BEWARE OF LIVING TRUST SCAMS

 

WATCH OUT FOR THE LIVING TRUST MILL!

Because of the proliferation of living trust "mills"; many individuals come to us as clients with questions about trust mill scams they have attended by an out-of-county business which came to town to  pitch living trusts. The pitchman is usually a salesperson, rather than an attorney, paralegal or qualified trust preparer, who  utilizes a variety of high pressure tactics to get you to buy the "one-day-only, sale-priced"  product. 

Many clients come to Baldwin Trust Group  concerned that they may be the victim of a living trust scam. Often senior citizens are approached by a door to door sales person or a "a nice young man over the phone" who want to sell them, or review an existing, a living trust. They want to know whether these type of living trusts are legitimate.

These salespeople are not attorneys or paralegals and therefore they cannot give you legal advice and may not be able to answer all of your questions, nor pick up on important issues such as taxes, insurance or health care. Often, the living trusts contain no more than "boiler-plate" language that cannot be written to specifically and adequately address the client's needs.

scam signcrop.jpg (72653 bytes)Furthermore, we have seen a number of cases where the out-of-county business fails to transfer a client's assets into the trust, which, of course, is the whole point of the trust in the first place. If a person's home, bank accounts, investments and other assets are not placed in the trust, the living trust is simply an empty shell and will not avoid probate for your  heirs.

An even greater danger occurs when the salesperson uses the offer of a low-cost living trust as a guise to acquire confidential financial information about you. The salesperson then uses this information to pressure you  into making inappropriate investments. Here is an example of one such unscrupulous trust-mill salesperson:

Recently, an 88-year-old client was convinced by a living trust salesperson to place his life savings of $25,000 in an annuity which would not begin to pay him any money until he was 105 year old! Similarly, a client who had attended a living trust seminar conducted by an out-of-county firm was told that if he did not transfer all of his savings into annuities (conveniently sold by the salesperson), the living trust would fail and the government would end up with everything he owned. 

In both of these situations, we were able to retrieve our clients' savings, but still at a great cost to their peace of mind. A living trust is a legal document and should only be drafted by a qualified person or firm who knows your financial situation and estate planning needs. Beware of slick salesmen and door-to-door solicitors with ulterior motives.

Elder Law Issues

APRIL 6, 1998 VOLUME 5, NUMBER 40
 
"Trust Mills" May Not Have Best Estate Plan For You

Living trusts have become the most popular estate planning device in this decade. Lawyers, financial planners, insurance agents, bankers and investment firms often tout the value of living trusts. It is often difficult to see through the hype and determine whether a living trust is really appropriate for your specific circumstances, and that difficulty is not eased by the fact that the trust salesperson frequently misrepresents the usefulness of these popular planning devices.

First, some definitions. The person who establishes a trust is usually called the "trustor" or, sometimes, the "settlor." A couple or any group of people can be trustors of the same trust. The "trustee" is the person who actually handles the trust assets and follows the trust's instructions regarding investment and distribution. The "beneficiary" is the person (and there can be multiple beneficiaries) entitled to receive distributions from the trust; beneficiaries can be income beneficiaries (and entitled to receive income during the life of the trust) or residual beneficiaries (and entitled to receive the trust's assets at some future time, such as upon the death of the trustor). Often, the three roles of trustor, trustee and beneficiary are filled by the same person or couple.

A "living" trust is any trust established during the life of the trustor, regardless of whether the trust is revocable or irrevocable. A trust which is only created upon the death of the trustor (usually by the decedent's will) is called a "testamentary" trust.

When most people discuss a living trust, they are referring to a revocable living trust, usually with the trustor serving as trustee and provisions for distribution of the trust's principal at the death of the trustor. Part of the confusion about trusts, however, stems from the fact that there are also a wide variety of irrevocable, special purpose and other trusts, any of which can be described as living trusts. It is often difficult to determine what (if any) special provisions should be considered to help minimize taxes, probate costs and family problems for a particular trustor.

