March 2004
An Unholy Alliance: Nonlawyers Who Mass-Market Trusts, and the Lawyers Who Assist Them
by Kevin Bank and Cheryl Kringle
As the population ages, scam artists are increasingly targeting seniors. Unfortunately, some of the scammers are right in our own backyard, and some Washington lawyers are aiding them, whether wittingly or unwittingly. In the past several years, the Bar Association has become increasingly active in disciplining lawyers who affiliate with nonlawyers in schemes that "sell" seniors legal products like living trusts and charitable remainder trusts (CRTs).
Living trusts and CRTs are legitimate estate-planning tools for some people, and many estate-planning professionals properly refer clients to licensed lawyers to assist clients in utilizing these tools. However, an entire industry has developed in which "estate planning" companies with reliable-sounding names like "Senior Financial Planning Services" or "Secure Benefits Group" use licensed insurance agents (or simply sales persons) to sell trusts to elderly consumers, whether or not the buyers understand or need them. The lawyers affiliated with these companies typically "review" the trusts and get paid a set fee for doing so. Unfortunately, these lawyers rarely provide appropriate legal advice or evaluation of the client's circumstances to determine whether the trusts are appropriate for the client.
The typical living-trust scam
In living-trust scams, or living-trust mills, as they are often called, the aim is to sell the most living trusts with the least amount of effort. Frequently, the purpose of the living-trust sale is to obtain asset information from the purchaser in order to facilitate sales of other products, such as annuities or long-term-care policies. The estate-planning company, financial planner, or insurance company may identify potential clients through advertising, telemarketing, or word-of-mouth referrals by customers. They frequently hold free seminars aimed at attracting senior citizens, and use this opportunity to collect names of seniors to target. The companies set up initial appointments by telephone. The initial appointments are usually held in the client's home.
The sales agents are carefully trained to sell the trust document, which in some cases also comes with membership in a dubious prepaid legal plan that may actually be nothing more than a lawyer referral service. The agents frequently regale the purchaser with inaccurate and unrepresentative horror stories about the probate process and the salesperson's allegedly traumatic experiences with probating the estate of a relative. The aim is to convince the purchaser that probate will be lengthy and that a significant portion of the estate will be consumed by lawyers. In fact, although probate costs and procedures can vary from state to state, Washington's are among the least expensive and most streamlined in the country.1 The scammers are very successful in tapping into widespread misconceptions about the cost and complexity of probate in Washington.
After the agent makes the sale, the agent and purchaser jointly complete a "living trust application" that contains detailed information about the purchaser's assets. In conjunction with the application, the purchaser is often persuaded to sign several releases and waivers (for example, a release permitting the salesperson to share the information collected with an affiliated insurance company). The agent then collects a check for an amount from $900 to $5,000, often based on the determination by the sales agent of how much the purchaser would be willing or able to pay — the sales agent is paid a commission on the sale. The check is usually made payable to the estate-planning company, although in some cases a second check is written to the lawyer who will "prepare" the trust.
The estate-planning company then fills in the blanks with the information gathered from the client on a trust template and, if a lawyer is involved in the trust mill, the document may then be sent to the lawyer "for review." When the lawyer completes his "review," the document is typically returned to the estate-planning company for insertion in a professional-looking binder of documents containing the living trust, pour-over will, and durable power of attorney. Unfortunately, since the legal documents are based on templates, they are a one-size-fits-all product, and will not necessarily bring about the client's desired result. The document binder is then delivered to the client by an insurance agent affiliated with the estate-planning company, who is also a certified notary.
The client is often unfamiliar with the lawyer involved until this delivery visit — among the documents usually delivered by the insurance agent is a letter or acknowledgement from the lawyer congratulating the client on the purchase of the trust and, in some cases, disclaiming liability for any claims against the lawyer for an invalid trust, will, or power of attorney. If the lawyer has made an effort to contact the purchaser personally, it is generally through a phone call where the lawyer either congratulates the person on his or her decision to purchase a trust, or simply confirms information from the application provided by the estate-planning sales agent.
