Avoiding Living Trust Scams: A Quick Guide for Advocates
Dishonest living trust
salespeople prey on seniors' fears that after their deaths, their life savings
and assets will be stolen by the government or by predatory probate attorneys.
These salespeople use high-pressure tactics and deceptive claims to coerce vulnerable
seniors into buying a product that many of them don't need.
Seniors are bombarded with
advertisements, phone calls, and pitches from door-to-door salespeople insisting
that living trusts work best for everyone. This may be true for some. For others,
buying a living trust is simply a waste of limited resources.
UNDERSTANDING
THE TERMS
It is important for advocates
to help educate seniors on the different types of estate planning tools. Key
terms to understand include:
TRUST
A trust is a legal arrangement
where one person (known as the "trustee") controls property
given by another person (known as the "grantor" or "trustor")
for the benefit of someone else (known as a "beneficiary").
Although it is not a requirement, with most living trusts, the grantors are
also the trustees during their lifetimes, as long as they remain competent.
Grantors name successor trustees to take over if they become incompetent or
die, and to distribute the property after they die.
LIVING TRUST
The term "living"
refers to the fact that these trusts take effect while the grantor is still
alive. In order for this to happen, grantors must transfer their property and
assets into the trust. Under most living trust arrangements, grantors,
while still competent, are free to change the terms of the trust. A living
trust is different from a living will. Living wills are documents that express
an individual's wishes about being kept alive if s/he becomes terminally ill
or seriously incapacitated.
WILL
A will is a legal document
that gives direction about how to distribute property after death. It does not
take effect until the person's death.
PROBATE
Probate is the legal process
that usually involves filing a deceased person's will with the local probate
court, taking inventory of the person's property, paying all legal debts, and
eventually distributing the remaining assets and property. If the person died
without a will (this is called intestacy), the estate still must be probated
and property will be distributed according to state law.
LIVING
TRUSTS VS. WILLS: HELPING SENIORS MAKE GOOD CHOICES
Living trusts and wills
allow seniors to choose how their property will be distributed after death.
Although there are other issues to consider, the primary advantage of a living
trust is that it can make it easier to avoid probate. Property transferred into
a living trust before death does not go through probate. Although this may seem
like an incredible benefit, the reality is that probate will not be a concern
for many seniors. In many cases, the estate will not be probated regardless
of whether the senior had a living trust or a will.
The first step is to help
seniors learn about their state laws and then assess the size and value of their
estates. This will help them determine whether they have to worry about probate.
If they still want to go ahead with a living trust, there are additional issues
to think about in finding the right product and deciding whether a living trust
is worth the expense.
Some of the most important
concerns to consider are:
1. Is it likely that
the senior's estate will be probated?
Most states have rules that allow small estates to be administered through
an expedited process. The dollar limit for using an expedited administration
process varies from state to state. In most cases, the property of low-income
seniors will be distributed either outside of probate completely or through
an expedited probate process.
2. Are there other
ways to avoid probate?
Living trusts are not the only ways to avoid probate. For example, another
option is to hold property in joint tenancy with a right of survivorship.
This property passes after death to surviving joint tenants. This does not
necessarily mean that advocates should advise clients to place property in
joint tenancy just to avoid probate. It is merely another option to consider.
3. Is the living trust
worth the expense?
Seniors who decide they want to go ahead with living trusts should be advised
that the process could be expensive. Lawyers often charge five or six times
the cost of a will to set up a living trust. Depending on the size of the
estate, the costs of a living trust may be much higher than the costs of probate.
This depends on the individual's situation.
4. Does the senior
know what is required to set up a trust?
It can take a lot of time to set up a trust properly. Writing up the document
is not enough. The trust will not be valid until property is transferred from
the individual's name to the trust. This is called "funding the trust."
Seniors should also be counseled that even if they decide to buy a living
trust, it is still a good idea to have a will as a back-up.
The decision about the appropriateness
of a living trust should be made, whenever possible, in consultation with an
experienced estate planning attorney. Concerns about the effect of a living
trust on Medicaid eligibility should also be considered.
COMMON
LIVING TRUST SCAMS
Many living trust mills
advertise through the mail, door to door, or by sponsoring special seminars.
These types of sales are especially suspicious. Other questionable sales tactics
include:
Companies that use names that sound a lot like the names of legitimate
non-profit organizations. AARP, for example, does not sell or endorse living
trusts. Companies will often try to use names that sound a lot like "AARP"
or "American Association of Retired Persons" to imply falsely that
they are endorsed by AARP.
Companies that sell "self-help living trust kits." These kits
are usually not a good idea because they are not tailored to individual needs.
They often require consumers to transfer assets on their own. Sometimes the
kits fail to even inform consumers that assets must be transferred. There
are a few high quality products available, but the basic lesson for seniors
is to be cautious and ask a lot of questions before buying.
