-gift non-grantor trust with no California trustee and no noncontingent California beneficiary is a different analysis (R&TC § 17742). See Nevada trusts and California taxes.

Where it sits: California trap.

9. Gifting low-basis assets you’d otherwise hold until death

The pitch: get assets out of your estate now, while the exemption is high.

What went wrong: a gift carries your basis to the recipient (IRC § 1015(a)). Property you hold until death gets a basis equal to its value then (IRC § 1014(a)). Assets in an irrevocable grantor trust outside your estate don’t get the step-up either (Rev. Rul. 2023-2). And the value of a lifetime gift is added back when your estate tax is computed (IRC § 2001(b)), so a gift saves estate tax only on growth after the gift.

Do this instead: give high-basis or high-growth assets, keep low-basis ones, and use a swap power to bring low-basis assets back before death.

Where it sits: self-inflicted, and worse in California, where gains are taxed as ordinary income.

10. Reciprocal SLATs and community property in SLATs

The pitch: each spouse creates a spousal lifetime access trust for the other, so the family keeps access to everything.

What went wrong: the reciprocal trust doctrine “requires only that the trusts be interrelated” and that they leave the settlors “in approximately the same economic position” as trusts for themselves would have (United States v. Estate of Grace, 395 U.S. 316, 324 (1969)). In California there’s a second problem. Funding a SLAT with community property means your spouse is giving half of it to a trust for your spouse. A change from community to separate property needs a writing with an express declaration (Fam. Code § 852(a)), and the writing has to say expressly that ownership is changing (Estate of MacDonald (1990) 51 Cal.3d 262, 272, construing the predecessor statute).

Do this instead: different terms, trustees and timing for each trust, funded with separate property after a written transmutation. See SLATs in California and transmutation agreements.

Where it sits: court loss and a California trap.

11. Skimpy or unfiled Form 709s

The pitch: no gift tax is due under the exemption, so there’s no need to file, or a one-line return will do.

What went wrong: if a gift that has to be reported isn’t shown on a gift tax return, the IRS can assess gift tax “at any time” (IRC § 6501(c)(9)). The clock starts only when the gift is adequately disclosed, which the regulations define in detail, including a description of the property and how it was valued (Treas. Reg. § 301.6501(c)-1(f)). See gift tax in 2026.

Do this instead: file a complete Form 709 with the appraisal for every gift of hard-to-value property, even when no tax is due.

Where it sits: procedural trap.

12. Gifting after the sale is effectively locked in

The pitch: give shares to charity or family right before the company sells, and the buyer’s cash lands with the recipient, not you.

What went wrong: in Estate of Hoensheid, T.C. Memo. 2023-34, the owner wrote that he would “rather wait as long as possible to pull the trigger” on a gift of stock to a donor-advised fund. The Tax Court held that the delay “until two days before closing eliminated any such risk and made the sale a virtual certainty,” so the gain was his. It also denied the charitable deduction, though it didn’t sustain the penalty.

Do this instead: make the gift while the sale can still fall apart, ideally before a letter of intent.

Where it sits: court loss on bad facts.

13. Moving California real estate into an LLC without a Prop 13 review

The pitch: deed the rentals into an LLC, then give the kids LLC interests each year without reassessment.

What went wrong: the transfer in is excluded only if everyone’s proportional interest stays the same (R&TC § 62(a)(2)). After that, the owners are “original coowners,” and once interests totaling more than 50% are transferred, the property is reassessed (§ 64(d)). Anyone who gets control of the entity also triggers reassessment (§ 64(c)). Since 2021, the parent-child exclusion doesn’t cover an interest in a legal entity (R&TC § 63.2(e)(8)).

Do this instead: map the original co-owners and every future transfer before the first deed. See LLCs for rental property and Prop 19 planning.

Where it sits: California trap.

14. Entity-redemption buy-sells funded with company-owned insurance

The pitch: the company buys insurance on each owner and redeems a deceased owner’s shares with the proceeds.

What went wrong: in Connelly v. United States, 602 U.S. 257 (2024), the estate valued the company without the $3 million of insurance proceeds, on the theory that the redemption obligation offset them. The Supreme Court held the obligation “did not diminish the value of those shares.” The IRS’s higher value produced an additional $889,914 in estate tax.

Do this instead: the Court itself pointed to a cross-purchase agreement, where owners hold policies on each other. Review any redemption agreement funded with company-owned insurance. See buy-sell agreements in California.

Where it sits: court loss.

15. Adding a tax reimbursement clause to an existing grantor trust

The pitch: decant or modify an old grantor trust so the trustee can reimburse your income tax.

