Avoid Bogus Trusts and Trust Schemes – Part II – Trust Schemes
Although trusts are excellent tools that legitimate professionals use to achieve a variety of worthwhile goals, there are a wide variety of scammers who take advantage of the public using the lure of fiduciary planning. These scammers are based on the ignorance of the public. They typically provide poorly conceived and implemented estate plans, poor service, and often do more harm than good to their clients. These schemes are generally found in high pressure seminars.
What is a trust scheme?
Several years ago, the Ohio State Supreme Court fined a company and a group of individuals, including several attorneys, $ 1 million for unnecessary sales and potentially harmful legal services for seniors. Several years later, the state of Ohio fined a prepaid insurance company and a group of attorneys for similarly misleading seniors. The state of Texas is currently investigating a Ponzi scheme in which seniors are alleged to have lost tens of millions of dollars. What these schemes have in common is that each involved the marketing and sale of living trusts.
Living trusts are so advantageous and so readily accepted by the general public that the scammer often sells a living trust as a front to sell some other illegitimate scheme or investment. Once the public’s trust is gained, the fake artist will sell the client’s shares in non-existent companies, unregistered and risky securities, poorly capitalized limited company interests, and just about any fraudulent investment or business scheme imaginable. By promising returns that are generally too good to be true, the scammer assures his clients that the investment is safe. The scammer is almost never an attorney, and trust is almost always incidental to his “product.” Also, the investments they offer are almost always reckless.
Recognition of a trust scheme
Because the trust is only incidental to the sale of some product or scheme, the easiest way to recognize a trust scheme is to use a generic “one size fits all” document that is generally presented for a limited purpose, such as avoiding inheritance or saving estate taxes. Often times, the promoter of the document is not an attorney, but can claim that the document was “created,” “reviewed,” or “approved” by an attorney. The attorney is often not even licensed to practice law in the state in which the services are offered, but is often an “expert” from another state, usually California, New York, New Jersey, or Nevada.
Proper estate planning requires substantive individual legal advice. Generic trusts generally occur after the “client” has filled out a simple form questionnaire (often a “check the box” type). The client usually receives very little guidance. In many cases the interview, if any, will last less than ten or fifteen minutes. Often the client meets or consults only with a “paralegal,” a “certified” advisor, or some other form of financial advisor, but not with an estate planning attorney. Some people are surprised when they learn that they should have consulted an attorney, because promoters almost always discourage such a conference as expensive and unnecessary.
These generic trusts, which are prepared with little or no advice and without the substantive guidance of an attorney, are often prepared solely for the purpose of avoiding probate and / or saving estate taxes. The promoters of these trusts give little or no consideration to protecting the estate in the event of incompetence, planning protective distributions for descendants, or tailoring distributions for families with children or grandchildren from different marriages. These trusts generally do not integrate life insurance and retirement funds with the provisions set forth in the trust documents and are therefore almost always incomplete estate plans at best.
Additionally, generic trust promoters generally do not fund the trust (that is, they transfer assets to the trust). Promoters generally give the client complicated instructions on how to fund the trust, but do not offer professional or substantial help in causing the transfers, or what is the best way to make the transfers given their particular situation. As a result, most of these trusts are not properly funded. When a trust is not properly funded, it does not work.
These generic “front-end” trusts do not suffer from the illegalities of bogus trusts, but they are generally a waste of money and are not suitable for proper estate planning. The real danger lies in the investment scam or fraudulent business scheme that often follows the trust. This does not mean that proper estate planning never involves financial services or products. But there is a big difference between legitimate insurance policies, annuities, stocks, bonds, and mutual funds, which are open to investigation, and the scams and schemes that scammers often offer. The latter are almost always impossible to investigate using publicly available sources. The latter is sure to drastically reduce the size of your estate.
How to avoid a trust scheme
Your best protection against a trust scheme is the involvement of a legitimate attorney, licensed to practice law in your state. If you are referred to an attorney by another professional, it is always a good idea to verify that the attorney is authorized by your state’s Supreme Court to practice law. Most states maintain disciplinary action against attorneys as public records available through state or local bar associations.
Similarly, you should request and verify the professional license of any advisor who recommends or sells any investment, insurance, or annuity. The legitimate professional will encourage, rather than discourage your verification, and facilitate your investigation, for example by providing the numbers of the state department of insurance, the SEC, or similar.
You should also research the investment or product thoroughly. Please carefully review all documentation and verify what information is provided privately and what information can be publicly verified. Don’t forget that if it sounds too good to be true, it is probably too good to be true. Also, even if it’s legitimate, consider how comfortable you will feel in an investment that is exotic, risky, or unfamiliar. If the investment is so complicated that you cannot explain what it is or why you are interested in it, you should probably consider missing the opportunity.
Post-retirement financial planning must carefully consider investment risk and flexibility, as people’s needs can change rapidly as they face changing or unexpected costs and circumstances, and there may be no opportunity to recover from losses investment, salvage fees or excessive costs and expenses.
Proper estate planning requires consideration of your specific needs, goals, and circumstances. When done correctly, by competent professionals, estate planning can accomplish a great deal. When estate planning is done incorrectly or for inappropriate purposes, a lot can be lost.