April 2008 Archives

April 28, 2008

Who Knew? Stranger-Owned Life Insurance Scams

estpl042908.JPGIf you, or anyone you know, has been approached by someone offering to buy them a life insurance policy and promising a risk-free way to earn some serious cash, be cautious. From the same folks who brought you risky mortgages that you couldn't afford and packaged them as 'no-risk' securities on Wall Street now comes stranger-owned life insurance: a way for third party investors to package life insurance policies into securities, promising a high yield with 'no risks'. Yeah, right. Here's how it works: A promoter will offer an elderly, wealthy person a fairly surprising deal: The older person agrees to purchase a $10 million life insurance policy, and the promoter lends them the money to pay the premiums for two years. They'll even throw in cash up front for the hassle of applying and going through a medical exam. The insured pays nothing during that time, not even interest. If they die during that time, their family gets the death benefit, minus the cost of the loan. If they don't die at the end of two years, they can keep the policy and pay back the loan plus interest. Or, they can sell the policy and use the money to pay back the loan, or transfer it to the lender and pay nothing. What's wrong with this picture? Lots. As the Music Man said, "We've got trouble, right here in River City." Grandpa's not breaking the law by agreeing to do this, but the promoters are aggressively pushing the boundaries of acceptable insurance practice and policy. They're betting that Grandpa won't agree to continue that policy after two years but will instead allow them to become the owners of the policy on his life. That's a pretty good bet, since Grandpa wasn't even thinking of buying that policy until the promoter came to town! If they pay Grandpa $500,000 up front for the hassle of going through the application process and taking that medical exam, and he doesn't choose to own it after two years, they know that when he dies, they'll collect the $10 million -- which is a great return on investment, even after the up front cash payment and the tax they'll owe on the payout. But, let's face it, life insurance isn't supposed to be packaged into investments and sold to strangers. It gets special tax treatment (it builds up value tax free and payouts are not taxed as income or capital gains) because it's supposed to protect families after a death. It's supposed to be about widows and orphans, not hedge funds and investments pools. You aren't allowed to buy life insurance on people you don't know or have no economic interest in insuring. But, here's the really clever/evil part of this scam: after a policy's been owned for two years, the insurance company can't do anything about a stranger owning the policy. That's why the promoters are willing to pay Grandpa up front to buy a policy he doesn't even want! It might not even work out so well for Grandpa: Buying the policy and selling it after two years could mean that he can't buy insurance coverage in the future. He might take a tax hit on the accrued interest he didn't pay for the two years; he might be taxed on the cash advance up front. The life insurance industry doesn't like this scheme either. They're worried that if Congress realizes that life insurance policies are really just investments, Congress will start taxing them that way, and they'll lose their special tax-favored status. If that happens, life insurance will probably become more expensive, and we'll all lose one of the all-time best estate planning tools for protecting our families at a reasonable cost. If scams like this transform the insurance industry in the same way that the mortgage industry was transformed, the whole industry could implode faster than a Las Vegas neighborhood emptied by foreclosures.

To learn more about common types of fraud committed again elders, see Long-Term Care, by Joseph Matthews (Nolo).

April 22, 2008

Who Knew? Safe Deposit Boxes Aren't The Best Places to Leave Your Estate Plan

safe deposit box It might be a digital world, but your estate planning documents are still on paper, and you want to be sure that they stay safe and can be easily found when your family needs to find them. So, where should you store them? Probably not in a safe deposit box at the bank. First, it's probably not big enough. Old-fashioned wills were printed on paper that easily folded into thirds (and were wrapped in nice blue paper to boot) but these days, most wills and trusts come in three-ring binders that won't fit in the standard shoebox-sized deposit box. Second, unless your friends or family are co-owners of the box (and sometimes even if they are), it won't be easy for them to open it if you're not there. Having the key isn't enough to get the bank to open it up for them -- the bank wants you to prove that you have the legal authority to require them to open it up. Think about it: The document granting your friends or family the right to act on your behalf as an executor is INSIDE the box, and until the box is opened, they can't prove that they have the authority to get the bank to open it... (and so on). Some states, having given this almost Zen-like problem some legislative attention, have laws that require the bank to open the box in this situation, just to see if there's a will inside; in other states, it depends on the bank's policy. In still other states, when an owner of a safe deposit box dies, the box is sealed until the state figures out how much the contents are worth -- even if there are surviving co-owners. And third, there's those annoying, small keys to safeguard. Losing the keys to your safe deposit box is not a terrific idea. (I know that after two kids and five moves, I've lost mine.) Lost keys are an expensive proposition. When you rent a box from the bank, they give you two keys. The only way the box can be opened is when one of your keys and one from the bank are used at the same time. If you lose both of your keys, you have to pay the bank to drill out and replace the lock on the box -- about $150, depending on the bank. So, where else should you store your estate plan? There are people who store them in their freezers -- estate planners recognize their documents because they are fragile and cold. It's a better idea to keep your originals in a fire-resistant safe in your house and to notify friends and family where it is -- and how to get it open.

For a step-by-step guide to organizing your records and important paperwork, see Get It Together: Organize Your Records So Your Family Won't Have To, by Melanie Cullen and Shae Irving (Nolo).

April 7, 2008

Who Knew? Banks Offer More Insurance for Trust Accounts

fdicThese days, while the titans of Wall Street teeter on the edge of financial ruin and there's media chatter about the great depression, bank failures, and the domino effect, here's a comforting tip: the Federal Deposit Insurance Corporation (FDIC), which guarantees bank deposits up to $100,000, offers extra insurance for accounts owned by living trusts.

Here's how it works--the owner of a living trust account (which would be the person who set up the trust) can insure up to $100,000 per beneficiary, provided these requirements are met:


  1. A beneficiary must be the owner's spouse, child, grandparent, parent or sibling.

  2. A beneficiary must get their money when the trust owner dies.

  3. The account title at the bank must indicate that the account is held by the trust.


Here's an example: A father has a living trust which leaves his assets equally to his three children. This trust can be insured up to $300,000.

Trusts with two owners can get $100,000 of insurance per beneficiary per owner, as long as the beneficiaries will inherit the money when the second owner dies. A mother and a father who establish a trust for the benefit of their three kids can insure up to $600,000 worth of trust deposits.

The $100,000 limit, though, applies to all trust accounts that an owner has at the same bank. So if a trust owner has a payable-on-death account and a living trust account, both naming the same three children as beneficiaries, the funds in both accounts would be added together and the total insured would be $300,000.