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Insurance Firm to Repay Seniors $115 Million


In what is believed to be the largest settlement of its kind in California, an insurance company has agreed to refund as much as $115 million to elderly customers who were allegedly deceived into buying inappropriate investments after receiving estate-planning advice.

The California attorney general's office, which on Tuesday announced the settlement with Cincinnati-based Great American Life Insurance Co., said the sales were part of a fast-growing scam targeting middle-income elderly people trying to avoid the high costs of California's probate system, the court process that follows death. In many cases, the victims did not understand the transactions or the potential risks of the investments they were buying, officials said.

Great American, which sold the investments through a now-defunct company, Lake Forest-based Alliance for Mature Americans, admitted no wrongdoing.

Senior citizen advocates and estate-planning attorneys say seniors' fear of probate often leads them to buy poorly designed trusts or unsuitable investments. The problem is particularly acute in California, which has a long and potentially expensive probate process.

"People are afraid of lawyers and what lawyers might cost. So rather than find out what they should do to manage taxes and protect their assets, they go for the quick fix," said Sandy Rae, an estate-planning attorney in Los Angeles and former chairman of the State Bar of California's committees on estate planning and probate.

Great American was one of several insurance companies whose tax-deferred investment products, known as annuities, were sold by Alliance. Alliance sold 9,700 annuities, mostly to California residents.

Law enforcement officials said Alliance salespeople often sold the investments to seriously ill people or those with Alzheimer's disease who were not able to understand the transaction.

Often, the clients were not told about the hefty tax bills they would incur from transferring their money into the investments, and some sales sessions lasted as long as eight hours as salespeople attempted to wear down buyers' resistance, officials alleged.

The attorney general's office and senior advocates said Alliance for Mature Americans was just one of several "trust mills" in the state that lure senior citizens by offering reasonably priced living trusts, a legal device designed to avoid the probate process. Once the seniors' financial information is collected, salespeople use high-pressure tactics to push them to buy investments without adequately informing them about the risks, officials said.

Living trusts and annuities may be appropriate for some people, but problems arise when they are sold without regard to a person's financial circumstances.

Norwalk resident Grace Hanson, 70, lost $40,000 after investing with Alliance when the company that issued her annuity, Harrisburg, Pa.-based National American Life Insurance Co. of Pennsylvania, went out of business.

Senior Assistant Atty. Gen. Herschel Elkins said annuities issued by the failed company cost Alliance investors $11 million.

Other customers faced tax bills of $50,000 or more after cashing in stocks and other investments that had gained in value throughout the years, Elkins said.

Alliance said it sold more than 20,000 living trusts for $1,000 to $2,000 each before it agreed to stop marketing them as part of a stipulated settlement reached last year. Alliance also agreed to pay $1.1 million in fines and restitution and a $100,000 civil penalty without admitting wrongdoing.

Alliance has since gone out of business, Elkins said. The company's former attorney, Daphne Stegman, said she did not know how to contact the business' founders, Stephen and Victoria Adams. Alliance had maintained that it did nothing wrong and that it was being targeted by lawyers who did not want to lose lucrative estate-planning business to nonlawyers.

Attorneys counter that nonlawyers often present incorrect information or use the trusts as a way to sell overpriced investments.

"They are approaching the elderly and telling them, falsely, that the only way they can avoid taxes and the horrible costs of probate is with a living trust," Rae said.

Living trusts, by themselves, do not avoid taxes, and probate costs can be avoided or minimized with other estate-planning techniques.

California Atty. Gen. Dan Lungren praised Great American for "voluntarily coming forward and cooperating" after his office began investigating Alliance's tactics in 1996.

The company said it will waive early-withdrawal penalties and make refunds of principal and interest to any Alliance customers who request them. It also agreed to pay $150,000 to the National Senior Citizens Law Center to teach senior citizens about estate planning and potential investment scams. And it agreed to ban agents from misleading customers to sell annuities.

Great American officials could not be reached for comment.

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