Because of the strong desire of many individuals to avoid the probate process upon their deaths, the sale of living trusts has become a growth industry. As noted in a recent Wall Street Journal article, however, many non-lawyer organizations have gotten into the business of selling trusts without having the tax and estate planning background necessary to make reasonable decisions and give good advice. These "trust mills," as they are often called, often "churn [trusts] out without considering whether they make sense for the particular individual." Perhaps more dangerously, the Wall Street Journal, points out that the trusts are "often sold by people who are unauthorized to practice law and have no expertise in estate planning, [and therefore] the dubious trusts can cost estates thousands of dollars in unnecessary taxes."

The trust mills often follow predictable patterns. They advertise free estate-planning seminars at hotels, or convention halls, usually including a continental breakfast or similar inducement. Once potential customers have been drawn in to the seminars, salespeople cite exaggerated probate costs, unlikely tax scenarios and irrelevant will contest proceedings to frighten attendees into considering living trusts. They usually are encouraged to schedule follow-up appointments, where they may be sold a fill-in-the-blanks form without regard for their individual tax or personal circumstances. The ultimate irony: most trust mills charge about the same (or slightly more) than the prevailing local rate for attorneys with sufficient legal training to tailor trust terms to the specific needs of the client.

Several states have begun actions to force trust mills out of business. In Arizona, however, the industry is thriving, without any apparent check on the misrepresentations or exaggerations. The Wall Street Journal article recommends that you consult an attorney to determine whether you even need one of these specialized estate planning tools, and then to draft it if you do.
 

 

NOTICE  

December 12, 2001

 

 

TO:

Life Insurers and Life Agents

FROM:

HARRY W. LOW, California Insurance Commissioner

SUBJECT:  

Living Trust Mills and Pretext Interviews


The purposes of this Notice are to:

1.

Inform insurers and production agents regarding the use of a marketing scheme known as a "living trust mill," and to address the responsibilities of  both insurers and producers in assuring that the described or similar marketing practices are not used in the solicitation and sale of Insurance in California.

2.


Address the provisions of the Insurance Information and Privacy Protection Act of the California Insurance Code, as they relate to the use of pretext interviews by insurers, producers and insurance-support organizations.

Living Trust Mills

Put simply, a living trust mill is an unlawful marketing scheme designed to accomplish the sale of annuities that is principally used in the solicitation of senior citizens. While the specifics of living trust mills may vary, they all share the common attributes of misrepresentation of identity and purpose. Each misrepresents the actual business of the sales representative and the true purpose of the solicitation. The initial approach to clients may be to solicit senior citizens at "seminars," purportedly designed to educate participants about the benefits of living trusts and other estate planning devices. The approach may be through mass mailing, telemarketing, door-to-door solicitation, or even while providing entertainment at senior related functions. Regardless of how clients are initially solicited, the sales presentations are basically the same. The representatives misrepresent themselves as experts in estate planning. They gain the trust and confidence of the client, and then misuse that trust to discover the extent of the client’s assets under the pretext of determining whether the client can benefit from a living trust. Trust mills typically use both licensed and unlicensed representatives, and often operate in conjunction with attorneys or attorney reference services in order to give the operation the appearance of legitimacy. After the living trust and related estate planning documents have been sold, a representative, usually a licensed agent, again misrepresenting his or her identity and purpose, attempts to sell an annuity to the client as part of their estate planning program. Clients characteristically perceive the agent as their legal advisor or estate planner and not as an insurance agent.

In 1997, the People of the State of California, represented by the Attorney General and a number of district and city attorneys, sought civil penalties, restitution, and injunctive relief against Fremont Life Insurance Company and others, including a corporate licensed life agent 1 and several individual licensees, in an action alleging unfair business practices and false advertising under California Business and Professions Code sections 17200 and 17500. The specific allegations of the Complaint were that the insurer, the agents and others, operated a "living trust mill" in which the agents, posing as experts in estate planning, marketed an estate plan to senior citizens in the manner described above. It was alleged that the concealed, material purpose for an estate planning interview conducted by the agents was to obtain personal financial information from clients in anticipation of the sale of a Fremont Life Insurance Company annuity, and receipt of the commissions generated by the sale. Where clients agreed to purchase the estate plan, the agents prepared standardized trust documents, and delivered them to the purchasers for execution during subsequent appointments. Typically, the agents would solicit the clients for the purchase of the annuity during the delivery and execution process.

