How to Avoid Being Robbed Blind After You Die

Complex estates require multiple layers of protection, but even estates that aren't very complicated can be protected by using these four best practices.

(Image credit: © Jared DeCinque 2008)

In February 2018, prominent NYC attorney Steven Etkind was arrested on charges of embezzling millions of dollars from a deceased client’s estate. The client’s will directed the creation of charitable trusts (of which Etkind served as co-trustee), funded with assets from the client’s estate, for the sole purpose of supporting charitable organizations.

Now facing a maximum sentence of 18 years in prison if convicted, Etkind and his co-conspirator are accused of setting up a phony charitable organization and using it to steal more than $3.5 million from their client’s trusts over the course of eight years. According to a press release issued by the Department of Justice, he used part of the money he stole to purchase a 6,300-square-foot home in Southampton, N.Y.

It’s no secret that higher-net worth individuals usually require extensive estate planning. From sophisticated trusts to tax-planning strategies and wealth-preservation techniques, the intricacies can be daunting. Unfortunately, sometimes it’s these very complexities that can expose more affluent individuals to fraud — when the planning is complex, even close family members may not notice suspicious activity.

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Individuals and families place a tremendous amount of trust in their financial planning team to ensure their wishes are carried out faithfully, but how can one be 100% confident in their advisers with stories like Mr. Etkind's floating around?

Based on our experience, there are a few ways individuals can protect their estate from harm, and it all starts with establishing the appropriate checks and balances within your planning team.

1. Be wary of sole practitioners

Many people planning their estates have financial advisers they have worked with for years and whom they are comfortable with. Some of these advisers may have left the firm they were with when the client first hired them to go out on their own. The potential issue with this scenario is that while you may like the person, without the structure and resources of the firm, they may not adhere to the same compliance guidelines, fiduciary practices or investment discipline they followed when working for their former employer.

Without the checks and balances provided by operating within a corporate structure, there will not be a second set of eyes to review and prevent actions of impropriety.

From an execution standpoint, as a stand-alone practitioner, the adviser will often lack the administrative support of a fully staffed firm, so transactional activities like wires and distributions may no longer be provided. In addition to a potential lack of back-office support, working with a sole practitioner often presents an additional risk of a potential lack of a succession plan for their advisory services. If your adviser is the only person who understands your situation, and they retire or something unforeseen happens to them, you’ll be scrambling to find a new adviser, and will be forced to start over, back at square one.

2. Be careful when selecting trustees for trusts

As I covered in a previous article, trusts are valuable tools that allow you to maximize tax-planning opportunities within your estate plan, spell out specifically how you want to distribute your assets, and ensure that your vision for your legacy is carried out faithfully. However, people often select someone they know well, rather than someone who is qualified and has the necessary bandwidth to serve as trustee. This can allow a host of vulnerabilities to creep in.

Many of our clients who have significant wealth opt to name a bank as corporate trustee because they find comfort in the size of the institution. They likely do so, however, without consideration of other important factors.

Corporate trustee shoppers may not be aware of the potential inherent conflicts of interest of such a model. For example, if you name a bank as corporate trustee, and that same institution employs your financial adviser, the arrangement may be perfectly legal, but having one institution provide both services can represent a considerable conflict of interest.

If a proprietary investment offered by the bank is suitable for the investor’s goals, the adviser can steer their client to toward it, even if there are other options in the marketplace that better support their goals.

That’s not to say a corporate trustee should be ruled out. In fact, I typically recommend using a corporate trustee, so long as they operate independently from the financial adviser. The key is making sure that the trustee and the adviser can provide the estate planning that your situation requires, and investment services that are free from conflicts.

3. Make sure assets are held with a reputable third-party custodian and never with a financial adviser

We all remember Bernie Madoff. A former stockbroker, Nasdaq chairman, and world-renowned financier, Madoff orchestrated one of the largest Ponzi schemes in American history, collecting billions of dollars from unsuspecting investors.

His victims (opens in new tab) included everyone from Hollywood A-listers (Steven Spielberg and Kevin Bacon, to name two) and professional athletes (baseball great Sandy Koufax), to charitable organizations and banks. Some clients invested everything they had with Madoff.

Most fraudulent scenarios occur when too much trust is placed in one unethical person. Madoff convinced investors that their money was completely safe in his hands, acting as his own asset custodian. This is now a major red flag in the eyes of the Securities Exchange Commission (opens in new tab) because it essentially gives the adviser free rein to do whatever he or she wants with the client’s money.

Never put money into an account with your financial adviser’s name on it, and make sure your investment statements list only your name. Also, be sure your financial advising firm does not hold any client assets in its own accounts or on its balance sheet — this is a key to “Madoff-proofing” your investments.

Your money should always remain your money — plain and simple. Assets should be held in segregated accounts with highly qualified, independent third-party custodians.

Today, most independent advisory firms hold client assets at one of the major financial institutions, and as the named adviser, they manage the assets on a discretionary basis. This simply means the money is elsewhere, so all your account statements are created by the independent third party, not by the advisory firm.

If Madoff had this type of setup, he would have never been able to create “fake statements,” and the scheme simply would not have happened. If you’re ever unsure about how your assets are held, consult your financial adviser and request formal documentation about their custodial practices.

4. Review estate planning documents often

Many people treat estate planning as a “set it and forget it” activity. In reality, this couldn’t be further from the truth. Over time, your wishes may change, or family dynamics may shift, and the plan that was once in line with your wishes may no longer support them. Even if nothing has changed in your life, the tax laws that govern the distribution of assets change constantly, so it’s important to ensure you’re not missing any opportunities to more efficiently transfer assets.

Review the beneficiaries on your retirement accounts, life insurance policies, IRAs and annuities on an annual basis when you meet with your financial adviser. I also recommend having a qualified attorney review your will and other estate documents at least every 10 years to make sure the language is still valid and to verify that new family members have been added and any estranged family members have been removed. It’s also important to make sure your executor is still appropriate, and that the documents reflect your current vision.

It’s worth mentioning that most financial professionals and firms will always act in their clients’ best interest. They want their clients to succeed because their reputation relies on that success. But when it comes to doing your part to protect your own interests and legacy, being too cautious is never a bad thing. In the end, keeping a watchful eye on your estate plan could help you catch unlawful activity before it’s too late.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Casey Robinson, CFP
Managing Director - Wealth Planning, Waldron Private Wealth

Casey Robinson is the Managing Director of Wealth Planning at Waldron Private Wealth (opens in new tab), a boutique wealth management firm located just outside Pittsburgh. He focuses on simplifying the complexities of wealth for a select group of individuals, families and family offices. Robinson has extensive experience assisting multi-generational families with estate planning strategies, integrating trusts, tax planning and risk management.