You may be the strictest adherent to a fiduciary standard - but that doesn't mean your clients aren't at risk of fraud on other fronts. Financial abuse, often aimed at the elderly and those in declining health, is more widespread than is generally assumed. As illustrated in these recent cases, the consequences can be devastating:
* A couple in their late 70s was persuaded to invest nearly 90% of their net worth in an annuity, a wildly inappropriate high-commission product that had no reasonable place in their plan.
* Under the guise of helping an elderly client whose competency was beginning to wane, a lawyer met with her weekly. At the end of each meeting, he had her write a substantial check, ostensibly to cover the costs of the session. To obscure his trail, each meeting was followed up by a memorandum that included a detailed bill.
* A social worker serving as a care manager gradually became her client's confidante and inserted herself into all meetings with the client's advisors. She ultimately influenced, and in some cases even directed, personal estate planning decisions, while billing for multiple meetings each week.
* A caregiver who assisted an elderly woman for the last 18 months of her life took his charge to a new lawyer, who drafted a will leaving him the entire estate. The nieces and nephews who had been beneficiaries under prior wills ended up receiving nothing. The prospective cost of a legal challenge was beyond what they could afford.
* A daughter was part of her father's CPA practice for many years. When her father was ailing, she took him to a new estate planning attorney, who drafted a will bequeathing the per capita exemption amount to trusts for each of his grandchildren. Since the daughter has five children and her brother has only one child, this effectively shifted most of the exemption amount to her own family. She also had herself named sole trustee of all of the trusts. This plan also cut her mother out of a large portion of the estate that was to have been available for her later years.
* An elderly couple consulted their CPA for a referral to an estate planning attorney. Their goal was to provide for each other and then for their children equally. But the attorney proposed a charitable lead trust to minimize estate taxes. The referring CPA was named executor and sole trustee. He was vested with total discretion to distribute each year's annuity amount to whatever charities he chose. The annuity rate was set at 10%, with the effect that little, if anything, would be left for the heirs. Meanwhile, the CPA as trustee would effectively be spending down the entire estate in donations to charities he chose, all while earning fees.
Financial abuse is difficult to challenge, and recovering what was stolen is even harder. The victims are often aging or suffering from a progressive disease. By the time the abuse is discovered, if it ever is, the victim's cognitive and physical condition may have deteriorated. Frequently, abuse is committed by someone who is in a position of trust: a family member, close friend, trusted professional or home health aide. In many cases, the abuse is discovered only after the victim's death. Even if fraud is discovered sooner, the cost and difficulty of a challenge can often dissuade those hurt from pursuing it.
In the case of the CPA who effectively deprived her own mother of financial security, the daughter was able to successfully defend herself against a legal challenge to her actions. She cited the purported tax benefits provided by the plan, which she claimed her father had devised. The reality is that a bypass trust for the benefit of the wife, children and all descendants would have provided the same generation-skipping tax-planning benefits while safeguarding the wife. But the court was not persuaded. Meanwhile, the widow spent down her IRA, with commensurate income tax costs, trying to fight her own child. She was devastated financially and emotionally.
The CPA who hoodwinked his clients into the charitable lead trust plan almost succeeded, but the scheme was discovered in time and the clients wrote new wills with an independent attorney. Had the clients died, this abuse would have been very difficult to overturn. How could it be proved that the charitable trust was not the couple's intent?
The CPA's position would likely have been that it was the charities, not him, who benefited. He might have contended that the plan was created to save estate tax. While that might be true, the plan itself dissipated the estate.
To challenge this result, the couple's three children would have had to come up with money to pay for the lawsuit, which the CPA knew two of the three did not have. They would also have had to work together, something he knew they would be unable to do because of family friction he'd helped to foment.
The most practical and cost-effective way to address financial abuse is to prevent it from occurring. When it does happen, the quicker and swifter the response, the better the odds of some retribution. Even so, the cost - in terms of dollars, time and emotional trauma - will likely be quite substantial.
Abuse comes in many forms and from many sources. To protect clients, advisors need to think in broad terms about the exposure any client could face. Mitigating the risks of financial abuse can be relatively simple, but too often is left till it is too late, because clients simply don't view themselves as at risk.
One of the most important steps is to coordinate a planning team. Common to almost every form of financial abuse is the fact that acts are committed surreptitiously. If you are in communication with your client's CPA, lawyer, insurance consultant and other advisors, you are more likely to be able to identify risk points, especially another advisor who hasn't been honorable.
Often, clients will disclose certain assets to one advisor and not another. It is often these orphan assets that fall prey to abuse. Educate clients that if any of their advisors recommend a significant planning step - say, purchasing a life insurance policy whose premium is 50% of the client's annual earnings - other advisors should be consulted.
Any advisor who dissuades a client from getting the perspectives of other members of the planning team should be viewed as suspect. If the recommendations are reasonable, the recommending advisor should be pleased to have them reinforced by other professionals on the planning team.
The biggest impediment to a team approach is almost always a client's distaste for professional fees. You may need an educational process about how prevalent, broad, surreptitious and sinister financial abuse can be, and how even intelligent, aware and healthy clients can be taken scammed.
The costs of preventing abuse are quite modest compared with the loss that might be prevented. In addition, regular communications with the entire team will almost assuredly lead to better planning overall.
Another tactic: Hold regular reviews. If a new will was signed you were not aware of, find out why. Identifying abuse early might permit simple correction.
Transparency is the best prevention for many forms of abuse. In the examples in which CPAs orchestrated abuse, planners and other advisors were intentionally left out of all discussions. If any advisor tries to minimize your involvement, blow the whistle. If the estate planning attorney objects to your participating in the planning process, perhaps out of concern that it will reduce his or her position, insist on involvement. Similarly, planners should include the client's CPA and attorney in at least an annual review meeting.
Integrate checks and balances into the process. The more checks that exist, the safer the client will be. Have duplicate monthly statements sent to a trusted family member or perhaps your client's CPA - anyone other than the agent under the client's power of attorney (or trustee under the client's revocable trust).
If a client is elderly or has health issues, encourage a periodic evaluation by an independent care manager whose report can be circulated to key family members and the planning team. This might be done once a year if the health or cognitive concerns are still minimal.
Use an institutional co-trustee on trusts. There is no shortage of high-quality institutions that can serve as administrative trustees, enabling the advisor to continue to manage a client's wealth. Inserting an institutional trustee, even in a mere administrative capacity, brings another layer of independence to the team.
Help the client to simplify and organize all of his or her financial and legal affairs. It is common to have an estate planning meeting in which a wealth manager who thought he was managing all the client's investment assets discovers that there are a half-dozen other accounts he hadn't been told about.
Even if a client insists on working with several advisors, everyone should be involved and have the big picture. Ideally, a client should consolidate.
Bills and credit cards should be shifted to auto-pay and deposits made automatically, to the extent feasible. Have clienta sign up for a credit monitoring or fraud detection service. Suggest a client use a post office box to minimize the risk that someone will tamper with his or her mail.
While these steps may be obvious to some advisors, too often clients at risk simply don't take them, since they view themselves as in control.
As investors have (painfully) learned, financial abuse is not confined to the elderly. The methods employed by perpetrators are far more sophisticated and diverse than most clients or even professionals may realize.
The best protection requires planning and coordination, as well as the implementation of steps advisors may find basic - but which too few clients seem to pursue until it's too late.
Martin M. Shenkman, CPA, PFS, JD, is a Financial Planning contributing writer and an estate planner in Paramus, N.J. He runs laweasy.com, a free legal website.
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