What went wrong: IRS Chief Counsel concluded that a modification adding the clause, with the beneficiaries’ consent, “will constitute a taxable gift by the trust beneficiaries” (CCA 202352018). A discretionary reimbursement power in the original trust doesn’t by itself cause estate inclusion. A mandatory one does (Rev. Rul. 2004-64).

Do this instead: put the discretionary clause in when the trust is drafted. California’s self-settled trust rule doesn’t treat that discretion as making you a beneficiary (Prob. Code § 15304(c)).

Where it sits: IRS ruling.

How much was at stake in these cases?

In the cases on this page, the IRS determined deficiencies ranging from $647,489 (Hoensheid) to $52,878,785 (Bongard), and courts sustained $2,099,011 in tax and penalty in Fields and an $889,914 deficiency in Connelly, all figures as the opinions report them.

A determined deficiency is the IRS’s opening number, not the final bill. Bongard ended in a split decision, and Hoensheid avoided the penalty. The gold bars are amounts a court sustained.

Worked example: what gifting a low-basis asset costs

On a hypothetical $5,000,000 stock position with a $500,000 basis, giving it to a child who sells it costs about $1,669,500 in income tax that holding it until death would avoid, and the gift would need about $57.6 million of growth after the gift before it pays for itself. The estate tax saved on that growth (40%) barely exceeds the income tax the heir also owes on it (37.1%), because gifted property keeps the donor’s basis while property held until death gets a new one.

The example is a hypothetical with stated assumptions. The heir sells after the donor’s death, in the top brackets: 20% federal capital gains rate (IRC § 1(h)), 3.8% net investment income tax (IRC § 1411) and 13.3% California (FTB; R&TC § 17043), 37.1% in all, ignoring deductions and the cap on deducting state tax. If you hold the stock until death, its basis becomes its value at death (IRC § 1014(a)) and a sale then produces no gain. The gift’s value is added back in computing estate tax (IRC § 2001(b)), so the gift saves estate tax only on growth after the gift, at up to 40% (IRC § 2001(c)).

Red flags in the pitch

• The return on the strategy is stated as a ratio of tax savings to dollars invested.
• It has to be done this month, before a deal closes or a deadline passes.
• You’d keep control of the money, or keep using it, after “giving it away.”
• The trust is described by a string of labels (“non-grantor, irrevocable, complex, spendthrift”) instead of by who the trustee is.
• Nobody mentions Form 8886, disclosure, or the IRS’s position.
• The structure was built in another state and nobody has checked California’s rules.
• The fee depends on the tax you save, or the promoter’s opinion letter is the only legal advice.
• It’s sold as working for everyone, at any estate size.

What changes in California

California has no estate tax of its own (R&TC § 13302; 26 U.S.C. § 2011 repealed), so the California traps on this page are about income tax, property tax and marital property.

• ING trusts are taxed to the grantor (R&TC § 17082).
• Prop 13 and Prop 19: entity transfers of more than 50% and changes in control reassess real estate (R&TC § 64(c), (d)). The parent-child exclusion is limited to a principal residence or family farm and excludes entity interests (§ 63.2).
• Community property: transmutations need an express writing (Fam. Code § 852(a)), and community property gets a full step-up at the first death (IRC § 1014(b)(6)), which a lifetime gift gives up.
• Self-settled trusts: a spendthrift clause in a trust for yourself is invalid against your creditors (Prob. Code § 15304(a)), and they can reach what the trustee could pay you (§ 15304(b)).
• Income tax: up to 13.3%, with no lower rate for capital gains (FTB), and no § 1202 exclusion (FTB).
• Trust residency: a California trustee or noncontingent beneficiary makes all of a trust’s income taxable here (R&TC § 17742).

Who this is for

This page is for families who’ve been pitched one of these strategies, who already have one in place and need their exposure measured, or whose adviser is proposing a structure built for another state. Eric works alongside your CPA and, where the matter calls for it, co-counsel. Unwinding or repairing a structure is built for each family and quoted in writing before any drafting starts.

Guides in this series

Every page in our California high-net-worth and ultra-high-net-worth series, by topic.

