FTC Case Targets Deceptive Selling of Living Trusts

The Federal Trade Commission has negotiated settlement agreements with two companies that sold more than 3,000 living trusts to elderly consumers in 43 states in conjunction with memberships in the American Association for Senior Citizens (AASC). A living trust is an estate planning tool, often viewed as an alternative to a will, in which a person’s assets are transferred to the trust during his or her lifetime and distributed at the time of death. The settlements in this case resolve charges that The Administrative Company, corporate officer Michael P. McIntyre, and Pre-Paid Legal Services, Inc. made numerous false statements about the benefits and appropriateness of living trusts in general, and about the trusts they sold in particular. For instance, the FTC alleged that buyers were not told that the $1,995 to $2,995 and higher amounts in fees that they paid for AASC membership and a living trust did not include transferring their assets into the trust. Unless all assets are transferred into a living trust, the purchaser’s estate or part of it still may have to pass through probate, the very problem that the respondents had promised consumers they could avoid by purchasing a living trust, the FTC said.

The settlement with Pre-Paid would require this Ada, Oklahoma-based firm to pay $165 to any consumer who purchased one of the living trusts and who has not already received a refund and does not live in a state with which Pre-Paid already has settled. In addition, both settlements would prohibit the respondents from making similar misrepresentations about living trusts and require them to make certain disclosures with regard to: legal challenges that can be made against living trusts; the possibility of probate for certain estates regardless of whether living trusts are used; and the transfer of the consumers’ assets into the trusts. The Administrative Company and McIntyre did business out of a Dallas, Texas, address. The AASC, now a defunct organization, is not named in the FTC complaint in this case.

“The practices we challenge in this case are particularly contemptible because they were designed to prey on the financial fears of the elderly by exploiting a general perception that probate is an expensive and drawn-out process, and then misrepresenting the AASC living trust as a solu tion,” said Jodie Bernstein, Director of the FTC’s Bureau of Consumer Protection. “The respon dents represented that a living trust was appropriate for all their customers. Indeed, the mere willingness to join AASC appears to have been enough to render a member an appropriate candi date for their living trust. It’s not that simple. Other estate planning options must be considered.”

According to the FTC complaint in this case, the respondents marketed the living trusts using sales literature representing that creating such a trust avoids all probate and administrative costs, allows assets to be distributed immediately upon death, and protects against catastrophic medical costs. They also represented that living trusts are the appropriate estate planning device for every consumer and that the AASC trusts were all prepared by local attorneys, the FTC alleged. These are all false claims, the FTC charged, noting in particular that, of the 3,064 living trusts prepared for AASC members in 43 states, approximately 3,000 were prepared by an Arizona attorney licensed to practice only in that state and in New York. The FTC complaint also alleges that living trusts are not appropriate for everyone, and that, in some states, there is no law limiting the time during which creditors may file claims against a trust instrument. As noted above, the FTC also took issue with the respondents’ failure to disclose to consumers that the transfer of assets into the living trusts was not included in the price consumers paid for such trusts, and that it was the purchasers’ responsibility to transfer their assets or to arrange for someone else to do so.

Included in the proposed consent agreements the FTC announced today to settle these charges are specific provisions that would require the respondents to clearly and conspicuously disclose to consumers to whom they market living trusts the facts that such trusts may be legally challenged on similar grounds as wills, and that living trusts may not be appropriate in all instances and all estate planning options should be examined before determining the best one to fit a parti cular individual’s needs. In addition, the respondents would be required to disclose, if true:

• the availability under relevant state laws of informal probate that allows minimal or no contact with the courts and reduces the time required to probate a will;
• that the transfer of an individual’s assets into the living trust is not included in the price of creating the trust;
• that it is the sole responsibility of the purchaser to transfer assets into the trust; and
• that creditors may have a longer period of time to file a claim against a living trust than against a probated estate.

Each settlement also contains provisions that would prohibit the respondents from making the false claims alleged in the complaint. The settlement with The Administrative Company and McIntyre includes additional prohibitions against making false, misleading or unsubstantiated statements about any legal instrument or service offered. Pre-paid would be required to monitor clients who sell living trusts and for whom it provides pre-paid legal services to ensure that the clients are complying with the disclosure requirements and the provisions barring misrepresenta tions in its settlement with the FTC.

The settlement with Pre-Paid also would require this firm to offer a $165 refund to every purchaser of an AASC trust who hasn’t already received a refund and who doesn’t live in Arizona, Arkansas, Colorado, Connecticut, Florida, Idaho, Illinois, Kansas, Kentucky, Massachusetts, Missouri, New Mexico, New York, North Carolina, Ohio, Texas, Utah, Vermont, Washington, or Wisconsin. (Consumers in these states have been offered partial refunds in conjunction with an earlier multi-state settlement with Pre-Paid.) Consumers who are eligible under the FTC settle ment would receive notification letters and must respond in order to receive a refund.

The Commission vote to announce the proposed consent agreements for public comments was 5-0. This case was investigated by the FTC’s Denver Regional Office.

A summary of the agreements will be published in the Federal Register shortly. The agreements will be subject to public comment for 60 days, after which the Commission will determine whether to issue them as final and binding. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission by the defendants of a law violation. When the Commission issues a consent agreement on a final basis, the agreement carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaints, proposed consent agreements, and analyses of them to assist the public in commenting are available on the FTC's web site at http://www.ftc.gov and also from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. Proposed consent agreements also are available by calling 202-326-3627. For the latest FTC news as it is announced, call the FTC's NewsPhone recording at 202-326-2710.

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(FTC File No. 932 3019)