Armstrong & Associates

Professionals and public officials alike are becoming increasingly alarmed about the multiplicity of estate planning scams, botched trusts, and other disasters confronting consumers today. While the aggressive efforts of some promoters may serve to increase public awareness of the need to plan for the future, persons are often exploited in the process. This article, and those that follow, are intended to alert consumers to the menace and real harm that can come from estate planning scams that result from good intentions gone awry.

Estate Planning scams generally involve high commission products such as annuities and even trusts themselves. While the techniques vary, deceptive sales practices, unsuitable advice or lack of adequate disclosure, and improper use of the consumer's confidential information are the tools of the promoter's trade. This article will focus on trust scams.

Business Trusts. The "business trust" or "pure trust" (sometimes known as the "unincorporated business organization" or "UBO") is a prime example of a scam that fleeces business owners while waving the Constitution of the United States before its victims. These trusts are promoted as a means to avoid paying taxes and to hide the true ownership of assets in such a way as to disguise the substance of ordinary transactions. "Business trust" promoters claim, among other things, that personal living expenses are deductible, that the "business trust" avoids probate and all estate and inheritance taxes upon the death of the creator, and that "business trust" assets are protected from creditor's claims. The arrangements often involve more than one trust with each holding different assets. Funds flow from one trust to another via phony "agreements".

To reinforce their sales pitch, the promoters claim that famous families, such as the Kennedy's and the Hunt's, have utilized the "pure trust" scheme to build wealth, and that "no State can regulate the operation of a 'pure trust' because such action would contravene the United States Constitution." Further, consumers are urged to ignore the advice of their own attorney or banker, who would "either be uninformed or unable to give an opinion because a 'pure trust' obviates the necessity for wills and for corporate trustees." Promotional literature is replete with discussions about trusts which "arise as a matter of right", as if blessed by some Higher Being. For their services in setting up the "pure trust", promotor's are paid commissions of thousands of dollars -- a mere pittance for the value received, or so they say.

Sound too good to be true? You're right! The use of the "pure trust" for business and tax planning is misguided and downright dangerous! Indeed, establishing such a trust can subject the taxpayer to significant penalties which may surface only years afterward. Any understatement of income attributable to fraud compels a 75% penalty under federal law.

What the "business trust" promoters do not tell you is that the Internal Revenue Service and the federal courts have been fighting abusive trust practices (such as the "pure" trust) for years! For a copy of "Too Good to Be True", telephone the IRS at (800) 829-0433 and request Publication 2193 (9-97), Catalog Number 24843F, or request IRS Notice 97-24.

Trust Mills. The indiscriminate mass marketing of revocable "living" trusts is another estate planning scam. Operating in the "shadowy world of misrepresentations and half truths", promoters are experts at telling the public what it wants to hear. Seminars are scheduled in locations that lend legitimacy to the scam, such as the local Senior Center or a nearby church. Sometimes it begins with a knock at the door by an aggressive salesman.

The sales pitch usually involves misrepresentations that no probate or other post-death administration will be required, that creditors won't have to be paid, and that federal estate taxes will be avoided. Most always, the salesman goes into a lengthy dissertation as to why the customer doesn't need an attorney for his estate planning needs. All their problems can be solved by having a trust supplied by the trust mill. By the time the sales presentation is concluded, the customer comes to believe that the trust will cure all their ailments!

Generally, a salesman takes financial and personal information from the "customer", obtains an agreement for the payment of fees, and the "trust package" subsequently arrives by mail. If an attorney is involved at all, he or she may be an employee of the trust mill and never actually meet with the "customer" or represent the customer's interests.

After the deal is concluded, the salesman gets his commission based upon what-the-market-will-bear. The salesman pays the trust mill for creating the documents (perhaps $300) and pockets the balance of the customer's fees. The salesman then takes the customer's confidential financial information and either (i) promotes the sale of an annuity or (ii) sells the customer's confidential financial information to another promoter who makes the pitch for the annuity. By the time the customer recognizes the scam, the salesman has $10,000 in commissions in his pocket and the customer has a vinyl notebook with estate planning documents and all the money tied up in an annuity that can't be liquidated without a substantial penalty! At this point, there are few remedies available to the consumer to redress the harm, mostly because the promoters are difficult to locate and prosecute.

Noting an advertisement for an upcoming "estate planning" seminar in a local paper recently, this author telephoned their 800 number for more information. When asked whether an attorney was involved, the promoter stated that "we have attorneys for you". When I requested their attorney's name and telephone number, the promoter stated that I should contact the "home office" because he didn't have the attorney's name. When I asked for the address of their attorney, the promoter stated that "there's no address -- just the post office box in Sacramento." The whole process is faceless!

The Attorney General's Office and the State Bar did manage to shut down the ALLIANCE FOR MATURE AMERICANS, a multi-million dollar trust mill that was accused of large-scale consumer fraud in this State. Rather than go to trial, AMA agreed to make restitution of $1,000,000 and to pay a penalty of $100,000. However, it's rumored that the attorney who was involved in that scam has simply shut down in California and moved his operation to Arizona.

No one knows better than a legitimate professional the damage that "trust mills" can wreak. In almost every case, additional work will be required to "fix" the problems created by poorly-drafted, inappropriate trust mill documents.

Courts, too, are aware of the problems surrounding "living" trusts produced by trust mills. While the number of probate matters has significantly declined, trust litigation has increased significantly. Particularly, California courts are confronted with petitions for the modification of defective trusts and controversies between family members, often created by mass-produced estate planning documents.

The best way to protect yourself against a trust scam is to check the credentials of the promoter. Make sure they have the education and experience necessary to assist you in estate planning matters. Above all remember, "estate planning" is not a product that you buy off the counter from a stranger. "Estate planning" means developing a relationship with a professional who will see you through all phases of the plan, and who will be available to serve you and your family in the future.

Stay Tuned. The next article in this series will focus on BOTCHED TRUSTS AND OTHER DISASTERS and will include a discussion of the problems created by inadequate and inappropriate estate plans. Of particular importance, the common disasters associated with IRA's and retirements plans will be discussed.

Respectfully submitted,

A. ANN ARMSTRONG

* The author is indebted to the Continuing Education of the Bar of the State Bar of California for the title (but not necessarily the substance) of this series of articles.