Companies that use the living trust as an excuse to find out more information
about a consumer's assets, and then try to sell additional products such as
annuities or life insurance.
In some cases, problems
arise because of false or misleading claims and advertisements. In other cases,
the product may be legitimate, but grossly overpriced. Common exaggerated or
false claims include:
Overstatement of the length and cost of probate.
Many companies use slogans such as "The Choice is Yours: Sacrifice Money
to the State or Protect Your Loved Ones." Living trust companies tend
to deceptively inflate the costs and hassles of probate. It is important for
clients to know the truth about their state laws and practices in order to
decide whether probate is likely to take a big chunk out of their estates.
Information can be obtained from the clerk (or Register) of wills or a local
attorney.
Misrepresentations as to tax advantages of living trusts
The truth is that a simple living trust (as opposed to a more complicated
tax-saving living trust) has no effect on taxes.
False claims that salespeople are attorneys.
Misrepresentations about what is required to establish a living trust.
False claims that creditors can't go after property in a living trust.
The truth is property and assets in a living trust are not automatically sheltered
from creditors.
WHAT CAN BE DONE TO CHALLENGE LIVING TRUST SCAMS?
LEGAL
REMEDIES
Victims of fraud should
consult a lawyer if possible. There are many consumer law claims that can be
used to combat scams including:
State Unfair and Deceptive Acts and Practices Statutes (UDAP).
UDAP statutes may be used to challenge unfair, deceptive, or fraudulent practices.
For more information, see the National Consumer Law Center's manual, Unfair
and Deceptive Acts and Practices. To order, contact NCLC Publications at 617-523-8089
or find out more on NCLC's web site, http://www.consumerlaw.org
State Unauthorized Practice of Law (UPL) Statutes.
UPL statutes usually do not provide for separate causes of action. Violations,
however, can be brought as per se UDAP violations or by prosecutors in criminal
actions.
Door-to-Door Sales Acts.
These laws should apply if the trust is sold door to door or somewhere other
than the seller's permanent place of business (at a hotel seminar for example).
Door to door statutes provide a three day cooling off period in addition to
other consumer protections. More information on these laws can be found in
NCLC's Unfair and Deceptive Acts and Practices manual.
Common Law Fraud, Breach of Contract, and Breach of Fiduciary Duty.
Criminal Prosecution.
Advocates should also assist clients in preparing complaints to government
law enforcement agencies. Unscrupulous salespeople can be criminally prosecuted
for fraud. Most UPL and UDAP statutes provide for criminal penalties.
Complaints can be filed
with state and local consumer protection agencies as well as the Federal Trade
Commission (1-877-FTC-HELP; http://www.ftc.gov). Advocates should also consider
contacting the local Better Business Bureau. (http://www.bbb.org).
PREVENTING
FRAUD
Consumer education and legal
assistance are critical to help seniors understand their estate planning options
and resist the high pressure sales tactics of living trust companies. Education
is important for seniors of all income levels. Concern about property distribution
after death is an issue that crosses class lines. The amount of worry does not
necessarily correspond to the size of the estate. The stakes are simply higher
in most cases for low-income seniors who are too often persuaded to dip into
limited funds in order to purchase a product that does not meet their needs.
SELECTED RESOURCES AND WEB SITES
AARP, "A Consumer's
Guide to Living Trusts and Wills", stock #D14535. For more information,
contact AARP at 1-800-424-3410; http://www.aarp.org.
American Bar Association
(ABA), "Guide to Wills and Estates" (ISBN 08129-2536-X). For more
information, contact the ABA at 1-800-285-2221; http://www.abanet.org.
Loonin, Michon, and Kinnecome,
"Fraudulent Notarios, Document Preparers, and Other Nonattorney Service
Providers: Legal Remedies for a Growing Problem," 31 Clearinghouse Review
327 (November/December 1997).
Stiegel, Norrgard and Talbert,
"Scams in the Marketing and Sale of Living Trusts: A New Fraud for the
1990s," 26 Clearinghouse Review 609 (October 1992).
Vallario, "Living Trusts
in the Unauthorized Practice of Law: A Good Thing Gone Bad," 59 Md. L.
Rev. 595 (2000).
Advocates seeking more information
can also call the National Consumer Law Center at (617) 542-8010.
This brochure was supported
in part by a grant from the Administration on Aging, Department of Health and
Human Services, Washington, D.C. 20201. Grantees undertaking projects under
government sponsorship are encouraged to express freely their findings and conclusions.
Points of views or opinions do not, therefore, necessarily represent official
Administration on Aging policy.
November 2001.
NOTE: This Consumer Concerns reflects the current law only. There are likely
to be changes after this publication that advocates should keep careful track
of.
and NCLC