The delivery visit presents a gold mine of opportunities for the insurance agent. With a thorough knowledge of the purchaser's assets, and an established relationship with the client, the agent is in a powerful position to suggest alternative investments, such as the insurance company's annuity products. The purchaser is often persuaded to sell existing investments, even if this means incurring significant penalties and taxes, to buy the insurance agent's products. This delivery visit presents another opportunity for the agent to earn commissions.
The role of the lawyer
There are a variety of ways that lawyers become involved in living-trust mills. In some instances, the lawyer accepts exclusive referrals from a financial advisor, who obtains the clients and then splits fees with the lawyer. In other instances, lawyers may respond to a classified ad or be approached by a representative of the estate-planning company, who describes the tremendous potential for the lawyer if he or she agrees to be the referral lawyer for that company. The lawyer may be asked to attend a seminar where the estate-planning company makes a slick presentation to prospective clients. The lawyer's attendance at the seminar is designed to demonstrate the company's professionalism to prospective clients, while at the same time demonstrating to the lawyer the opportunity for obtaining new clients.
Once the lawyer is on board with the company, the lawyer is usually told that all he has to do is review the application for appropriateness and make brief contact with the clients in exchange for a share of the total fee. The lawyer's share of the fee may range from $100 to $500. Although this amount may appear fairly modest, the true living-trust mill is a volume business, and the lawyer does a minimal amount of work for the fee. This arrangement can sound very attractive to lawyers who are looking for a steady source of income. The estate-planning company may represent to the lawyer that its business model "is approved by AARP" or "has been reviewed to make sure it does not violate the Rules of Professional Conduct." Of course, a lawyer may not rely on representations made by the estate-planning company and must independently determine whether participation in the business model complies with the Washington Rules of Professional Conduct (RPCs).
Lawyers participating in trust mills can violate numerous Rules of Professional Conduct
A lawyer who participates in a living-trust mill walks into an ethical minefield. Although it may be tempting for a lawyer to try to rationalize that the particular arrangement proposed by the financial advisor or estate-planning company avoids ethical problems, it is unlikely to be the case. Among the many violations of the RPCs that are potentially involved are:
Conflict of interest (RPCs 1.7 and 1.8)
Whether or not a lawyer-client relationship exists between the estate-planning company and the lawyer (in most cases the relationship is more akin to an ongoing business relationship), the lawyer will more than likely be found to have established a lawyer-client relationship with the trust purchaser. The lawyer is usually identified in the documentation provided to the purchaser as the preparer of the documents, and in some instances, does have a brief telephone conversation or meeting with the client. The lawyer's financial interest in having the estate-planning company obtain and refer clients to him is likely to conflict with his duty to provide independent and disinterested advice to his estate-planning client. This conflict can violate RPC 1.7(b), prohibiting a lawyer from representing a client if the representation of that client may be materially limited by the lawyer's responsibility to another client, a third person, or the lawyer's own interests, and where the company pays the lawyer's fee; and RPC 1.8(f), prohibiting lawyers from accepting compensation for representing a client from one other than the client unless the client consents and there is no interference with the lawyer's independence.
In a reciprocal discipline case from Oregon, the Washington Supreme Court approved a 60-day suspension for a lawyer who was employed in an estate-planning "company" as an associate and, later, as corporate counsel. The lawyer simultaneously represented the company's customers who had bought living trusts from the company through its nonlawyer sales agents.2 In his stipulation to discipline, Mr. Lofton admitted that his own financial and business interests could have affected the exercise of his professional judgment on behalf of clients and that he had engaged in conflicts of interest.
