According to the New York Times articles (here and here), reverse mortgages allow people to access the equity in their homes with no requirement to make monthly payments. The loan must be repaid when the borrower moves out, sells the house or dies. People over 62 are eligible, and the property must be the primary residence. The limit on the amount that can be borrowed was raised earlier this year to $625,500.00. And a borrower can never owe more than the value of the home, which is significant when it’s been recently reported that 23% of mortgage borrowers have negative equity in their homes.

While the ability to convert equity to cash may be a lifeline for some people, it is not appropriate for everyone, and there are risks involved. Professor Gerry Beyer links a September 2009 Consumer Reports article which reports that reverse mortgages:

can be terrible for customers who don’t understand the complicated rules governing them and how quickly high fees and interest charges can balloon. They can end up stranded in their homes without any remaining equity to cover unexpected costs later in life.

Use of the loans is exploding as lenders—who shoulder almost no risks—push them to the growing ranks of retired baby boomers, especially for spending on vacations, new cars, and more.

Lawmakers and regulators are getting worried. “The people who are making these loans and advertising them so heavily to seniors on cable TV get the rewards but escape the risks that come with them. It’s going to be the sequel to the subprime-mortgage mess,” says Sen. Claire McCaskill, D-Mo., who is pushing for reverse-mortgage industry reforms.

You can read the full Consumer Reports article here.

More about reverse mortgages and their risks can be found on the HUD website and AARP’s website.  See especially Reverse Mortgages Ripe for Abuse, AARP 10/7/09, raising concern about reverse mortgage scams and questionable sales practices.

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The case has all the hallmarks of a classic will contest. Anthony Marshall, Brooke Astor’s son, is accused of taking advantage of his mother’s dementia to divert assets from her estate to himself by influencing her to amend her will. The matter is now the subject of a criminal trial in State Supreme Court in Manhattan, but the issues – testamentary capacity and undue influence, among others – are most often seen in Surrogate’s Court.

It’s not just a question of which forum the case is tried in. The issues involved can get very sticky when applied in the real world. Family dynamics are always nuanced. When elderly parents, particularly those with diminishing mental capabilities, rely on their children, are the children being helpful, are they being controlling, do the parents feel controlled? What goes on outside of the earshot of the lawyers preparing the will? In the Astor case, the lawyers themselves are alleged to be part of the problem.

I noted earlier that whether someone has testamentary capacity is not a simple yes or no. Someone can suffer with Alzheimer’s disease and lack testamentary capacity, but wake up one morning with a clear mind and sign a will. The will may be valid, but proving capacity is another matter entirely.

These issues frequently arise in will contests, and Surrogate’s Court has the expertise to deal with them. A criminal fraud and conspiracy trial, on the other hand, may not be the best way to untangle what exactly was or was not on Brooke Astor’s mind when she signed the amendment to her will. In this particular case, the drama involving the so-called “doyenne” of New York society and her son, the cameo appearances of famous people like Henry Kissinger and Barbara Walters as witnesses, and news, blog and tabloid coverage (in no particular order), will certainly compound the difficulties of a careful analysis of the issues.

But there’s another important consideration. Unlike Supreme Court, Surrogate’s Court can’t impose criminal sanctions. It can order Anthony Marshall to return assets, but it can’t send him to prison for committing fraud. According to a former prosecutor quoted in the Law Journal article, “as the problem of elder financial abuse has gotten more serious, the courts have recognized that the penal law must be read more broadly to fully fulfill its purpose.”

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The New York Times published an article last week on ElderServe at Night, a night program run by the Hebrew Home at Riverdale for people suffering with Alzheimer’s disease.

Quoting from the article:

Nighttime can be treacherous for people with dementia, who are often struck by sleeplessness or night terrors and prone to wandering about. This agitation and disorientation, called “sundowning,” is especially vexing for relatives trying to care for them at home, and often hastens their placement in nursing homes.

While there are countless day care programs for the nation’s estimated 5.3 million Alzheimer’s patients, some experts believe that ElderServe at Night, which began a decade ago, is the only one of its kind in the country.

Participants are fetched from their homes by vans and spend 7 p.m. to 7 a.m. painting, potting plants, dancing and talking — or, for those immobilized by their disease, relaxing amid music, massage and twinkling lights. The patients rest as they need, for a few minutes or a few hours, and return home the next morning fed, showered and, usually, tuckered out.

The article and a video are at All-Night Care for Dementia’s Restless Minds, by Cara Buckley and James Estrin, NYTimes, 6/12/09.

The New Old Age blog linked the article and there are some excellent reader comments there that are well worth reading.

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Seizing on fear of stock-market turmoil, sales people and fraudsters are hawking investments that claim to be “low-risk,” or a supposedly safe way to invest in the stock market and earn back losses. In fact, the products may be complex and have significant downsides.