The lawsuit against the insurer proceeded to trial in Los Angeles Superior Court in early 1999; the production agents’ having previously stipulated to a final judgment which included civil penalties and restitution. On October 27, 1999, the court filed its Statement of Decision in favor of the People and against Fremont Life Insurance Company. In making affirmative findings with regard to each of the above-recited allegations, the court made the following significant determinations:

  • The insurer was involved in and responsible for the unauthorized  practice of law by its agents in marketing the estate plans.

  • The insurer was engaged in an unfair, fraudulent and deceptive business practice in the marketing of its annuities where, pursuant to training practices known to the insurer, its agents:

 

  • Misrepresented that they were advisors on matters of estate planning through the use of inter vivos trusts, rather than salespersons who had the   ultimate goal of selling annuity policies to customers.

 

  • Misrepresented that the agency was an organization of senior citizens or an organization which functioned on behalf of senior citizens, rather than  an insurance sales organization.

  • The insurer was responsible for the acts of its agents, not only under the theory of agency, but that of ratification for accepting the substantial benefits of the unlawful acts of its salespersons.

The court’s Statement of Decision and subsequent judgment provided injunctive relief, restitution to policyholders and civil penalties of approximately $2.5 million dollars. While an appeal is currently pending regarding the amount of the award of civil penalties, the appeal is not material to the findings of the court addressed herein.

While this litigation was widely publicized, both within and outside the insurance industry, the Insurance Commissioner continues to receive and investigate complaints of similar activities, and to take action against those found responsible for unlawful practices. These continuing circumstances have necessitated the issuance of this Notice. The Commissioner, along with other state and local officials, is determined to stop these fraudulent practices by pursuing all appropriate administrative, civil and criminal enforcement remedies necessary to the task.

Pretext Interviews

The activities described in this Notice, both with regard to the pending litigation and general discussion, are actionable under Business and Professions Code sections 17200 and 17500. As indicated above, established violations can result in injunctive relief, restitution and both civil and criminal penalties. As well, such violations are administratively actionable under the provisions of the Insurance Information and Privacy Protection Act, 2 and may result in orders to cease and desist, subsequent monetary penalties and the suspension or revocation of certificates of authority and production agent licenses.

Insurance Code section 791.03 provides that "[n]o insurance institution, agent or insurance support-organization 3 shall use or authorize the use of pretext interviews to obtain information in connection with an insurance transaction." Insurance Code section 790.02(u) defines "Pretext interview" as "an interview whereby a person, in an attempt to obtain information about a natural person, performs one or more of the following acts: (1) Pretends to be someone he or she is not. (2) Pretends to represent a person he or she is not in fact representing. (3) Misrepresents the true purpose of the interview. (4) Refuses to identify himself or herself upon request."

Acts (1) through (3) are inherent in the operation of a trust mill, and insurers and agents found to have used or authorized the use of these practices will be the subject of appropriate sanctions under the Insurance Information and Privacy Protection Act.

While neither the Business and Professions Code’s Unfair Competition Law or the Insurance Information and Privacy Protection Act are limited in their application to living trust mills, the prevalence of such schemes in current marketing practices is cause for the Insurance Commissioner to request agents and insurers to conduct a focused identification and review of  each marketing program in which they are involved, for the purpose of assessing their compliance with the above cited statutes. Particular attention should be given to any program for annuity sales in which the insurer or agent states or infers that they possess particular expertise in the areas of law, finance or financial planning. Offending programs should be corrected immediately, and remedial action should be taken. Remediation should include allowing purchasers that were unlawfully solicited to rescind their contracts.

Thank you for your consideration of this matter.


1

Alliance For Mature Americans Insurance Services, Inc.

2

Insurance Code section 791 et seq.