Aiding in the unauthorized practice of law (RPC 5.5(b))
In affiliating with estate-planning companies owned by nonlawyers who send out salespersons or insurance agents to purchasers' homes to sell living trusts, lawyers may violate RPC 5.5(b), prohibiting aiding nonlawyers in the unauthorized practice of law. Although the trust-mill lawyers and salespersons often contend that the sales/insurance agent is simply gathering information, testimony from the victims of the mills belies that claim. What the agents invariably do in practice is provide self-interested legal advice to convince potential purchasers that the living trust is the best option for their needs.3
In a recent case resolved by stipulation to a two-year suspension, lawyer Michael J. Scaringi stipulated to assisting a California estate-planning company, and so-called "paralegals" hired and trained by the estate-planning company, in the unauthorized practice of law. Mr. Scaringi acknowledged that he was aware that neither he nor any other licensed Washington lawyer was present "when the client received advice regarding estate planning from the paralegal, signed the engagement letter, and made the payment for the living trust."4
Lack of diligence and communication (RPCs 1.3 and 1.4)
Lawyers who become involved in living-trust mills are very likely to run afoul of their fundamental duty to represent diligently and communicate with the clients whose living-trust documents the lawyers review and/or prepare. The lawyer's review is usually nothing more than filling in the blanks on preprinted forms, with no or minimal communication with the client. In many cases, the clients already have wills and other estate-planning documents, but the lawyer rarely engages enough with the client to find that out, let alone to make a determination whether replacing the will with a trust is in the best interests of the client.5
Multiple violations of the duty of diligence can result in serious consequences. Under the American Bar Association Standards for Imposing Lawyer Sanctions that guide bar discipline cases in Washington, disbarment is the presumptive sanction for a lawyer's knowing failure to perform services for a client when that failure causes "serious or potentially serious injury." Disbarment is also the presumptive sanction for a "pattern of neglect" that causes serious or potentially serious injury to clients.6 Of course, the presumptive sanction depends on the specific facts and is not always the sanction that is ultimately imposed. Under the ABA Standards, many factors are taken into account, including aggravating and mitigating factors such as prior discipline, motive, degree of remorse, and whether the lawyer pays timely restitution to clients.7
Other potential RPC violations
Depending on the terms of the lawyer's agreement with the estate-planning company, a lawyer involved in a living-trust mill can also violate the RPC by sharing fees with nonlawyers (RPC 5.4(a)) as well as by failing to supervise nonlawyer assistants (RPC 5.3(b) and 5.3(c)).8 RPC 7.3 can be implicated if the lawyer solicits clients through third persons, and violations of RPC 7.1 can occur if the lawyer is involved in disseminating false or misleading advertising regarding the advantages of purchasing living trusts.9
Lawyers who participate in trust mills can violate the Consumer Protection Act
The Consumer Protection Act, RCW 19.86.020 (CPA), prohibits unfair and deceptive acts or practices in the conduct of trade or commerce. The CPA can be enforced by private individuals, or by the attorney general.10 In recent years, living-trust marketing firms have come under heavy attack by state attorneys general across the nation.11
The Washington Supreme Court has held that the CPA applies to entrepreneurial or commercial aspects of the legal profession.12 "Entrepreneurial aspects" are those activities relating to how the price of legal services is determined, billed, and collected or how a lawyer obtains, retains, and dismisses clients.13
Under the CPA, an act or practice is considered deceptive if it has a tendency or capacity to deceive a substantial portion of the general public.14 A lawyer may violate the CPA by assisting sales people in making misrepresentations in the advertising or sale of trust documents. For example, if a lawyer prepares literature that misrepresents the probate process in Washington as unduly costly or burdensome, and that literature has the potential to mislead consumers into purchasing a trust document not suited to that individual, a CPA action may be brought against the lawyer. A lawyer involved with a trust mill may also violate the CPA by misrepresenting his involvement and deceiving consumers into believing a lawyer is substantially involved in preparing the trust and providing legal advice on the appropriateness of the trust for that specific consumer.
