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PREPARED STATEMENT
OF THE FEDERAL TRADE COMMISSION
ON LIVING TRUST SCAMS
Before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
Washington, D.C.
July 11, 2000
I. Introduction
Mr. Chairman, I am Elaine Kolish, Associate Director of the Bureau of
Consumer Protection's Division of Enforcement at the Federal Trade
Commission.(1) I am pleased to be here
today to testify about scams involving living trusts. It is important to
note at the outset that living trusts can be legitimate and valuable
estate planning tools. However, scams involving living trusts raise
serious and growing concerns. These scams often prey on older Americans'
concerns that their estates will be subject to long and costly probate,
and involve misrepresentations about the costs and benefits of trusts
versus wills and that local attorneys will create the trust documents.
I want to thank the Committee for holding this hearing and drawing
public attention to this issue. To help alert older Americans and others
about these scams, we are today issuing a new Consumer Alert. We hope
that with the Committee's assistance and that of our many partners such
as AARP, state Attorneys General, and the Council of Better Business
Bureaus, we can together raise consumer awareness about living trust
scams.
II. Background
The FTC is the federal government's primary consumer protection
agency. Congress has directed the FTC, under the FTC Act,(2)
to take action against "unfair or deceptive acts or practices" in almost
all sectors of the economy and to promote vigorous competition in the
marketplace. The FTC Act authorizes the Commission to halt unfair or
deceptive conduct through administrative proceedings, and to bring civil
actions in federal district court for injunctive relief to halt the
targeted illegal activity and for redress for victims.(3)
Where redress is impracticable, the Commission obtains disgorgement to
the U.S. Treasury of defendants' ill-gotten gains or, in certain
situations, uses the money to conduct educational campaigns to prevent
further fraud.
Many Commission initiatives and law enforcement actions target scams
that prey on older Americans. The Commission brings a wide range of law
enforcement actions against fraudulent marketing practices conducted
through various media. For example, FTC and Canadian officials recently
sued a Canadian telemarketing company engaged in an illegal lottery
scheme that targeted elderly U.S. citizens.(4)
The Commission also pursues aggressively false and unsubstantiated cure
or treatment claims for cancer and other diseases, and other health
claims with obvious appeal for elderly consumers.(5)
The Commission is also vigilant in pursuing predatory lending practices
that often target older and low income citizens, to protect them from
losing what is typically their most valuable asset - their homes.(6)
III. Living Trust Scams
A. Living Trusts
As you know, a living trust is a legal arrangement where a person,
called the "grantor," places his assets into a trust during his
lifetime. The trust is administered by a "trustee" for the benefit of
the trust's beneficiaries. The grantor may be a trustee and a
beneficiary of the trust. Living trusts are a widely recognized and
legitimate estate planning device. Because assets transferred to the
trust are no longer owned by the grantor, at the grantor's death, the
assets are not part of the grantor's estate and do not have to be
probated. Accordingly, a living trust can avoid what could be a costly,
lengthy process. Whether or not this is a major advantage varies by the
size of the estate and by state and locality; for small estates, many
states have an informal probate process that minimizes cost and delay.
Whether a living trust is an appropriate estate planning tool depends
upon an individual's circumstances and goals, and state laws.
B. Scams Involving Living Trusts
Misinformation and misunderstanding about probate and estate taxes
provide a ripe environment for scam artists to prey on older consumers'
fears that their estates will be eaten up by costs, and that
distribution of their assets to loved ones will be long delayed. Some
unscrupulous businesses advertise seminars on living trusts or send
postcards inviting consumers to call for in-home appointments,
ostensibly to learn whether a living trust is right for them. A common
practice is to greatly exaggerate the benefits of living trusts and
falsely claim that locally-licensed attorneys will prepare the
documents.(7) In some instances,
consumers send money for living trust kits but receive nothing. In
others, the offer of estate planning services is merely a ruse to gain
access to consumers' financial information and to sell them other
financial products, such as insurance annuities.(8)
These practices may violate federal securities laws, as well as other
laws.
Many state Attorneys General and other authorities, such as
disciplinary or grievance committees of state or city bar associations,
have taken enforcement actions against living trust scam artists. Some
cases have been brought under state Unfair and Deceptive Acts and
Practices laws. Others have been prosecuted as the unauthorized practice
of law because the salespeople were not lawyers.(9)
Even in instances where there may be some attorney review, it may be
insufficient to render the activity legal.(10)
The U.S. Securities and Exchange Commission also has prosecuted
companies purporting to offer estate planning services, such as living
trusts, for violating the securities laws through fraudulent investment
schemes targeting senior citizens.(11)
IV. The Commission's Experience with Living Trusts
Unlike state authorities, the Commission has had limited experience
with prosecuting living trust scams. Historically, the Commission has
received few consumer complaints about living trusts. Nonetheless, the
Commission sued two companies selling living trusts after AARP brought
their practices to our attention.
