By Michael G. Rudd, CFP®
This paper discusses the increased danger of identity theft for aging Americans. It examines the effects of age on decision-making abilities and shows how the decline of these abilities allows identity predators to target the older population. Discussing the planner's importance in protecting older clients, the paper points out the significance of knowing clients on a personal level. Finally, the paper provides the relevant parameters of the revocable trust and shows how the planner can use trusts to protect elderly clients.
Mattie Williams returns from her mailbox, a bundle of junk mail, a retirement magazine, and a few letters clutched in her withered hand. As she places the mail on the table, an official-looking letter lies atop the pile. Having lived alone since her husband's death a couple of years ago, Mattie fully embraces caring for herself with the substantial sum left to her by her hard-working husband. Lately, however, she has been forgetting the simplest things; her memory clouds with each passing day. More and more often, she finds herself searching for the name of her next-door neighbor only to be denied by the advancement of years.
As she looks to her mail, she finds comfort in recognizing her bank's name and logo on the top letter. She opens it; it is an alert that someone may have accessed her accounts. Terror fills her as she dials the number provided in the letter. A woman with a pleasant, soothing voice answers. Reassuring Mattie that all will be fine, the voice asks for Mattie's Social Security number, date of birth, bank account numbers, and credit card numbers. Her mind in a fog, Mattie turns over everything to the voice. In a split second, with the click of a mouse, everything Mattie's husband had worked for-everything he carefully planned for her-was gone.
This frightening scenario occurs countless times a day, all over the world, and this problem continues growing at an alarming rate. Banks, insurance companies, investment firms, and mutual funds spend countless hours and millions of dollars each year protecting clients from criminals who spend every waking moment assessing ways to steal identities. Financial services firms use myriad techniques to protect their clients-procedures that include obtaining proper identification when opening accounts, constant monitoring of client account activities, and knowing clients on a personal level.
These actions have slowed the increase of fraud among mature Americans, but identity theft remains a considerable problem. Consequently, the financial planning profession can do more to reduce identity theft among older Americans. According to The President's Identity Theft Task Force: Combating Identity Theft, "During the past few years the issue of identity theft has become serious not only for individuals but the government and private sector too."1 The financial services industry works diligently at protecting seniors from deceptive schemes. But to enhance client protection, industry leaders should emphasize educating both planners and clients about the aging process. With the convergence of an aging population and a rise in identity theft among the elderly, the revocable trust is an enormously under-used financial tool in helping seniors fight those seeking to steal information. Planners should consider recommending revocable trusts when appropriate as an added level of protection against identity criminals.
A Broader Understanding
According to one article, "It is a fact that older adults are preferentially targeted by fraudulent and misleading advertising, presumably because they are more likely to make ill-informed decisions that make them easier prey for scam artists."2
A medical doctor, after observing a client closely and receiving input from family members, will determine if the client meets the standard of incapacity. Sometimes the diagnosis is easy, other times it is not. Generally, a person may be considered incapacitated if he or she is unable to perform two of seven activities of daily living (ADLs), which are walking, eating, bathing, toileting, dressing, transferring, and continence. But the lapse of time when an individual may be entering the early stages of incapacity and a formal diagnosis by a medical doctor may be several years. One author argues that the early stages of diminished decision-making may start as early as age 55.3
As individuals age, they become more forgetful, not recalling friends' names, or occasionally misplacing a family heirloom. This is normal. Gradually, however, many seniors develop dementia or go into early onset Alzheimer's disease. Unfortunately, as the population ages, the occurrences of mental incapacity will certainly increase. Herein lies the problem: with this compromised mental capacity comes the increased risk of identity theft.
Given the recent research by George Finn, seniors are easy targets for illicit actions by those seeking to steal information for personal gain. Those between the ages of 55 and 64 are especially at risk since they are at the peak of their personal wealth,4 but may be unknowingly entering early stages of reduced decision-making abilities.5
Planners may spend hours reviewing interest rate risk, default risks, and inflationary risks, employing brilliant strategies to hedge against these dangers. But they might not give much thought to defending a client from identity theft. Planners must ease clients' fears not only about traditional risks associated with the stock markets and personal liability, but also must alleviate worries about information predators.
To accomplish this objective, planners must gain a broader and deeper understanding of the aging process and its effects on an older client's financial decisions. Honest conversations and open lines of interaction between planners and clients will lead to a stronger awareness of any reduction in a client's decision-making ability caused by aging. This awareness can lead to more timely and prudent client recommendations.
