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Spotting the Red Flags That May Signal Trusts and Estates Fraud

by | Aug 25, 2022

Illustrated Analysis for Litigation

It’s a classic fraud scenario. Well-to-do, elderly parents in ill health decide to turn over management of their affairs to one of their two children, the younger child. As time passes, the older child suspects something is amiss with her parents’ finances. The issue lands in court, and a judge appoints a guardian ad litem to oversee the couple’s estate.

The guardian then hires a forensic accounting firm to conduct an independent investigation to locate assets and examine financial records. As investigation proceeds, it becomes increasingly clear: The daughter was right to raise questions. In the end, the investigation finds that the brother has defrauded his parents—to the tune of nearly $10 million.

This anecdote is no hypothetical. It’s a brief description of a real-world case that our firm investigated, and it serves as just one example of the stakes and players involved in trusts and estates-related fraud cases.

What makes fraud in these circumstances particularly insidious is the difficulty advocates, guardians and beneficiaries face in detecting wrongdoing. In this article, we discuss red flags that may help advocates spot fraud and mismanagement, as well as the techniques investigators use to uncover evidence to determine whether fraud has occurred.

A Widespread Problem

As many attorneys and guardians who work on such matters already know, fraud against vulnerable parties is a multi-billion-dollar annual business. By some estimates, some five million older Americans are each year in financial scams, more often than not by people who are supposed to be taking care of them.

Predators may strike before or after a person’s death, and any number of players who have power over an individual’s finances or estate may be involved. Family members and trusted caregivers are the most common culprits in such cases—a fact than can add an additional layer of complexity in uncovering fraud. Victims may be too embarrassed or emotionally stricken to supply or believe evidence against someone who has been so close to them.

Advocates have been implicated, as well. Our investigations have found instances of trustees, executors, and attorneys-in-fact making distributions for their own benefit, especially in cases where the trustees, executors or attorneys are family members.

Scams by unscrupulous guardians ad litem were dramatized in the 2020 Netflix movie “I Care A Lot,” where a con artist persuades the courts to name her as guardian for a number of wealthy senior citizens. Once in control of her victim’s finances, the scammer strip mines the life’s savings of her wards by charging huge hourly fees and selling off assets. While a fictionalized account, the crimes portrayed in the film are rooted in reality. The movie was inspired by of a Nevada-based professional guardian arrested in 2017 and later convicted of hundreds of counts of perjury, theft, and elder exploitation after a years-long fraud scheme.

Warning Signs

Financial abuse may be described as the illegal or improper use of funds, property or assets including misusing or stealing money or possessions, coercing or deceiving people into signing documents like wills or contracts, and improperly administering a conservatorship, guardianship, or power of attorney.

Spotting this kind of abuse requires vigilance. Lawyers, guardians, beneficiaries and others should be on the lookout for red flags that may indicate fraud or mismanagement, and they should trust their instincts. If they see something, they should say something.

The following are red flags that may prompt further investigation:

  • Shifting Bank Balances: This may include sudden changes in account balances, particularly larger-than-usual withdrawals.
  • Missing Assets: Such as the unexplained disappearance of funds or valuable possessions, or the sudden transfer or sale of assets. If the fine art on the wall suddenly disappears, questions should be raised.
  • Odd Transactions: Including transactions between a trust or estate and the trustee, executor, or attorney-in-fact or their associates.
  • Vague Information: Fraudsters often attempt to obscure their actions with reports or accounting that lack substance or detail.
  • Late or Missing Reports: This is another sign that all may not be as it seems. People involved in a fraud may hesitate to provide updates on their activities.
  • Past Due Notices: If late notices are piling up, the estate may have been drained of the money necessary to keep up with its bills.
  • Credit Card Abuse: Including balances that have dramatically spiked or that have reached or exceeded their credit limits.

Other red flags may include: evidence of substandard care, such as malnutrition, depression or anxiety; unexpected changes to key financial documents, such as a will; and charges to the estate for services that appear to be unnecessary or priced exorbitantly.

Building a Case

Suspecting fraud is one thing, proving it is another. And in cases where complex, high-wealth estates are targeted, fraudulent activity is often sophisticated and well hidden. Solid evidence is required. Here are a few of the places investigators commonly look:

  1. Start at the Bank: Reviewing bank statements is a good place to start the evidence-collection process. Ask: How are funds being used? Is cash being withdrawn? Is it being transferred to unknown accounts? Cash withdrawals by or transfers to a trustee or executor should be scrutinized. All transactions should be properly recorded with supporting documentation. Beware when trustees, executors, or attorneys-in-fact claim they were repaying themselves for a “loan” to the estate.

  2. Look for Inconsistencies: Does spending fit the lifestyle of the person whose finances are being managed? For example, a deceased person may have been known to have avoided using credit cards. If, during the last months of the person’s life, the same person suddenly racks up a large number of charges, a review of asset activity may be helpful. In the case of the parents who lost $12 million, for instance, we established their prior spending patterns and noted drastic changes after their child took over their finances.

  3. Examine the Timing of Transactions: Did the person make large gifts to some beneficiaries, and not others, or to trustees, executors or attorneys-in-fact just prior to death? Were large assets purchased that are no longer in the deceased’s name? Have large cash withdrawals been made from accounts just prior or immediately after the date of death. In those cases, pay close attention to the signatures on checks to uncover irregularities or signs of forgery.

  4. Review the source of funds: Has all of the income earned by the trust or estate been accounted for? Are regular dividend or interest deposits reaching the accounts or have they been diverted? If assets have been sold, are all of the proceeds being deposited in the trust’s or estate’s accounts? A review of deposits for a period prior to the appointment of an attorney-in-fact or the death of the testator should help establish the sources of income and determine whether any payments have been diverted.

A Forensic Approach

Investigating potential financial abuse in a trust or estate can be challenging—particularly when the estate has a large number of assets—because of the array of accounts and transactions that may be involved. Even in the best of circumstances, when no fraud is suspected, an individual asset may be difficult to trace if it moves among several accounts.

For counsel, an experienced forensic accountant will likely be necessary to extract evidence that will stand up to scrutiny law enforcement and the courts. Even if fraud is not suspected or found, counsel may seek a forensic review to determine if all assets have been accounted for and that they are being equitably distributed among beneficiaries.

This kind of investigative work requires sophisticated forensic tools that combine distinct data sets, financial records and unstructured data into a single platform for investigation and analysis. Using advanced data analytics, an experienced forensic investigation team can identify inconsistencies and irregularities that may help uncover fraudulent activity.

People no longer in control of their finances are particularly vulnerable to mismanagement and fraud. For counsel, trustees, executors and others involved in the trusts and estates process, familiarizing themselves with potential red flags, understanding the sources from which they may draw evidence, and knowing when to call upon forensic professionals can help stem the tide of losses and reduce the pain and suffering of fraud victims.

This article was originally published in the New York Law Journal on August 9th, 2022. https://www.law.com/newyorklawjournal/2022/08/09/spotting-the-red-flags-that-may-signal-trusts-and-estates-fraud/

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