3

Insurance-support organizations are persons engaged in the business of assembling or collecting information about natural persons for the primary purpose of providing the information to an insurance institution or agent for insurance transactions. Insurance institutions include insurers holding certificates of authority, and agents include production agents’ licenses pursuant to the provision of the California Insurance Code.

Attorney General Lockyer Warns Seniors about "Living Trust Mills" and Annuity Scams

February 19, 2003
03-017
FOR IMMEDIATE RELEASE
(916) 324-5500

(SACRAMENTO) – Attorney General Bill Lockyer today warned California consumers to be on the lookout for "living trust mill" con artists who fraudulently sell trusts and annuities to senior citizens.

Sales agents for these scam operations often misrepresent the disadvantages of seniors' current investments and the advantages of the investments the agents are selling. They may even make seniors believe their bank accounts are less safe than the annuities or other investments they want seniors to buy. To give themselves a cloak of legitimacy, these sales agents pretend to be experts in living trusts. They often work in assisted living centers, churches and other places where seniors gather, hooking elderly victims through free seminars and other sales presentations.

"Consumers, particularly seniors and their families, should be wary," said Lockyer. "We believe there are living trust mills violating the law -- and the trust placed in them by seniors. We are determined to investigate and punish fraudulent conduct, but we also want to help seniors avoid becoming victims."

Seniors pay substantial sums of money to sales agents for living trust mills. But through fraud and deceit, the sales agents damage seniors' estate plans, and the security of their investments and life savings.

A state appellate court recently affirmed a multi-million dollar judgment the Attorney General obtained against an insurance company that conspired with a living trust mill to commit fraud in selling trusts and annuities to seniors.

In their solicitations, sales agents often pose as expert financial or estate planners. They pass themselves off as a "trust advisor," "senior estate planner" or "paralegal," and schedule an initial appointment with seniors in their homes. Under the guise of helping set up or update a living trust, the sales agents find out about seniors' financial assets and investments.

Usually, the sales agents then schedule a second visit to deliver a completed trust and have documents signed and notarized, and title of assets transferred to the trust. Typically, the agents go over the assets to be placed in the trust. They use that review of seniors' investments to scare them into believing their investments are unsafe, and that by "moving" their money, they can earn higher interest with no risk. The agents may have seniors sign documents that transfer the senior's CD, mutual fund accounts, or other investments to an annuity, or a so-called "promissory note" or other investment.

Planning an estate and choosing investments involve important legal, financial and personal decisions. If estate planning documents are not properly prepared or executed they can be invalid and cause lasting damage.

Following are additional tips to help consumers avoid becoming victims of living trust mills and their scams:
 

  • Living trust mills' sales agents are not attorneys and are not experts in estate planning.
     

  • Documents in the trust packages may not comply with California law.
     

  • Sales agents may not follow procedures set by law for executing or witnessing wills and other documents. These violations may make the documents subject to challenge.
     

  • Watch out for companies that sell trusts and also try to sell annuities or other investments.
     

  • Sales agents may fail to disclose possible adverse tax consequences or early withdrawal penalties that may be incurred when transferring stocks, bonds, certificates of deposit or other investments to annuities.
     

  • An annuity is not 100% safe, and only a portion is guaranteed by the state. Insurance companies can and do fail, and their assets may not be enough to pay the full value of their customers' investments.
     

  • So-called "promissory notes" are not insured by the FDIC or any other government agency and may be very risky. They may not be registered as securities with the state.
     

An attorney qualified in estate planning can help consumers decide if they need a living trust or other estate planning documents, or help them review an existing trust or will. To obtain a list of attorneys who are certified as estate planning specialists, and to receive other written information about estate planning and how to select an attorney, call the State Bar of California's toll-free number for seniors at 1-888-460-7364. Before consumers buy an annuity or any other investment, they should review it with people they know and trust, such as their financial or tax advisor, their attorney and trusted family members.

Consumers who feel they have been victimized by a living trust mill, or annuity or promissory-note fraud, should report it to their local district attorney and the California Department of Insurance. Consumer complaints also may be filed online at the Attorney General's Website at http://www.ag.ca.gov/consumers/mailform.htm.

Do You Need a Lawyer to Make Your Living Trust?

