Sales agents claiming to be “estate planning experts” are selling trusts and annuities and victimizing consumers, particularly senior citizens.

While the specifics of these enterprises vary, these scams generally have two main objectives:

• Sell or replace the consumer’s existing investments, frequently focusing on the annuities and life insurance; and
• Persuade the consumer to buy the estate planning documents proposed by the sales agent.

Both objectives result in pecuniary benefits to the agents involved. While prosecution is on the rise against companies and individuals who perpetrate these scams, this offers little solace to the victims.

“Living trust mill” is often used to describe a company engaging in an unethical sales practice. Most of these companies solicit customers through direct-mail campaigns, newspaper advertisements, telemarketing or by conducting estate planning seminars where seniors gather.

While this doesn’t mean that everyone who engages in these activities is unscrupulous, care should be taken to ensure that one is dealing with a reputable firm. 

Similarly, an annuity scam process typically begins through relentless marketing efforts by an insurance agent. The agent schedules initial appointments with consumers under the pretext of helping them establish a formal estate plan. The sales agent will generally schedule a second meeting to sign and notarize the estate planning documents proposed during the first meeting. In the second meeting, the sales agent will use the information uncovered during the previous meeting to convince customers to make changes to their investments. 

During these meetings, the agent selling the annuity may fail to disclose early withdrawal penalties that may be incurred upon transferring the existing assets into an annuity. There can be adverse tax consequences to the proposed transaction that aren’t discussed; and the sales agent may also fail to disclose that the annuity is not 100 percent safe and not fully guaranteed by the state of California. 

A majority of Americans devote a significant part of their working years to the accumulation of financial resources with the hope of providing financial security for an increasingly longer life span. Decisions relating to the distribution of the assets upon death must also be planned and executed with great care, and with the aid of competent counsel. 

When sales agents attempt to fill the role of a counselor without the necessary legal training and professional experience, it is often the client who pays a heavy price for the costly mistakes made in the process. The trusts marketed and sold by the agents often lack many essential provisions and sometimes even create substantial ambiguity that can give rise to postmortem contest or other litigation. 

One problem with trust mills is that they generate poorly drafted, one-size-fits-all documents.

Seniors often pay thousands of dollars for flawed estate planning documents; worse yet, with these dubious estate plans, the flaws often come to light only after death, when not much can be done to remedy the situation. 

The one-size-fits-all approach to estate planning may leave out an A-B provision; funding formula; choice of law; special needs trust provision where there is a beneficiary with special needs; or provisions relating to a non-citizen spouse. 

The absence of competent counsel at the planning stage also deprives the grantor(s) of essential discussions about the family dynamics, such as deciding a suitable successor trustee or whether the final distribution at the death of the grantor be made directly to the beneficiaries or to the trust established for their benefit.

The latter decision is an important planning consideration where a beneficiary lacks the financial maturity to manage the inheritance.

The California State Appellate Court recently affirmed a multimillion-dollar judgment, which 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. 

This alarming trend often drains the life savings of many senior citizens and puts their estate plan in chaos. 

To help clients create a sound estate plan, start by talking to them about their existing plan. Involve an estate planning attorney to help clients decide if they need a living trust and other estate planning documents. To find an attorney who specializes in estate planning, visit the State Bar of California at www.calbar.org.   

Before your clients decide to buy or make changes to their existing annuity, advise them to have their options reviewed with the people they know and trust. The California Department of Insurance offers tips on buying annuities at www.insurance.ca.gov.  

If you believe a client has been victimized by a living trust mill or annuity scam, ask them to file a complaint with their local district attorney’s office, the California Department of Insurance or the attorney general’s website, www.ag.ca.gov/consumers.

David Jaffer, J.D., ChFCis a member of CalCPA’s Estate Planning Committee and can be reached at (760) 845-8507. Jane Peebles, J.D. is a principal of Los Angeles-based Freeman, Freeman & Smiley, LLC. You can reach her at (310) 255-6131. For more information on the Estate Planning Committee, visit www.calcpa.org/estate.

©2005 California Society of Certified Public Accountants. For reprint permission, contact Aldo Maragoni, managing editor.