Freezing and transferring wealth

• GRAT (Grantor Retained Annuity Trust): How It Works, With the California Rules
• Intentionally Defective Grantor Trust (IDGT): How a Sale to a Grantor Trust Works in California
• Do You Still Need a SLAT After the 2026 Tax Law? (California)
• CA Dynasty Trusts: Benefits Guide 2026
• Generation-Skipping Trust in California: How It Works
• Family Limited Partnerships in California
• Defined Value Clauses and the Wandry Clause: Formula Gifts That Survive an Audit
• Valuation Discounts, Qualified Appraisals and Adequate Disclosure for Family Entity Gifts
• Swap Powers and Upstream Basis Planning: Getting a Step-Up After Rev. Rul. 2023-2
• Form 709: The Federal Gift Tax Return, Explained

Charitable planning

• Charitable Remainder Trust Attorney in California
• Charitable Remainder Annuity Trust (CRAT): Rules, 2026 Payout Math and the SPIA Listed Transaction
• Charitable Lead Annuity Trust (CLAT): Zeroed-Out CLATs, GST Traps and California Rules
• Private Foundation vs. Donor Advised Fund: Control, Deductions, 2026 Rules and California

Life insurance and liquidity

• Irrevocable Life Insurance Trust (ILIT): How It Works in California (2026)
• Private Placement Life Insurance (PPLI): Investor Control, Webber and California Rules
• Split-Dollar Life Insurance in Estate Planning: Levine, Morrissette, Cahill and Connelly
• Estate Tax Deferral Under Section 6166: Paying Estate Tax on a Family Business Over 14 Years
• Buy-Sell Agreements for California Businesses

Business owners and founders

• Estate Planning Before Selling a Business in California: Timing, Trusts and Taxes
• QSBS, Section 1202, and California
• Installment Sales of a California Business

Spouses, trusts and administration

• QTIP Trust Administration After the First Spouse Dies (CA)
• Estate Tax Portability in California: The 706 Most Families Skip
• Non-Citizen Spouse and the Estate Tax: The QDOT Rule (California)
• What Does HEMS Mean in a Trust? Health, Education, Maintenance, Support
• What Is a Trust Protector – and Do You Need One in California?
• Trust Decanting in California: A Trustee’s Guide
• Private Trust Companies and Family Offices: A California Guide

Residency, trusts and California tax

• Leaving California: Is There an Exit Tax, and What Follows You
• Can a Nevada Trust Avoid California Income Taxes?
• ING Trusts in California: How SB 131 and R&TC § 17082 Ended the NING
• Expatriation Tax and Estate Planning: Sections 877A and 2801
• California Billionaire Tax: What Prop 40 Would Do

Asset protection

• Asset Protection in California: What Actually Works (and What Is a Myth)
• Offshore and Domestic Asset Protection Trusts: Why They Fail Californians
• Moving California Real Estate Into an LLC: The Prop 13 Reassessment Trap

Strategies that backfire

• Deathbed Family Limited Partnerships: Why Late FLPs Fail Under Section 2036
• Micro-Captive Insurance: Section 831(b), the Court Losses and Form 8886 in 2026
• Monetized Installment Sales: Why the IRS Says the Deferral Fails
• Gifting Appreciated Assets vs. the Step-Up in Basis: When a Lifetime Gift Costs More Tax

Data, cases and examples

• Estate Tax Planning Strategies Compared: 22 Techniques Side by Side
• Estate Tax Cases Won and Lost: 34 Cases Scored
• Estate Tax Statistics (2026): 36 Verified Figures With Sources
• High Net Worth Estate Planning Examples: Four California Families by Net Worth

Working with Ridley Law

The first call is free and runs 30 minutes, by phone or Zoom. Book my free call or call 805-244-5291.

Frequently asked questions

What is a listed transaction?

A transaction the IRS has identified as a tax avoidance transaction. Participants must disclose it on Form 8886, the assessment period stays open until they do (IRC § 6501(c)(10)), and the penalty for not disclosing is 75% of the tax decrease, up to $100,000 for an individual (IRC § 6707A).

Are family limited partnerships still legal?

Yes. Bongard upheld a transfer with a legitimate and significant nontax reason. Partnerships fail when they’re formed at the end of life, hold nearly everything the person owns, or pay personal expenses.

Is a charitable remainder trust a tax shelter?

No. A CRT is in the tax code (IRC § 664). What the IRS listed in July 2026 is the version that buys an annuity and reports the payments under § 72.

Can I still use an ING trust if I live in California?

Not to avoid California income tax. Since 2023 its income is taxed to you (R&TC § 17082).

Do I have to file a gift tax return if I owe no gift tax?

Usually, for gifts above the $19,000 annual exclusion (2026). Without a return that adequately discloses the gift, the IRS can assess gift tax at any time (IRC § 6501(c)(9)).

What did Connelly change for buy-sell agreements?

Company-owned life insurance used to redeem a deceased owner’s shares counts in the company’s value, and the redemption obligation doesn’t offset it (602 U.S. 257 (2024)).

How do I check a strategy someone is pitching me?

Ask for the code section and the cases, check the IRS listed transactions page, and ask how it works under California law. A real strategy has answers to all three.