Don't get ripped off by lawyers; find out how much a living trust should cost.

For many Americans, a significant goal of estate planning is to avoid probate. A living trust, unlike a will, offers people a fast, private, probate-free way to transfer one's property after death. Although a living trust is not a complete substitute for a will (it doesn't allow you to name a guardian for a child, for example), it is definitely a cheaper and more efficient way to transfer property at death, especially large-ticket items such as a house, business and investments.

Assuming you decide to prepare a revocable living trust, how much should you expect to pay? If you are willing to do it yourself, with a self-help aid such as those offered by Nolo and other publishers, it will cost you about $30 for a book or $50 for software. If you hire a lawyer to do the job for you, get ready to pay between $1,500 and $2,500. Non-lawyer living trust companies (commonly referred to as trust mills by attorneys who hate their competition) typically come in a few hundred dollars cheaper than attorneys.

You may assume that paying $1,000 or more for the assistance of a professional means you'll receive good value for your money -- you get what you pay for, right? Maybe not. If you are willing to invest a couple of hours of your time using a top quality self-help resource, you may end up with a better result than you would achieve with many lawyers.

To understand why most lawyers charge too much for a living trust and why it is safe and easy to do it yourself, it helps to know that a living trust is simpler to prepare than a will. To draft a standard living trust -- which is what most attorneys offer -- you start with a lot of legal boilerplate (off-the-shelf legal language) and add the following information:

  • The name of the person creating the trust (the trustor). If it's your trust, that's you.

  • The name of the person who will manage the trust (the trustee). Again, if it's your trust, this is you. That's right, the same person creates it and controls it.

  • The name of the person who will take over as trustee and the distribute property in the trust when the trustor dies or becomes incompetent (the successor trustee). This will usually be your spouse, child or close friend.

  • The names of the people who will receive the property in the trust (your beneficiaries, just as with a will).

  • The name of a person to manage any property left to minor beneficiaries.

Once the trust is drawn up (these days, spit out by a high-speed laser printer), you sign it in front of a notary, who may charge you $100 or more for their service. Finally, to make the trust effective, all property to be distributed under its terms must be transferred into the name of the trust using a deed or other standard transfer document.

If it's this easy, why does the same lawyer who charges only $200-$300 for a will charge five or six times this amount for a living trust? Much of the answer lies in the word "trust," which most Americans apparently regard as a highly complicated legal document used by the super-rich to build and keep their fortunes.

Also key to getting consumers to pay big bucks for a living trust is the promise of the big savings that will eventually result from having your estate avoid probate. While this message has some integrity coming from non-lawyer estate planners (who nevertheless charge too much for this simple document), when made by lawyers it amounts to little more than a sales pitch for a protection racket. That's because it's attorney lobbying groups who fight to keep the probate system on our law books in substantial part so local lawyers can say, "Pay me $1,500 now to prepare a living trust designed so your inheritors can avoid being charged even more by me or some other probate lawyer down the road."

And, of course, it's the very fact that living trusts, but not wills, avoid probate that largely explains why lawyers charge a much more reasonable price for wills. Or put more bluntly, lawyers don't feel a need to charge exorbitant prices for wills, because they often end up handling the lucrative probate when the maker of the will dies. By contrast, with a living trust lawyers are anxious to get a big payment up front precisely because there will be no probate.

Once you understand what a living trust is and how simple it is to prepare it, you can judge for yourself whether it makes sense to buy one from a professional or do it yourself. In our opinion, anyone -- lawyer or non-lawyer -- who charges more than $300-$400 for a basic probate-avoidance living trust (plus a reasonable secretarial fee for transferring property to the trust) is charging too much. But you'll probably have a tough time finding a lawyer who will agree.

Legal information is not legal advice and information alone may not meet your specific needs or questions. Use of such information in this web site application is subject to the Terms of Use and is not a substitute for obtaining the advice of an attorney authorized to practice law in your jurisdiction. The information on this website and use of Rapidocs are provided "as-is." This is a legal information website. Legal information applies to all states of the United States except Louisiana

 

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