Time Is Ripe for Trusts
At a time when identity theft is skyrocketing, nearly 8,000 people are turning 60 each day.6 As distressing as these risks are, the financial services industry already has a financial tool to mitigate risks drastically. Although trusts have been around for several hundred years, their benefits might prove more important and timely than ever.
Trusts began evolving into their current form during the 17th century under English common law. This early financial tool still plays a decisive role in protecting the elderly from thievery in the modern day. Planners can take steps to protect clients from fraud by recommending the use of revocable trusts. Revocable trusts not only offer financial protection against obvious mental incapacity such as Alzheimer's disease but also against more subtle cerebral impairments that can develop years before an official medical diagnosis.
According to a recent study, an analysis of older Americans revealed those over age 55 performed significantly worse in decision-making assessments than did those under age 55.7 Given the reality of how early people may exhibit reduced decision-making abilities, planners should discuss the advantages of trusts, especially revocable trusts, well before clients reach age 55 and not wait until after obvious symptoms of reduced mental capacity take hold.
Trustee as a Safety Net
By transferring property to a revocable trust managed by a professional trustee, a person immediately builds a firewall between the client's wealth and identity thieves. The trustee maintains a close watch over the assets constantly managing risks while pursuing reasonable returns. For example, say a client asks his trustee to distribute $10,000 to an unfamiliar individual because the client has been told he can make a quick $20,000 as a result. Owing a duty of loyalty to the beneficiary, the trustee examines the merits of the request and offers useful feedback about the questionable authenticity of this "deal of a lifetime." In discussing this "opportunity" with the trustee, the client decides to forgo what turns out to be an illegal proposition, thereby allowing the trustee to act as a safety net for the client.
Simply having a trustee to discuss ideas with does not guarantee that a client will be safe from identity theft that results in financial loss. If a client unwisely chooses a trustee with no skills specific to a competent fiduciary, the client may increase the chances of being defrauded. According to a recent article, "It is sometimes those close to the senior that are likely to steal from her."8 For this reason, one should always choose a professional trustee that is regulated by both federal and state authorities. Since the trustee is bound by a duty of loyalty and strict statutory regulations about how it operates, an elderly client can rest more easily knowing financial assets lie in the hands of a professional trustee. At least, in the unlikely event that an individual suffers a loss because of a dishonest professional trustee, the client may sue in civil court and collect damages from an entity with deep pockets.
Identity theft among the elderly is increasing at an unsettling pace. The ease with which criminals around the world can now gain access to virtually anyone's personal information gives rise to threats that people once did not face. A financial tool like the trust, which has existed several hundred years, becomes more relevant than ever and goes a long way in protecting seniors from monetary harm resulting from identity theft.
Tools exist to safeguard the elderly, but advisors have to widen their view of risk and begin having open and honest discussions with clients about the certainty of aging. Taking into consideration that "(i)n recent years complaints about identity theft have topped the Federal Trade Commission's top ten list of consumer fraud complaints and the number is growing,"9 planners must be assertive and engage older clients in discussions about the concept of revocable trusts and their uses against identity crimes.
1. Alberto R.Gonzales, Attorney General, "Combating Indentity Theft: A Srategic Plan," Executive Order, Executive Branch, U.S. Federal Government, 2007, 1.
2. George Finn, Shannon McGillivray, and Peter Finn, "Older Adults Make Less Advantageous Decision than Younger Adults," J Int Neuropsychol Soc (2007): 480-489, par. 1.
3. Finn, par. 22.
4. Edward N. Wolff, "Recent Trends in Household Wealth in the United States," Working Paper No. 502, the Levy Economics Insitute of Bard College, June 2007: 34.
5. Finn, par. 22.
6. U.S. Census Bureau. January 6, 2006, press release, accessed online April 2, 2008.
7. Finn, par. 15.
8. Kathryn A. Wilson, 8 March 2008. Kiplinger.com., accessed online April 2, 2008.
9. "Legal Counsel for the Elderly," University of Alabama Law School Clinical Program 2004, accessed online June 23, 2008.
Greg Rudd is a vice president and senior relationship manager for Regions Financial Corporation based in Birmingham, Alabama. Greg advises high-net-worth clients on various financial planning issues including developing retirement income sources, long-term care planning and asset and liability management. Greg can be reached at email@example.com .