Catch Me If You Can: How To Detect Trustee & Estate Fraud

A former attorney was recently accused of embezzlement in connection with a long-running scheme to embezzle funds from trusts for which he served as trustee. The attorney served as trustee for three family trusts with fiduciary responsibilities to protect, preserve, and pay expenditures for the benefit of the beneficiaries.

Instead, the attorney embezzled and misappropriated more than $600,000 from the trusts and used the proceeds for personal expenses, including purchasing a vehicle and a vacation home and paying his credit cards. The attorney was sentenced to two years in prison, three years of supervised release, and was ordered to pay restitution to his victims.

Trustees and executors have a fiduciary duty to the beneficiaries of a trust or an estate. A breach of fiduciary duty happens when the fiduciary acts in their own best interest, such as using estate or trust assets for personal gain.

Trust and estate disputes typically occur when one or more beneficiaries believe the trustee or executor is mishandling finances, misappropriating funds, or improperly distributing assets. All it takes is access to someone’s bank accounts to transfer large amounts of monies from one person to another. Looking for cash withdrawals or transfers to unknown accounts and/or transfers to the executor or trustee should receive additional scrutiny. All transactions should be appropriately recorded with supporting documentation.

Estate theft often goes undetected because family members cannot identify red flags or know how to investigate potential theft. Forensic accounting is critical when beneficiaries suspect their trust’s assets are mismanaged or misappropriated. It is essential to bring a forensic accounting expert early in the case as they can provide an early case assessment, including an initial review of documents and facts regarding the matter, to objectively assess the strengths of critical arguments and potential damages or exposure.

‘Red Flags’ To Watch Out For

Examples of “red flags” that may signal potential trustee or estate fraud include the following:

  • Commingling of estate assets
  • Self-dealing
  • Withholding distributions from beneficiaries
  • Gifts that were given prior to the decedent’s death
  • The will primarily benefits non-relatives (i.e., a home healthcare worker)
  • Assets are given away or there is a sudden transfer or sale of assets by the trustee or executor
  • A family member is excluded from a will
  • Pieces of the estate are unaccounted for
  • Charging inflated fees
  • Credit card bills that are being paid when the deceased did not use credit cards
  • Dividends or interest deposits that are diverted
  • Selling assets for below-market value
  • The trustee and/or executor may have a conflict of interest with the beneficiaries
  • An accounting for an estate or trust lacks detail in an effort to hide transactions

Estate fraud often involves people the decedent trusts the most, as they can use their undue influence to manipulate or defraud the estate. Seniors, especially those who experience financial fraud, do so at the hands of their own family members and/or caretakers who take advantage of them.

In a recent litigation matter that was tried in Manhattan Surrogates Court, a home healthcare aide took advantage of an elderly woman with dementia by persuading her to make him a joint owner and beneficiary on her bank and investment accounts. The healthcare aide gained access to close to $5 million. After she passed away, he transferred the assets into his personal accounts.

Preliminary executors appointed by the court filed a motion seeking turnover of the decedent’s assets from the respondent. The respondent tried to justify his actions by stating that he was never paid a salary, which was quickly refuted, as a review of the woman’s banking records showed that he would write a check out to himself bi-weekly when she was in his care.

Additionally, flowcharts were prepared for trial for each bank account to trace the flow of funds from the elderly woman’s accounts to the respondent’s accounts. The Surrogate Court judge enjoined the respondent from withdrawing, transferring, encumbering, or otherwise disposing of the woman’s assets.

Investigating trustee and/or estate fraud can be perplexing, especially if numerous bank accounts and transactions are involved. Even if fraud is not suspected, a beneficiary may want to obtain a forensic accountant to account for all assets and ensure they are appropriately allocated among beneficiaries.

Involving a forensic accountant in trust and estate litigation matters is critical as they can assist in requesting specific information from the parties and have the skill set to trace data among several accounts and/or locations, identify patterns and irregularities, and summarize and present vast amounts of data in a manner that is both understandable and supportable.

Forensic accountants should be able to manage voluminous records and distill the information into clear and concise schedules and/or written communications for counsel and/or the trier of fact to understand.

After quantifying the damages related to the fraud, forensic accountants can assist with mediation and settlement negotiations. In a litigation setting, accountants can serve as expert witnesses, offering opinions on damages and critiquing the opposing sides’ damage quantification.

In conclusion, with the increase in fraud in trust and estate matters, accountants are needed to analyze, interpret, summarize, and present complex financial issues in a manner that is both understandable and supportable.

Moreover, before disputes become contentious and expensive, an independent forensic accountant can be retained to help settle the matter before it gets to litigation.



As first seen published in the New York Law Journal. NOT FOR REPRINT © 2024 ALM Global, LLC, All Rights Reserved.