Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Fiduciary Fraud & Abuse. Who’s minding the store?

The U.S. Census Bureau estimates that by 2030, approximately 20.3 percent of the U.S. population will be aged 65 and over[1].  Among developed countries, the United States currently has the largest number of people aged 65 and over.  This trend is expected to continue into the future, with the U.S. reaching 73 million older adults by 2030, and almost 83 million by 2050.  This aging of America presents unique challenges to those of us in the financial and legal sectors.  Not only will we have to watch out for our own aging family members, but as financial and legal professionals, we have an ethical obligation to remain vigilant to the signs of financial elder abuse in our clients.

My parents are members of the baby boom generation, and like many of yours, are getting older.  The day will come when they are no longer able to handle their own finances, either due to physical illness or cognitive decline.  It will then be necessary to bring in a fiduciary, someone with the legal authority to manage their money and property.  A fiduciary can be a professional, such as an accountant or an attorney, but it is much more likely to be a family member, friend, or neighbor[2].  Regardless of who is named fiduciary, the risk of financial elder abuse exists and must be considered.

The National Center on Elder Abuse reports that the most common perpetrators of financial elder abuse are family members (57.9%), followed by friends and neighbors (16.9%), then home care aides (14.9%).[3]  A famous example of financial abuse involves Anthony D. Marshall, son and heir of New York philanthropist Brooke Astor.  Mr. Marshall, and Ms. Astor’s attorney, Francis X. Morrissey Jr., were convicted in October 2009 for stealing tens of millions of dollars from the late philanthropist’s estate[4].  The two men obtained funds by engineering changes to Ms. Astor’s will after she began to suffer from Alzheimer’s disease.  While this is an extreme example, it does demonstrate the need to carefully screen and choose a fiduciary, even if the individual under consideration is a family member.

Fiduciaries, such as executors and trustees, have not only a legal duty to act in the best interests of the beneficiaries they serve, but an ethical one as well.  The fiduciary is entrusted with the management of affairs solely for the benefit of another individual.  When that individual is frail, vulnerable and/or incapacitated, the element of trust becomes even more critical.  Professional fiduciaries have national and state associations which set standards and promote ethics, such as the National Guardianship Association, the Arizona Fiduciaries Association, and the Professional Fiduciary Association of California.  However, no such organizations or standards exist for those fulfilling the fiduciary role in an unofficial capacity, such as those individuals caring for family members.

Fiduciaries breach their legal and moral duty by committing bad acts, such as failing to act impartially, not using reasonable judgement, or willfully ignoring the law such as in the case of self-dealing.  Self-dealing can include stealing, modifying terms of legal documents such as wills, wasting money, or otherwise acting inappropriately.  Some real-life examples of fiduciary self-dealing include:

  • A Minnesota pastor who persuaded a former parishioner, suffering from Alzheimer’s and Parkinson’s diseases, to allow him to manage his finances. The pastor made over 130 withdrawals from the older man’s bank account and was later convicted of stealing about $25,000[5]
  • An Indiana home care worker who was charged with nine felonies after she took more than $150,000 from a 79-year-old woman with dementia. The caregiver stole the funds through transactions on multiple credit cards, checks drawn on a savings account and cashed certificates of deposit.[6]

How can you protect your loved ones and clients from this type of financial abuse?  Some warning signs, or red flags, to look out for include:

  • Sudden change in estate planning documents;
  • Unusual banking activity, such as large withdrawals, uncharacteristic wire requests, switching banks, ATM activity by someone who is homebound, or adding new signers to accounts;
  • Individual is fearful and/or submissive around the fiduciary;
  • The fiduciary isolates the individual from others, including family members;
  • Sudden appearance of numerous unpaid bills in the individual’s name;
  • Mailing address for bank and credit card statements has been changed, and is no longer coming directly to the individual;
  • The fiduciary becomes secretive about the individual’s finances;
  • The fiduciary lives with the individual and depends on them for financial support;
  • The fiduciary insists on being present when anyone else is with the individual, and possibly will not let the individual speak for themselves;
  • Squalid living conditions, or the appearance of deprivation (absence of food, water, clean clothing, medication, proper heat/cooling, medical services, etc.). Deprivation can often be used as a technique to control the individual, or force compliance with the fiduciary’s financial requests;
  • Large, unexplained gifts to the fiduciary including cash;
  • Unexplained spending by the fiduciary that is outside their normal lifestyle;

While the presence of one or more of these red flags does not directly indicate fraud or financial abuse, it should prompt a closer look at the situation.  So, what should you do if you suspect fiduciary fraud or abuse?

The first step is to obtain an independent review of the fiduciary’s actions.  This review should include an accounting of how all assets are being spent and managed, as well as a review by a forensic accountant to identify possible fraud.  There are several government agencies that elder financial abuse can be reported to as well.  If you suspect a crime has been committed, you can report the incident to your local police department.  In addition, most cities and states have an Adult Protective Services (APS) division that investigates allegations of elder abuse (financial and otherwise).

[1] U.S. Department of Commerce, Economics and Statistics Administration. (2014, May). An aging nation: The older population in the United States. Retrieved November 28, 2016, from https://www.census.gov/prod/2014pubs/p25-1140.pdf

[2] http://www.cdc.gov/aging/caregiving/facts.htm

[3] https://ncea.acl.gov/whatwedo/research/statistics.html#14

[4] https://www.philanthropy.com/article/Conviction-of-Brooke-Astors/219067

[5] http://www.startribune.com/local/east/169851546.html

[6] http://www.indystar.com/story/news/investigations/2016/01/17/financial-exploitation-cases-burden-seniors-indiana/78810678/