How psychological biases could undermine high net worth estate plans

Setting out how you want to pass on your wealth is a crucial part of effective financial planning. It ensures your assets are distributed in line with your wishes and that they’re managed as tax-efficiently as possible.

While it’s important to get the legal and tax details right, estate planning is rarely just a technical exercise, especially for high net worth individuals (HNWIs) with complex assets and family dynamics.

Indeed, estate planning often involves facing deeply emotional subjects, such as mortality and family relationships. This could trigger unconscious biases (patterns of thinking) that shape your financial decisions and behaviours, potentially in unhelpful ways.

Read on to learn more about how psychological biases could undermine your estate plan and find out how financial advice could help.

Why high net worth estate planning can be psychologically challenging

As an HNWI, you might have a diverse range of assets, such as business interests, property portfolios, offshore structures and so on. This complexity could make estate planning decisions feel overwhelming and stressful.

You may need to make choices that challenge your sense of identity and purpose, such as deciding if or when to sell a business.

Family expectations and considerations could add further pressure, filling your head with concerns and questions like, “Are my children ready to manage any wealth I give them?” and “Have I provided for my children fairly without favouring one over another?”

Unfortunately, without appropriate advice and support, these psychological battles could lead to:

• Procrastination and delayed decisions
• A reluctance to review and adjust outdated plans
• Impulsive decisions that don’t align with your long-term goals

3 cognitive biases to be aware of when planning how to pass on your wealth

Psychological biases develop over many years based on your experiences and environment, such as your upbringing and cultural trends. They help you make sense of the world by giving your brain mental shortcuts for processing the wealth of information it receives.

However, because many of these ’shortcuts’ operate outside conscious awareness, you might be unaware of how they’re influencing your choices.

Learning to recognise your biases is the first step towards making more intentional decisions about your wealth and legacy.

Here are three of the most common psychological biases that, left unchecked, could undermine your estate plan:

1. Overconfidence bias

Whether you’ve come from an affluent family or built your wealth independently, having a substantial financial safety net could lead to an overconfidence bias.

While confidence is important for accumulating and managing wealth effectively, when it comes to estate planning, this cognitive bias could lead you to:

• Delay seeking financial advice – You might be more likely to take a DIY approach rather than consulting a professional if you overestimate your financial knowledge, which may result in costly mistakes and missed opportunities
• Misjudge or ignore potential risks – An unshakeable belief that everything will turn out for the best, even without careful financial planning, makes it easier to overlook potential problems
• Underestimate the time and emotions involved in estate planning – You might tell yourself you’re too young and healthy to need an estate plan now, and that you’ve plenty of time. Unfortunately, no one knows what’s around the corner, and this approach could mean your estate isn’t passed on in line with your wishes and increase the risk of family disputes

2. Confirmation bias

This is the tendency to seek out, interpret or remember information in a way that confirms what you already believe or expect while dismissing evidence that challenges these thoughts.

Confirmation bias could affect your estate plan in several ways:

• Uneven division of wealth – Using outdated or biased valuations of your assets because they align with what you think they’re worth could mean you unintentionally leave more to one beneficiary than another
• Poor structuring of assets – You might stick with a specific trust or gifting strategy because it met your needs years ago or you know it works for others, while ignoring changes in the law, shifting family dynamics and your unique needs
• Dismiss valuable advice – If you only want to hear advice that reflects your existing beliefs, you might dismiss valuable guidance from professionals who raise uncomfortable, yet important, questions or alternatives

3. Present bias

If you tend to value rewards that arrive sooner more highly than those you have to wait for (even if the later payoff could be larger), you might be experiencing present bias.

In HNW estate planning, this could appear as:

• Chronic procrastination – You might delay important estate planning tasks in favour of meeting short-term financial needs and desires. For example, putting off gifting some of your wealth to loved ones, even though this could reduce Inheritance Tax (IHT) exposure over time; the loss of assets now feels much larger than the benefit of a lower IHT bill in the future
• Unfulfilled legacy plans – Prioritising your current lifestyle and spending over planning for the future could mean you don’t accumulate or preserve the wealth you intended to pass on
• Inadequate preparation and protection – Failing to create and update key estate planning documents, such as your will and lasting powers of attorney, could mean your assets aren’t passed on in line with your wishes. It may also lead to family disputes and expensive legal proceedings that cause stress and upset at an already difficult time

Your financial planner can provide an objective perspective

Psychological biases operate automatically and unconsciously, making them hard to spot and overcome on your own.

Your financial planner can play a crucial role in bringing these biases to the surface and gently challenging your assumptions to ensure your estate plan achieves what you want it to.

We can use cashflow modelling to provide a clear picture of your current and future finances, identifying any areas you might have overlooked or misjudged. We’ll also stress-test your plans against different scenarios, such as longer or shorter life expectancies and market downturns, to ensure your estate plan is resilient enough to withstand change.

This data-driven approach allows us to show you the cost of procrastination, delay and any other behaviours that your psychological biases may trigger. We can then work together to create and regularly review an estate plan that aligns with your legacy goals.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, trusts, Lasting Powers of Attorney, or will writing.