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 Com
mittee'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 prima
ry 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 eco
nomy 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 th
e 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 mo
st
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 a
ssets 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 a
uthorities, 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 prac
tices 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 cos
ts; 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 cle
arly 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 Co
nsumer 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 10
0 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 notifie
s 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 absol
ute 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, cred
it 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 servi
ces. 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 sc
ams, 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 artist
s 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 wi
th 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 ev
eryone. 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 a
nd 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 c
ancel, 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 o
rally 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
canceli
ng 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 C
redit 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 h
ave 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 di
stribute 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 sp
otlight 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 fash
ion 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 que
stions 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 fo
r 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 C
laims 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 F
TC 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 Fu
nding 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 AAR
P, 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 Attorn
ey 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 determin
ation 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 r
elease 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 a
s 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 i
ncluded 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>.