A. Cases
In 1997, the Commission charged that The Administrative Company (TAC),
and its president, Michael McIntyre, and Pre-Paid Legal Services, Inc.
(Pre-Paid) together violated the FTC Act by engaging in deceptive
practices in selling living trusts. The Commission's staff worked with a
21-state coalition in developing the cases.
The Commission's complaint alleged that TAC, McIntyre and Pre-Paid
misrepresented that a living trust avoids all probate and administrative
costs; the use of a living trust allows assets to be distributed
immediately or almost immediately; a living trust cannot be challenged;
living trusts are prepared by local attorneys; a living trust protects
against catastrophic medical costs; a living trust is the appropriate
estate planning device for every consumer; and there are no
disadvantages to a living trust. The administrative consent orders
obtained by the Commission require the respondents to stop making these
misrepresentations and to disclose clearly and conspicuously that living
trusts may be challenged on similar grounds as wills; living trusts may
not be appropriate in all instances; and all estate planning options
should be examined before determining which estate plan best suits a
particular individual's needs and wishes.
Given differences in state laws, the orders also require the
respondents to disclose, where true, that: (1) the availability of
informal probate under a state's law allows minimal or no contact with
the courts and reduces the time required to probate a will; and (2)
creditors have a longer period of time to file a claim against a living
trust than against a probated estate. The order against Pre-Paid also
required redress to consumers who had not previously received refunds or
did not reside in states in which Pre-Paid already had settled with
state authorities. Under the FTC order, 480 consumers received a total
of more than $78,000.
B. The Commission's Consumer Sentinel Complaint Database
The Commission's Consumer Sentinel database does not identify living
trusts as one of the most frequently complained about consumer
protection problems.(12) Consumer
Sentinel is an online complaint database and investigatory tool
available to more than 240 law enforcement agencies in the U.S. and
Canada. Initially focusing on telemarketing fraud when it was first
created in the late 1990s, it has expanded to include complaints about
all types of consumer fraud. The Consumer Sentinel database contains
more than 250,000 consumer fraud complaints that have been filed
directly with the FTC through a toll-free telephone number
(1-877-FTC-HELP), an online complaint form, or the mail, or added by
Sentinel partners. These include other federal, state and local law
enforcement agencies, such as the U.S. Postal Inspection Service,
Canada's Project Phone Busters and private organizations, such as more
than 100 BBBs, and the National Consumer League's National Fraud
Information Center and Internet Fraud Watch projects.
Consumer Sentinel can be accessed by law enforcers in the U.S. and
Canada through an encrypted Web site to identify particular targets for
law enforcement, to determine whether a particular fraudulent scheme is
local, national or cross-border in nature, to help spot larger trends
for law enforcement action, and to monitor rapidly emerging frauds, such
as telephone cramming and sophisticated hi-tech fraud, including
Internet pagejacking. It features an
"Alert" function that informs users whether a company, address, phone
number or email that they came across during a search is of interest to
another member, and an "Auto Query" function that notifies users when
new data relating to one of their investigations is entered into the
complaint database.(13)
Consumer Sentinel shows few complaints
about living trusts in both absolute numbers and in relative ranking to
complaints on other topics. Thus far this year Consumer Sentinel has
recorded 14 complaints on living trusts, ranking it the 144th category
out of 200 that are recorded; in 1999, there were 17 living trust
complaints, with a ranking of 163. By way of contrast, there are more
than 1000 complaints for each of the top 30 complaint topics, involving
many credit topics (e.g., credit bureaus, debt collection, credit cards,
credit information providers, mortgage lenders, credit repair, advance
fee loans), travel scams, Internet auctions, telephone pay-per-call
services, autos, computers, Internet access providers, mail order sales,
and business opportunities, subjects that are frequent targets of FTC
actions.
Although Consumer Sentinel is a powerful
tool for finding new or emerging frauds, the Commission also looks to
other sources of information that may suggest budding problems. On the
topic of living trust scams, for example, AARP and Michigan Attorney
General Jennifer Granholm recently reported new data showing a 125%
increase over the last decade in the number of people aged 50 and older,
with incomes of $25,000 or less, who own living trusts, a growth that
far outpaces the living trust ownership growth rate of seniors with
moderate and higher incomes.(14) This is
a cause for concern because generally consumers of modest means are the
least likely to benefit from sophisticated estate planning services. At
a press conference, General Granholm also warned that older people
living in Michigan were being targeted by unscrupulous sellers of
costly, "cookie-cutter" trusts.
