Living Trust Mills

A noticeable problem within the estate planning field is the proliferation of living trust mills. The following are some questions that address this problem.

1. What is a trust mill?

A trust mill is an elaborate scam concocted by nefarious insurance agents that seek to deceive consumers into purchasing costly and largely unneeded financial products, namely annuities, through the guise of providing them with a living trust.

In other words, the allure of purchasing a living trust serves as the Trojan horse, and once the sales agent has gained access to the consumer, he or she then seeks to sell largely useless financial products to the unwitting consumer.

2. How does a trust mill work?

A trust mill company will publicize a free living trust seminar at a local diner, hotel or inn in a local newspaper. Since there are legal advantages for writing a trust, such as the avoidance of probate and estate taxes, consumers are naturally intrigued by this. Also, the allure of a free meal or beverage cannot be understated as well. Consequently, interested consumers will attend the seminar.

The seminar is almost always hosted by an insurance agent who uses the title "trust advisor," "senior estate planner" or "paralegal" instead of insurance agent. These aforementioned titles have basically no legal value to them because these titles do not indicate a license to practice law independently. It is simply a facade to deceive consumers into believing that the insurance agent has the requisite legal expertise. Regardless, these sales agents sign up curious consumers at the seminar who wish to write a living trust. The sales agent then makes an initial visit to the consumers’ home to gather the necessary financial information to write the trust. The sales agent passes this information on to a person to write the actual trust document. Some trust mills actually have attorneys write the living trust while others do not. The sales agent then takes the trust document to the consumer’s home for execution. At this point, the crucial part of the scam takes place.

Armed with the consumer’s financial information, the sales agent strongly encourages the consumer to consider purchasing financial products from them, which are invariably annuities. The sales agent will often say whatever is necessary to complete the sale, or lying. The reason why the sales agent wants the consumer to purchase an annuity is because of the high commissions the sales agent will receive for selling an annuity. Meanwhile, in almost all cases, the annuity the sales agent is offering is the worst possible investment for the consumer. For reference, an annuity is basically a financial arrangement where the investor is paid a fixed sum of money for a fixed number of years for making an initial lump-sum investment. While it might sound financially attractive, the annuities that these sales agents offer often have high up-front costs and severe early withdrawal penalties. The end result is that the consumer purchases an expensive and superfluous financial product, while the sales agent walks away with a hefty commission. Or in the other words, the consumer loses and the sales agent wins.    

3. How can I spot a trust mill?

There are a couple of tell-tale signs for spotting a trust mill. First, the seminar is hosted by a non-attorney. Second, the flyer for the seminar will mention how an insurance agent may deliver the trust documents to the consumer. If you see either of these variables the seminar is probably a trust mill.  

4. How prevalent are trust mills?

Trust mills are prevalent here in California as well as the United States. For example, in 2007, the California Attorney General reached a $7.2M settlement with American Investors Life Insurance Company, Family First Insurance Services, and Family First Advanced Estate Planning for their roles in selling high-priced annuities to seniors.

 

5. Who should I contact if I have been victimized by a trust mill?

You should contact your district attorney’s office and the CA Department of Insurance consumer hotline at 1-800-927-4357. 

Living Trust Myths

The following are some myths I have seen that are related to living trusts.

Fiction: Writing a living trust will, by itself, avoids estate taxes for the decedent’s estate
Fact: Writing a living trust only allows a person to reduce or eliminate estate taxes. In order to reduce or eliminate estate taxes, a person needs to take affirmative steps. For example, assume that husband and wife establish an A/B trust in 2007. At the time of the husband’s passing in 2011, the estate is worth $8M. For reference, the estate tax in 2011 is $5M. Even though husband and wife wrote an A/B trust, wife will need to take affirmative steps to eliminate the estate tax by funding her husband’s B trust with the estate tax exemption amount, $5M, and then allocating the remainder to her trust, the A trust. In sum, simply because husband and wife wrote an A/B trust does not mean that an estate tax issue is resolved.

Fiction: Assets held in a revocable trust do not count towards the resource threshold for Medi-Cal eligibility.
Fact: If a trust is revocable, the assets of the trust are considered an available resource for the Medi-Cal applicant. 42 USC §1396p(d)(3)(A); 22 Cal Code Regs §50489.5(e); Medi-Cal Eligibility Procedures Manual (MEPM) Letter No. 192 (Dec. 18, 1997), 9J-73. However, assets held in a testamentary trust for the Medi-Cal beneficiary do not count towards eligibility requirements. 42 USC §1396p(d)(2)(A); 22 Cal Code Regs §50489.5(a)(1). For reference, a testamentary trust is a trust created at someone’s death for the benefit of another person. Conversely, a revocable trust is one created during someone’s lifetime that benefits them.

Fiction: A non-attorney, as trustee of a trust, can sue on behalf of the trust.
Fact: A non-attorney trustee cannot litigate on behalf of the trust in propria persona against a third party. Ziegler v Nickel (1998) 64 CA4th 545. For example, if a trust owned a vacant lot and a person routinely trespassed on the vacant lot, a non-attorney trustee would be required to hire an attorney to prosecute the trespass action. This is similar to legal action taken by a corporation, in that a corporation must be represented by an attorney in court as well.

Fiction: An irrevocable trust can never be modified.
Fact: Even though it sounds logically inconsistent, California law permits an irrevocable trust to be modified in the following circumstances: all beneficiaries consent (Prob C §15403); all beneficiaries and the settlor consent (Prob C §15404(a); at least one beneficiary and the settlor consent (Prob C §15404(b); principal is uneconomically low (Prob C §15408); there are changed circumstances (Prob C §15409); and to conform the trust to tax laws.

Fiction: A trust can last forever.
Fact: Only certain trusts can last forever. For example, a charitable trust may last forever provided there are ample funds. Prob C §21225(e). Conversely, a non-charitable trust will most likely last at most 90 years because of the Uniform Statutory Rule Against Perpetuities. Prob C §21225(b).

Fiction: The signatures that execute a trust require notarization.
Fact: There is no California law that says that a trust has to have notarized signatures. However, no competent attorney will allow a client to sign a trust without a notary present because it is best practice.

Fiction: Attending a living trust seminar is always a good place to find answers about trusts.
Fact: Living trust seminars are often facades to sell annuities to unsuspecting victims. The organizers of these seminars, known pejoratively as "living trust mills", are usually insurance agents, not attorneys, who use the allure of a trust as a Trojan horse to peddle annuities. This lawsuit filed by the California Advocates for Nursing Home Reform succinctly summarizes the scam that is perpetrated by these living trust mills.