Avoiding Sham Trusts and Trust Schemes – Part II – Trust Schemes
Although trusts are excellent tools used by legitimate professionals to accomplish a variety of worthwhile objectives, there are a wide variety of con artists who prey upon the public using the lure of trust planning. These con artists rely on the ignorance of the public. They generally provide poorly conceived and implemented estate plans, poor service, and often do more harm than good to their customers. These schemes are usually encountered at high pressure seminars.
What is a Trust Scheme?
Several years ago, the Supreme Court for the State of Ohio fined a company and a group of individuals including several attorneys one million dollars for selling unnecessary and potentially damaging legal services to seniors. Several years later, the State of Ohio fined a pre-paid insurance company and a group of attorneys for similarly cheating 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 scam artist will often sell a living trust as a front for selling some other securities fraud attorney illegitimate scheme or investment. Once confidence of the public is attained, the sham artist will sell the client stock in companies that do no exist, unregistered and risky securities, poorly capitalized limited partnership interests, and just about any fraudulent investment or business scheme imaginable. Promising returns that are usually too good to be true, the scam artist assures their clients that the investment is safe. The scam artist is almost never an attorney, and the trust is almost always incidental to their “product.” Moreover, the investments that they offer are almost always unwise.
Recognizing a Trust Scheme
Because the trust is only incidental to selling some product or scheme, the easiest way to recognize a trust scheme is the use of a generic “one size fits all” document usually presented for a limited purpose such as to avoid probate or save estate taxes. Often the promoter of the document is not a lawyer, but may claim to have the document either “created by,” “reviewed by,” or “approved by” a lawyer. The lawyer 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, typically California, New York, New Jersey, or Nevada.
Proper estate planning requires substantive individual legal counseling. Generic trusts are usually produced after the “client” has filled out a simple form questionnaire (often of the “check the box” type). The client is usually given very little counseling. In many cases the interview, if there is one, will last less than ten or fifteen minutes. Often the client meets or confers only with a “paralegal”, a “certified” advisor, or some other form of a financial advisor, but not with an attorney who practices in estate planning. Some folks are amazed when they learn that they should have conferred with an attorney, because the promoters will almost always discourage such a conference as expensive and unnecessary.
These generic trusts which are prepared with little or no counseling, and without the substantive guidance of an attorney, are often prepared solely for the purposes of avoiding probate and/or saving estate taxes. The promoters of these trusts give little or no consideration to protecting the estate in the case of incompetency, to planning protective distributions for descendants, or to tailoring distributions for families with children or grandchildren of different marriages. These trusts typically do not integrate life insurance and retirement funds with the dispositions provided for in the trust documents, and therefore are almost always incomplete estate plans, at best.
Moreover, promoters of generic trusts generally do not fund the trust (i.e., transfer assets into the trust). Promoters usually give the client complicated instructions on how to fund the trust, but offer no professional or substantive help in causing the transfers, or how best to accomplish the transfers given your particular situation. As a result, the majority of these trusts are not properly funded. When a trust is not properly funded, it does not work.
These generic “front” trusts do not suffer the illegalities of sham trusts, but they are usually a waste of money and not suited for proper estate planning. The real danger lies in the investment scam or fraudulent business scheme which often follows the trust. This does not mean that proper estate planning never involves financial services or products. But, there is a great difference between legitimate insurance policies, annuities, stocks, bonds and mutual funds, which are susceptible of investigation, and the frauds and schemes typically offered by scam artists. The latter are almost always impossible to investigate using publicly available sources. The latter will most assuredly reduce dramatically the size of your estate.
How to Avoid a Trust Scheme
Your best protection from 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 licensed by your state Supreme Court to practice law. Most states keep disciplinary action against attorneys as public records available through state or local bar associations.
Similarly, you should request and verify the professional licensing of any advisor recommending or selling any investment, insurance, or annuity. The legitimate professional will encourage, rather than discourage your verification, and will facilitate your investigation by, for example, providing numbers for the state department of insurance, the SEC, or the like.
You should also investigate the investment or product thoroughly. Review carefully all paperwork, and verify what information is provided privately, and what information can be verified publicly. Don’t forget that if it sounds too good to be true, it probably is too good to be true. Moreover, even if it is legitimate, consider how comfortable you are going to be in an investment that is exotic, risky, or unfamiliar. If the investment is so complicated that you can’t explain what it is, or why you are interested in it, you probably should consider passing on the opportunity.
Post-retirement financial planning should consider carefully investment risk, and flexibility since the needs of persons can change rapidly as they face changing or unexpected costs and circumstances, and there may be no opportunity to recover from investment losses, surrender fees, or excessive costs and expenses.
Proper estate planning requires consideration of your specific needs, goals, and circumstances. When performed correctly, by competent professionals, estate planning can accomplish much. When estate planning is performed incorrectly, or for improper purposes, much may be lost.
Monty L. Donohew is an attorney concentrating his practice in estate planning, wills, trusts, succession planning, and probate, with an emphasis on strategic trust planning. His firm, Monty L. Donohew, LPA, has offices in: Green, Ohio (Akron, Canton); Beachwood, Ohio; Westlake, Ohio; Dublin, Ohio; Cincinnati, Ohio; and, Chesterfield, Missouri (St. Louis). Monty received his Juris Doctorate from Washington University School of Law in St. Louis, Missouri, where he served on the Washington University Law Quarterly, Washington University’s most prestigious law review. Monty has been admitted to practice in Ohio, Illinois and Missouri, and currently practices in Ohio and Missouri. He is a member of several local and state bar associations.
Monty L. Donohew graduated from Tallmadge High School in Summit County, Ohio. He received his B.A. in political science from Eastern Illinois University, where he attended on a full academic scholarship. Monty was an intercollegiate debater, and received numerous individual and team awards, including placing second at “Novice Nationals,” a national tournament for freshmen debaters, and qualifying three times for the National Debate Tournament. While at Eastern Illinois, Monty was an award winner in the annual social sciences writing competition, and received a coveted appointment to the Student Legal Services Board after serving as a student legal intern.
Although trusts are excellent tools used by legitimate professionals to accomplish a variety of worthwhile objectives, there are a wide variety of con artists who prey upon the public using the lure of trust planning. These con artists rely on the ignorance of the public. They generally provide poorly conceived and implemented estate plans, poor…