V. New Consumer Alert
The FTC shares AARP and General
Granholm's concern that the increase in living trust ownership among
lower-income consumers may indicate a corresponding increase in living
trust scams. We hope that this hearing and increased education about the
dangers of one-size-fits-all trusts will raise awareness about this
problem, preventing additional seniors from falling prey to these scams.
To that end, the Commission today is issuing a new Consumer Alert
(attached) about how to spot and avoid living trust scams.
The new Consumer Alert warns consumers
about living trust scams, and how unscrupulous businesses may use
marketing for estate planning services as a ruse to gain entrance to
consumers' homes and their financial data for the purpose of selling
them other investments. It also notes that often living trust scam
artists claim affiliation or endorsement with legitimate nonprofit
organizations such as AARP or claim that they got the consumer's name
from AARP. Such claims are a red flag because AARP does not sell or
endorse any living trust product, and does not partner with any company
that promotes or sells such documents. AARP also never sells its
members' names or sells its services door to door. The Alert also
advises consumers to check with their local BBB for a reliability report
before making any major purchases of goods or services.
Consumers who are concerned about
probate and other estate issues should consult a reputable local
attorney experienced in wills and trusts or a trusted financial advisor.
Although a living trust may be useful for some, it is not for everyone.
And, unless the trust is properly drafted and the assets properly
transferred to the trust, it will not achieve its purpose. Consumers
should beware of individuals or companies who portray living trusts as a
panacea for all estate planning issues and probate as a necessarily
protracted, hugely expensive process.
Consumers also should be aware of FTC
and state laws that give them the right to cancel certain purchases.
Under an FTC regulation known as the Cooling-Off Rule, consumers have a
right to cancel, within three days, the purchase of goods or services,
including estate planning products and services, they make in their
homes or at a location that is not the seller's principal place of
business (e.g., rented hotel space).(15)
All states have similar laws or regulations.(16)
To comply with these rules, sellers are required to advise consumers
orally and in writing of their right to cancel. Although scam artists
are not likely to provide such notices, consumers still have the right
to cancel and should do so in writing if they have second thoughts about
their purchases. No explanation for canceling need be given. Stopping
payment on a check is also a good idea. If a consumer paid by credit
card and the seller did not credit the consumer's account for the
cancellation, the consumer should follow the dispute billing procedures
provided by the Fair Credit Billing Act.(17)
Credit card issuers generally provide information on the back of
credit card statements on how to dispute charges.
The Alert also advises consumers who have purchased a living trust or
other financial planning services and who believe that they may be the
victim of a scam to file complaints with the FTC in writing, online or
by calling the FTC's new toll-free number, 1-877-FTC-HELP.
The Commission will distribute the Consumer Alert through its
extensive network of contacts, including organizations for the aging,
legal aid societies, community service organizations, extension home
economic services, state and local consumer protection agencies and
thousands of media. We also are seeking new partnerships with other
organizations that have frequent contact with older Americans. We hope
that this outreach effort will prevent additional consumers from being
victimized and lead others to report complaints to the FTC or other
authorities.
VI. Conclusion
The Commission greatly appreciates the Committee's effort to
investigate the problems associated with abuses in the marketing of
living trusts and to assess the potential scope of living trust scams.
Putting the spotlight on this problem will help alert consumers to the
dangers they may face by buying living trusts or other estate planning
products from strangers who play on their fears that their loved ones
will not get the benefit of their estates in a timely fashion because of
probate costs and delays. Thank you for providing the Commission the
opportunity to participate in this hearing.
Endnotes
1. This written statement represent the
views of the Federal Trade Commission. My oral presentation and response
to questions are my own, and do not necessarily represent the views of
the Commission or any individual Commissioner.
2. 15 U.S.C. §§ 41 et seq. The
Commission also has responsibilities under more than 40 additional
statutes.
3. 15 U.S.C. §§ 45(a) and 53(b).
4. See FTC Press Release,
"Cross-Border Lottery-Bond Scheme Alleged to Violate U.S. Laws," dated
Jan. 21, 2000. Consumers complaining to the FTC about telemarketing
activity often indicate that they are older citizens. Similarly, older
Americans account for 60 percent of the fraud victims who call the
National Consumer League's National Fraud Information Center.
5. See, e.g., FTC Press Release,
"Operation Cure.All Nets Shark Cartilage Promoters: Two Companies
Charged With Making False and Unsubstantiated Claims for Their Shark
Cartilage and Skin Cream as Cancer Treatments," dated June 29, 2000
(Operation Cure.All is an ongoing federal and state law enforcement and
education campaign launched in June 1999 targeting bogus health claims
on the Internet); and FTC Press Release, "Marketers of 'Vitamin O'
Settle FTC Charges of Making False Health Claims," dated May 1, 2000.