The unauthorized practice of law is a violation of the CPA.15 When an attorney assists in the unauthorized practice of law by participating in a trust-mill scheme, a facade of credibility and legality is created.16 Assistance in the unauthorized practice of law in this context is therefore a deceptive act violating the CPA. This is especially true if a consumer is harmed by receiving incorrect legal advice as a result of the unauthorized practice of law, or is induced to make decisions about the disposition of his or her estate based on false or misleading information about Washington's probate system. The consumer may also be harmed by purchasing a trust document provided by the trust-mill company that is not appropriate for a Washington state consumer, such as when a template is used without due consideration for Washington laws. Even if the document is appropriate in general for a Washington consumer, the template may not fit the needs of the specific consumer, who is unlikely to realize the shortcomings of the trust document due to the inability of the average consumer to understand the legal ramifications of a trust document.
The Washington Attorney General, through the Consumer Protection Division, has taken action to deter the trust-mill industry through education, coordination with other agencies, and litigation. Recently, the Attorney General filed suit against Senior Estates Legal Services, Asset Preservation, Inc., Neil Adkins, and C. John Cannon, alleging violations of the CPA through the unauthorized practice of law and misrepresentations in the sales of trust documents.17
When the Attorney General brings an action for a violation of the Consumer Protection Act, she is authorized to seek injunctions, restitution for consumers, and costs and fees, including reasonable attorney's fees, incurred in pursuing the action.18 In a private action for violations of the CPA, a consumer can ask for injunctions, costs and fees, including reasonable attorney's fees, and treble damages in an amount not to exceed $10,000.19 Additionally, RCW 19.86.140 authorizes a civil penalty of up to $2,000 per violation for every person who engages in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.
Charitable remainder trusts — a new frontier?
A recent case may indicate that the estate-planning companies are becoming even bolder in their sales pitches — in addition to living trusts, they are now trying to sell consumers CRTs through in-home sales. The injury to clients who purchase CRTs without fully understanding the consequences can be enormous. CRTs involve earmarking a portion of the person's estate to a charitable entity, with the principal of the earmarked amount not being accessible during the person's lifetime. In other words, the person who establishes a CRT is bidding farewell to the principal forever and cannot use it in the event of an emergency. A recently filed Bar Association complaint against a lawyer alleges that the lawyer affiliated himself with insurance agents who sold CRTs to seniors, and "reviewed" the applications for the CRT and CRT instrument. The complaint alleges that the lawyer never had any direct communication with the clients to determine whether they understood the consequences of purchasing the CRT, specifically, that significant portions of their estate would be left to charity rather than family members, and that significant amounts of their total assets would not be accessible to them during their lifetimes.20
Ethical lawyers can help stop the spread of trust-mill activity in Washington state
Trust mills actively encourage a distrust of lawyers and the legal profession. When a prospective client is visited by a sales agent from a trust mill, she is often told that the probate system benefits only lawyers or that lawyers discourage use of trusts because lawyers are afraid of losing the income generated by probate. The prospective client is regularly told that purchasing the trust document offered by the company will save her money, although she is not told that she most likely could obtain a living trust or a simple will that would involve minimal probate expenses directly from a licensed lawyer for the same or a lower cost.
Lawyers who engage in marketing strategies that encourage consumers to "avoid the horrors of probate" or similar messages feed into the misconceptions that allow the trust-mill industry to thrive. Consumers need rational, comprehensive information about the Washington probate system, and about the benefits and costs of using trusts or wills (or a combination of both) to allow them to make educated decisions regarding their estate planning. Lawyers can play a role by taking the time to educate clients about their options and by correcting misperceptions regarding probate in Washington.
Lawyers can also protect consumers from the trust-mill industry by notifying appropriate agencies of unfair and deceptive business practices. Estate-planning lawyers are often the first to become aware of trust-mill activity, when a client either asks for a review of a document produced by a trust mill, or queries the lawyer about whether he or she should purchase a trust from an estate-planning company. A lawyer who is aware of potential trust-mill activity may report the individual or organization to the Consumer Protection Division of the Attorney General's Office; the WSBA Office of Disciplinary Counsel (complaints against lawyers involved in trust mills); or the WSBA Practice of Law Board (complaints about nonlawyers engaging in estate planning).