Special mention, at least in Arkansas, goes to free lunch seminars. The seminars are pitched to seniors as educational events with complimentary lunch, but are sometimes nothing more than sales opportunities for unethical brokers who misrepresent financial products and aggressively push products that are inappropriate for older people. The article contains a helpful list of questions you might want to ask before investing.

According to the article, Arkansas recently passed a law doubling the civil penalty for securities violation when the victim is 65 or older, and ten other states (I counted Michigan, Idaho, Maryland, Minnesota, Missouri, New Jersey, Rhode Island, West Virginia, Wisconsin and Pennsylvania) have either recently passed, proposed, or are expected to introduce legislation aimed at financial scammers who target the elderly.

Read the full article here.

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- A side note to subscribers of the blog’s feed and e-mail updates. The blog has been moved to a new web address, http://trustsestateslaw.com. It also has a new and improved design. Click over, take a look, and let me know what you think.

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Paula Span’s post today on the blog The New Old Age does a good job explaining the challenges of establishing whether someone with dementia had the capacity to sign or change a will.

The occasion for the post is, of course, the ongoing criminal trial of Brooke Astor’s son, Anthony D. Marshal, and lawyer, Francis X. Morrissey Jr., who are accused of diverting money from Astor’s estate. One of the issues at trial is whether Astor, who was diagnosed with Alzheimer’s disease, had the mental and legal capacity to make changes to her will.

As Paula Span writes:

Alzheimer’s sufferers may experience days of comparative lucidity alternating with days of bewilderment. Cognitive ability “may even vary throughout the day,” said Dr. Ronald C. Petersen, a neurologist at the Mayo Clinic who chairs the medical and scientific advisory board of the Alzheimer’s Association. “A person might be relatively sharp in the morning and by evening be quite confused.”

Caregivers are familiar with the late-day agitation called “sundowning.” Medications, disrupted sleep, social stimulation and even a minor cold can affect these diurnal cycles. Though a variety of doctors are expected to testify during the two-month trial, they may shed little light on whether Mrs. Astor had, in legalspeak, “testamentary capacity” on a particular January afternoon in 2004, when she altered her will.

Read the full article here. At the end is a short video of Brooke Astor speaking at her 100th birthday party. The video was recently shown in court.

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The STOLI agent or broker’s sales pitch does not inform the customer of the risks. I heard a spiel last summer from someone in the STOLI business. I’m not sure this particular person saw any downside to a STOLI arrangement.

As he put it, the investor pays the premiums for two years (the period in which an insurance company may contest a policy), so there’s no out of pocket cost. After two years, the insured person gets a lump sum payment he or she wouldn’t otherwise get. The insurance companies issuing the policies are often players on the secondary market themselves, so it isn’t as though they don’t know the policy might be sold. Nobody is hurt, no one’s out any money, and the purchaser walks away with a lump sum risk-free. I’d have to be crazy to talk my grandmother out of purchasing a STOLI.

So where is the harm? Consider these points:

• There may be hidden income tax ramifications for the insured person resulting from of the lump sum payment and from the payment of premiums on his/her behalf (if you’ve purchased a STOLI policy, speak to your tax professional).
• Turning life insurance policies into easily traded commodities may induce Congress to strip life insurance policies of the tax benefits they now enjoy, which hurts everyone.
• Pricing for policy premiums takes into account that a percentage of policies will eventually lapse because the policy owners stop paying premiums; in order to make up for STOLIs, which are investor backed and won’t lapse, premiums for all policies would have to increase.
• If an insurance company succeeds in rescinding a policy, the insurance company is not back to where it was before. It’s out the huge commission it paid to the broker. If it can’t find the broker or the broker is judgment proof, the insurance company might try to recover the commission from the estate of the original policy purchaser.
• There’s a public policy behind the statute. Remember how short sellers were being blamed for causing the financial crisis by betting against the market and driving down stock prices? When someone buys your life insurance policy, they’re betting against your longevity. How well will you sleep at night knowing that some stranger somewhere has no idea what a wonderful, caring person you are but has a very profitable, multi-million dollar incentive in seeing you dead? (Cue up the horror soundtrack.) You might want to join a self-defense class or get a licensed weapon.

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In ruling on a motion to dismiss claims in Phoenix Life Ins. Co. v. Irwin Levinson Ins. Trust II, Justice Carol Edmead wrote by way of background that in a SOLI arrangement:

a policy is purchased, not with a view of the insured paying premiums for the benefit of the insured’s family, but with a view toward reselling the policy to an “outside investor” in a secondary market for life insurance. The outside investor pays the insured in order to make a “wager” on the duration of the insured’s life. [Blogger's note: i.e., the investor pays the premiums for two years and then buys the policy for a lump sum.]

The entire secondary market for life insurance policies (sometimes called the “life settlement” market) is a multibillion dollar financial industry that provides life insurance policyholders who do not wish to continue maintaining their policies alternatives besides either allowing their policy to lapse or selling it back to the insurer for its cash surrender value, but also involves parties who seek to invest in an “insured’s imminent demise.”

