A recent case provides a cautionary tale on why family members must be on guard against people who might cozy up to elderly relatives and surreptitiously and illegally siphon off money.
The U.S. Tax Court recently agreed with the IRS that a caregiver owed tax on a staggering sum of unreported income earned as the caregiver to an elderly client. The caregiver had claimed that the money, which amounted to more than $1 million over two years, constituted gifts or loans, rather than earned income. Neither the court nor the IRS bought that argument. (Alhadi, T.C. Memo. 2016-74)
The caregiver’s client had been a successful optometrist in California. He never married and accumulated about $3 million in assets, mostly invested in mutual funds. After being retired for several years, he developed serious health problems, including a diagnosis of dementia and cognitive decline. His physician insisted that he enlist home health aid.
The retired optometrist hired a nursing assistant to be his caregiver. Her job included preparing meals, doing the laundry, bathing the optometrist, ensuring he took his medications, providing basic nursing, shopping for groceries, banking, cleaning and providing some companionship, among other duties.
Payments Grew and Grew
The caregiver was initially hired at an hourly rate, but the optometrist later agreed to pay her $6,000 a month, although the going rate was $3,750. He also gave her $1,000 a month for groceries, well beyond his needs. The payments later became irregular. For instance, on April 14, 2007, the optometrist wrote a check to her for $11,100; two days later, he gave her another check for $100,000. He also bought her expensive electronic equipment.
The caregiver’s lifestyle dramatically improved. In June 2007, she used money from the optometrist as a down payment on a million-dollar home. Then she began pressuring him to help pay the mortgage. By the end of November 2007, he had written checks to her adding up to roughly $400,000.
She used the money to pay off her husband’s $80,000 interest in their old home and to remodel her new home. She also spent $7,000 on furniture; $8,000 on a stone facade; $34,000 on landscaping, and $73,000 on a pool complete with a spa and a “therapeutic turtle mosaic.”
During the summer of 2007, the caregiver told the optometrist that she had won a cruise and she wanted him to come with her. It was a ploy — she hadn’t won anything — and the optometrist ended up paying $25,000 for the trip. Although the optometrist did go on the cruise, the caregiver mainly left him sitting in the sun while she went off with her children. He later couldn’t remember paying for the trip and was surprised when he was shown the check he had written.
By the fall of 2008, the optometrist had written checks totaling nearly $800,000. Finally, in October, the caregiver pressured him to write her five checks, each for $100,000, out of his mutual fund accounts.
That’s when the scheme started to unravel. The mutual fund’s fraud team called the optometrist to verify that he had authorized the checks. During the call, the investigators could hear the caregiver coaching the optometrist’s responses. As a result, the fund refused to honor the checks. It suspended his access to his accounts and sent him a letter explaining the steps he needed to take to regain control.
The caregiver interceded and he never received the letter.
The fund company sent a report of suspected elder abuse to the California Department of Health and Human Services. Investigators found that the optometrist was being seriously neglected and living in filth.
An investigator also found some papers, including a document in broken English, written entirely in the caregiver’s hand and purporting to make “any amount of money given to her as a gift or loan will be void and cancelled after his death.” The document went on to say that the optometrist had made the decision in payment for the caregiver’s “excellent care for me for take good care of him every day.”
Nevertheless, the caregiver made one last grab for the money, trying to gain power of attorney over the optometrist’s financial affairs. But the attorney she consulted saw through the ruse. He refused her request and even counseled her to repay the money she had taken from the optometrist.
The optometrist died on Feb. 13, 2009, at the age of 93.
In August 2010, a trust the optometrist had created years before as a substitute for a will settled a suit it brought against the caretaker. The trust recovered assets and $310,000 in cash. Her million-dollar home with its pool was foreclosed. The rest of the money she had spent, given away or made untraceable.
Tax Court Outcome
The IRS acted on the tax aspects of the case and alleged that the caregiver failed to report income and filed false tax returns. Throughout the course of the opinion, the Tax Court’s disdain was clearly evident. At numerous times, it stated that it simply didn’t believe the caregiver’s claims and expressed disapproval of her actions. The court agreed with the IRS that this was a case of undue influence and elder abuse.
Focusing on the main tax issues, the court considered whether the transfers of money to the caregiver constituted gifts or loans or whether payments were fraudulently coerced from the optometrist. In examining if undue influence had been exerted, several factors were considered, including:
- Understating income,
- Concealing income or assets,
- Filing false documents,
- Failing to cooperate with tax authorities,
- Giving implausible or inconsistent explanations of behavior,
- Illegal activity, and
- Living a lavish lifestyle.
Based on all these factors and the sheer lack of evidence the caregiver produced to support her contention, the court ruled that:
- Through undue influence the caregiver obtained $451,891.05 in 2007 and $474,983.22 in 2008 that she should have reported as income on her returns,
- Her income from the optometrist was self-employment income, and
- Her returns for those two years were fraudulent.
This type of abuse is common among elderly people who can’t take care of themselves. When relatives live far away or are otherwise unable to provide personal care, they may be forced to seek solutions such as hiring in-home care. Although the majority of caregivers are professional and reputable, there is always the risk that a loved one’s caregiver will try to pry away money or assets by gaining the loved one’s trust. Frequently, elderly people getting in-home care no longer possess the mental capacity for resisting.
No matter the distance or circumstances, it is important to remain vigilant by checking up on the condition and finances of a family member who has a caregiver. It will help to have professionals in your corner — including attorneys, CPAs and financial advisors — whom you can count on to act in the elderly person’s best interests.