A lawyer who is approached by a trust mill offering an opportunity that sounds too good to be true should remember the old axiom — if it sounds too good to be true, it probably is. By analyzing business offers from financial advisors or estate-planning companies in the context of the RPCs and the CPA, a lawyer can avoid becoming involved in a venture that may be unethical and illegal. More importantly, the lawyer can protect consumers and clients from unscrupulous scammers who seek to exploit them.
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Kevin Bank has been a disciplinary counsel at the Washington State Bar Association since 1999, and prior to that, worked as a consumer-protection attorney for the Federal Trade Commission. The opinions expressed in this article are the author's and are not official or unofficial positions of the WSBA.
Cheryl Kringle is an assistant attorney general for the Washington State Attorney General's Consumer Protection Division. The author expresses her own opinions in this article, not the opinions of the attorney general.
1 See Michael D. Carrico, When Revocable Living Trusts are Appropriate for Your Clients, WSBA CLE materials for "Living Trusts: The Consumer Controversy," Sept. 25, 1992, at 1-6, 1-8.
2 See In re Thomas D. Lofton, Order Imposing Reciprocal Discipline, 317/871, March 10, 1998.
3 See Washington General Court Rule 24 (defining practice of law as "giving advice or counsel to others as to their legal rights and responsibilities" and/or "selection, drafting, or completion of legal documents . . . which affect the legal rights of an entity or person").
4 See Order Approving Stipulation to Suspension in In re Michael J. Scaringi, 443/527, June 10, 2003. See also Columbus Bar Ass'n v. Fishman, 781 N.E.2d 204 (Ohio 2002) (one-year suspension imposed on lawyer who participated in living-trust mill; lawyer violated Ohio discipline rule prohibiting aiding unauthorized practice of law by allowing insurance agents to explain legal principles of wills and trusts to clients in a manner that directed the clients to choose the trust option).
5 See, e.g., In re Scaringi, supra n. 4 (by failing to review necessary documents and consult with his clients regarding estate-planning options, the lawyer violated RPC 1.3 (duty to act with reasonable diligence in representing clients), and RPC 1.4 (duty to explain a matter to the extent reasonably necessary to permit the client to make informed decisions about the representation)).
6 See ABA Standards, stds. 4.41(b) and 4.41(c) (1991 & supp. 1992). See also In re Anschell,
149 Wn.2d 484, 508, 69 P.3d 844 (2003) (presumptive sanction for lawyer who knowingly and negligently failed to perform services for client that resulted in serious injury is disbarment).
7 See ABA Standards, stds. 9.2-9.4.
8 See, e.g., In re Scaringi, supra n. 4.
9 See Deric J. Barnes, Attorney Association with Living Trust Marketing Firms: Examining the Legal Issues, 51 S.C.L. Rev. 1003 (2000).
10 RCW 19.86.080.
11 See Barnes, supra n. 9.
12 Short v. Demopolis, 103 Wn. 2d 52, 70, 691 P.2d 163 (1984).
13 Id. at 60-61.
14 Id. at 70.
15 Bowers v. Transamerica Title Ins. Co., 100 Wn. 2d 581, 591-592, 675 P.2d 193 (1983).
16 Cincinnati Bar Ass'n v. Kathman, 748 N.E. 2d 1091, 1096 (Ohio 2001) (citing People v. Cassidy, 884 P. 2d 309, 311 (Colo. 1994)).
17 State v. Senior Estates Legal Services, Inc., No. 03-2-33476-6SEA (King Co. Super. Ct., filed Aug. 13, 2003).
18 RCW 19.86.080.
19 RCW 19.86.090.
20 See Formal Complaint in WSBA Public No. 03#00091 (filed October 20, 2003).
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