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In 2006 alone, more than $12 billion in life insurance policies (measured by face value) were sold to purchasers in the secondary market such as Goldman Sachs & Co., Credit Suisse, and UBS AG. Phoenix itself created its own separate division, Phoenix Life Solutions, to participate in the life settlement market.

The problem with STOLI policies is that, under New York law, it is illegal to procure a life insurance contract if the benefits are payable to a person who at the time the contract was made did not have an insurable interest in the person insured.

What is an insurable interest? “In the case of persons closely related by blood or by law,” an insurable interest is defined as “a substantial interest engendered by love and affection.” Among other persons, an insurable interest is defined as “a lawful and substantial economic interest in the continued life, health or bodily safety of the person insured, as distinguished from an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the insured.” (New York Insurance Law § 3205)

The investors behind a SOLI have no interest in the insured person’s continued life. On the contrary, they’re betting that the insured person will die sooner rather than later, so that fewer premiums are paid before they receive the large death benefits.

How do they get around the law? Justice Edmead wrote:

To conceal the real policyholder’s lack of insurable interest from the insurer, as well as to induce the insured’s application, investors establish an irrevocable trust solely to hold the target insurance policy. The trust is established around the time that the insured submits his application, and is named as the owner and beneficiary of the policy, with the beneficiary being entitled to the death benefits payable under the policy. The beneficiary of the trust is typically disclosed to the insurer and designated as the insured or a family member. Once the policy is issued, the insured transfers the beneficial interest in the policy to an outside investor in exchange for a significant lump sum payment.

Investors selling STOLIs usually target elderly people because they benefit from shorter life expectancies. Often, to get the purchaser eligible for the large policy, the application involves medical or financial misrepresentations.

Whether the policy owned by the Irwin Levinson Insurance Trust was in fact illegal is subject to dispute between the parties. Phoenix Life Insurance said the policy was stranger-originated. They also claimed that application for the policy contained medical misrepresentations. The Trust countered that the Phoenix’s refusal to pay the death benefits was part of a deceptive business practice.

Justice Edmead ultimately decided not to dismiss the deceptive business practice claim. However, she also noted that individuals instrumental in procuring the policy include life insurance experts who are also involved in a number of large life insurance transactions currently being litigated. Referring to the Trust, she further noted that:

it appears that defendants are relying on a consumer protection statute to defend a practice that the very same statute was intended to guard against.

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I have no doubt that many people pay the debts out of a sense of morality or the feeling that the decedent would have wanted them paid. But the methods used are troubling, not least because the relatives are apparently not told that they’re being asked to give charity to credit card companies. The article reports:

[S]ome of those who pay a dead relative’s debts are unaware they may have no legal obligation.

Scott Weltman of Weltman, Weinberg & Reis, a Cleveland law firm that performs deceased collections, says that if family members ask, “we definitely tell them” they have no legal obligation to pay. “But is it disclosed upfront — ‘Mr. Smith, you definitely don’t owe the money’? It’s not that blunt.”

The debt collection agencies seemed to have micromanaged the information the Times reporter had access to, all in the name of debtor privacy. Not surprisingly, despite Scott Weltman’s minor indiscretion, the article comes across as credit agency PR spin, as though we’re to believe that out of the goodness of their hearts the collection agencies are helping the dead rest easy. But really, how many people send in letters expressing appreciation for the opportunity to pay off loved one’s debts? Or is the real story that people, unaware that they have no obligation to pay, appreciate that the debt collection agency rep was sympathetic and let them “work out a deal”? Many people wouldn’t know to ask if they have a legal obligation to pay, especially if the decedent was the one handling the family’s bills, and even more so shortly after the death of a loved one when family members are in the early stages of grief.

Contrast the Times article with this article which reports that according to a former Bank of America rep, BoA’s debt collection agents are given financial incentives to recover a decedent’s debts.

The rep said that employees were encouraged to walk right up to the line of actively deceiving a caller about the consequences of non-payment. “As long as you don’t get caught [lying],” the former rep added, “there’s no really no punishment.” (sic) 

The article describes the tactics used by a Bank of America rep to get Paul Kelleher to pay his deceased mother’s credit card bill. When Mr. Kelleher told the rep that he wouldn’t pay the bill, the Bank of America rep reportedly responded, “I know that if it were my mother, I’d pay it. That’s why we’re in the banking crisis we’re in: banks having to write off defaulted loans.” (Credit to Gerry Beyer for linking the article on his blog.)

Hopefully, outrageous statements like that are not representative of techniques used by debt collectors. But it certainly highlights the fine ethical line between asking a relative if they would please like to assume a debt they have no legal obligation to assume and using varying combinations of deceit, false sympathy, manipulation and intimidation to get relatives to dig deeper than they already have to provide a bank with a private bailout.

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