In 2005, then California Attorney General Bill Lockyer and Insurance Commissioner John Garamendi filed a $110 million lawsuit in Los Angeles Superior Court against an alleged trust mill. The company was suspected of duping senior citizens into buying annuities with their retirement investments, which then earned substantial commissions and fees for the advisors in the process.
"The perpetrators of this fraud deceived seniors into using their hard-earned retirement nest eggs to buy unneeded annuities that actually undermined their financial security," Lockyer stated when the lawsuit was filed.
Fast-forward to today and trust mills still exist. Perhaps you've been a victim of one or know of an elderly relative who has. If you're lucky enough to have never heard of a trust mill, here's what you need to know to protect your assets.
What is a Trust Mill?
A trust mill—also called a living trust mill—is a scam in which agents deceptively try to sell individuals (typically seniors) an investment under the guise of estate planning. Typically these sales agents work for an insurance company, which oftentimes was created solely for the purpose of churning out living trusts.
The sales agents' job is to persuade their clients to cash in their retirement investments such as CDs and mutual funds in order to purchase an annuity for which the agents receive commissions. Generally the sales pitch follows a pattern. Targeted seniors are told their current investments are high-risk or generate low interest rates. Therefore, it's in the seniors' best interest to cash in their investments and buy the less risky or higher interest annuity the agent sells.
This scenario poses several problems. First, these are sales people, not estate planners or attorneys—their main goal is to make a commission. As a result, they rarely have their clients' best interest in mind. Second, it's illegal to provide any legal advice regarding estate planning unless you are a licensed attorney in a given state.
In addition, seniors oftentimes aren't informed about the financial consequences of transferring their existing investments to an annuity, such as the significant penalties assessed for early withdrawal or the negative tax consequences. Buying an annuity from an insurance company also isn't 100 percent safe. If the insurance company ever goes bankrupt, the annuity is only partially guaranteed by the state and isn't insured by the FDIC at all.
How Does a Trust Mill Operate?
Sales agents from trust mills use promotional brochures and flyers, employ telemarketers, or hold seminars at senior centers all in an effort to find potential clients.
Once the agents find a prospect, they offer a free consultation, called a home visit, where they go over the living trust in greater detail. This living trust “package” is generally pitched as a way to avoid estate taxes and probate court (which might be considered legal advice and would be illegal). Agents may then employ persuasive language detailing how their clients' current investments may not be a safe option, and convincing them to transfer the investments to a trust or annuity. The agents avoid mentioning any adverse tax consequences that may result from the transaction.
The agent then schedules a second home visit to deliver the completed trust. At that time, the clients' assets are transferred, and documents are signed and notarized.
What to Watch Out For
Passing themselves off as financial planning or estate planning experts, sales agents may refer to themselves as a trust advisor, senior estate planner or even a paralegal—none of which is accurate. Sales agents are not attorneys, nor are they able to produce legal documents. Furthermore, they have no experience in estate planning. For a better understanding of who you might be dealing with, you can always contact the Better Business Bureau in your area.
Estate planning is serious business that involves important financial, personal and legal decisions. If you or someone you know has been scammed by a trust mill, contact your state's attorney general's office or state insurance commissioner's office.
You can speak to an attorney about a living trust or other estate planning questions through the LegalZoom Personal Legal Plan. Or you can start your own living trust online and have it reviewed by an attorney (along with other benefits) as part of the comprehensive package.