If you were to die tomorrow, would your loved ones be taken care of? It is not a pleasant thing to think about, but it is an essential part of your overall financial plan.
Consider the story of Stanley Smith, a multimillionaire who made his fortune selling iron ore to the Japanese after World War II.
Before his death in 1968, he made careful arrangements surrounding his wealth. Three-quarters of his estate would go into a charitable foundation benefiting homeless people, veterans and people with disabilities. The remaining $100 million would go into a trust to ensure the well-being of his wife, May Wong Smith. A team of three trustees would manage the trust.
But in a story told on the next episode of CNBC's "American Greed," one of those trustees, Mark Avery, went rogue. He skimmed more than half of May Wong Smith's trust fund, ostensibly to invest in a security business. But through that business, Avery created his own small army, navy and air force, including a heavily armed security force, a patrol boat, helicopters and vintage U.S. and Soviet fighter planes.
Authorities concluded that rather than investing in a business for the benefit of the trust, Avery was simply building an outlandish collection of "toys" for himself.
"How often do you see somebody spending $53 million in six months?" asked Bryan Schroder, an assistant U.S. attorney in Alaska, where Avery was convicted of 11 felony counts, including fraud and money laundering. Avery, who is serving a 13-year sentence, is appealing his conviction from prison.
While most of us will never have to worry about a $450 million fortune, the story of Stanley Smith, May Wong Smith and Mark Avery carries some important lessons regardless of your net worth.
A matter of trust
Estate planners frequently advise clients to move assets into a separate entity such as a trust. It is an arrangement not unlike the one Smith set up, albeit on a much smaller scale.
While trusts come in many forms, the main objective is to shelter your assets — including money, investments and your home — from taxes and the courts, especially the long and often costly process known as probate that is generally required to carry out a will. In a trust, the money automatically passes to your beneficiaries — based on your specific directions — after you die.
The other common thread among trusts is that they are run by a third party known as a trustee. Choosing that individual or individuals is one of the most important decisions you will make.
"I'm sad to say that there are predators out there," said author and investigative journalist Diane Dimond. Dimond is working on her fourth book, "The Final Racket," which she describes as "an expose and a self-help guide" for families dealing with aging parents.
Dimond cautions that trusts "are never ironclad," and can be filled with loopholes. That is why, when it comes to a trustee or the executor of your will, you need to appoint someone you completely trust.
"I would never appoint an attorney as your executor, unless of course you're married to them or they're part of the family and you truly do trust them," she said. "Get someone else besides an attorney. They know the loopholes. They know the laws."