6. In March 2000, the FTC, the Department
of Justice and the Department of Housing and Urban Development announced
a settlement with Delta Funding Corporation, a national subprime lender,
that resolved allegations that Delta engaged in asset-based lending, in
violation of the Home Owners Equity Protection Act (HOEPA) (i.e.,
extending loans based on the borrower's collateral
rather than considering the borrower's current and expected income
obligations, etc.) In July 1999, as part of "Operation Home Inequity,"
the Commission obtained settlements with seven subprime mortgage lenders
for violating HOEPA, the Truth in Lending Act and the FTC Act. See
FTC Press Release, "FTC Testifies on Enforcement and Education
Initiatives to Combat Predatory Lending Practices," May 24, 2000.
7. Other problems include misrepresenting
affiliation with or endorsement by a legitimate nonprofit organization
such as AARP, and using a "cookie-cutter" approach to trust documents,
which should be customized to the individual's circumstances. See
"Scams in the Marketing and Sale of Living Trusts: A New Fraud for the
1990s," by Lori A. Stiegel, Lee Norrgard and Robin Talbert,
Clearinghouse Review, Oct. 1992.
8. In 1998, for example, Florida Attorney
General Bob Butterworth and AARP charged Senior Estate Services Inc., a
Texas-based firm with offices in Florida, and Remington Estate Services
of Florida Inc., an affiliated firm, which purported to sell living
trusts, with using the sales presentation to persuade consumers to
liquidate their assets and purchase insurance annuities, even if the
annuities paid a lower rate of return than consumers already earned.
See Florida Attorney General News Release, "Firm Charged With
Deceiving Seniors Into Buying Trusts, Annuities," dated June 10, 1998.
9. At least nineteen states have issued
ethics opinions specifically addressing the marketing of living trusts,
concluding that the determination about whether a living trust is an
appropriate estate planning device should be made by an attorney and
that the trust documents should be prepared by an attorney.
10. See "Fraudulent Notarios,
Document Preparers, and Other Nonattorney Service Providers: Legal
Remedies for a Growing Problem," by Deanne Loonin, Kathleen Michon, and
David Kinnecome, Clearinghouse Review at pp. 329, 335-36 and nn. 61-62,
70-71 (Nov.-Dec. 1997). The sale of self-help kits also may violate some
state Unauthorized Practice of Law statutes. Id; see also The
Florida Bar Re Advisory Opinion-Nonlawyer Preparations of Living Trusts,
613 So.2d 426 (Fla.1992).
11. See SEC Press Release, "SEC
Halts Fraudulent Investment Scheme Targeting Senior Citizens," dated
Sept. 1, 1999. The release also notes that in 1996 a state court had
enjoined some of the defendants from offering trust and estate planning
services because they were engaged in the unauthorized practice of law.
The SEC obtained a temporary restraining order and was seeking a
permanent injunction forbidding further violations of the antifraud
provisions of the federal securities laws, disgorgement of wrongfully
obtained profits and penalties. The four individual defendants also were
indicted on October 20, 1999 and as of June 7, 2000, three had been
sentenced to terms ranging from 52 months to 20 years. SEC Press
Release, "United States v. Gary Davenport, et al.," dated June
7, 2000.
12. This may be because representations
made in the promotion of living trusts often concern probate, a state
and local issue, or because issues of validity and interpretation of
living trusts are governed by state law. Thus, consumers may not direct
complaints to the FTC.
13. In addition, Sentinel features include
fraud trend analysis, an index of fraudulent telemarketing sales pitches
available from the National Tape Library, a compilation of companies
already sued for fraud and a catalog of companies currently under
investigation. It also offers a contact list as well as how-to
information to help agencies coordinate joint actions.
14. See AARP Press Release,
"AARP, Granholm Take Aim at Generic 'Living Trust' Products," dated June
14, 2000.
15. Rule Concerning Cooling-Off Period for
Sales Made at Homes or at Certain Other Locations, 16 C.F.R. Part 429.
The purchase price must be at least $25 for the rule to apply. See
"FTC's Facts for Consumers on the Cooling Off Rule: When and How to
Cancel," at <www.ftc.gov>.
16. Some state actions against living
trust sellers have included charges that they failed to comply with
applicable Cooling-Off rules.
17. 15 U.S.C. §§ 1666-1666j. See
FTC's "Facts for Consumers, The Fair Credit Billing Act," at <www.ftc.gov>. |
