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One Family’s Tragic Story

Katsu and Charles Bradley of Tacoma, Washington, owned their own home and enjoyed ample savings for their retirement. Later, when they could no longer live on their own because of advanced dementia, the family hired Norma Cheesman to be a live-in caregiver.

The Bradleys’ daughter, Caroline Moye of Seattle, reported that Cheesman “took everything” her parents had worked and saved for their entire lives. “In a matter of 10 months, she made my parents homeless and penniless.”

The prosecutor in King County, Washington, reported that Cheesman convinced 86-year-old Charles Bradley to give her power of attorney, name her as the beneficiary of his estate, disinherit his wife, and purchase the house Cheesman was living in for her. Cheesman also orchestrated a reverse mortgage on the Bradleys’ home and used that to fill the Bradleys’ bank accounts with several hundred thousand dollars in cash, which she stole. (Source: NBC News 2014)

The Crime of the 21st Century

Atlanta attorney Kristen M. Lewis names it “The Crime of the 21st Century.” And it has already earned its own acronym: Elder Financial Abuse (EFA). The money involved is enough to run a small country: estimated annual losses to U.S. older citizens run $2.9 billion annually.

As Ms. Lewis reports, one out of every six adults over age 65 has been a victim of EFA, with women twice as likely as men to be victims. Financial exploitation accounts for up to 50 percent of all forms of elder abuse, and is the third most frequent type of elder abuse following neglect and emotional or psychological abuse.

The elderly are vulnerable to this crime for many reasons. Alzheimer’s disease and other dementias that impair judgment increase significantly with age. The National Institutes of Health has determined that increasing age causes physiological changes to the brain that diminish older people’s ability to assess the trustworthiness of potential predators. Because localized multi-generational families are no longer common in our mobile American society, elders are becoming socially isolated, with almost one-third of non-institutionalized elders living alone. Unfortunately, this means that there are fewer people in an elder’s life who can reliably detect EFA.

According to Ms. Lewis, perpetrators of EFA include:

  • Both strangers and people that the elder knows;
  • family, friends, and neighbors;
  • in-home caregivers;
  • people acting as agents under powers of attorney or as guardians or conservators;
  • business, professional, and financial service providers.

Ms. Lewis notes that in their estate planning work with elders, attorneys must guard against one of the most insidious forms of EFA—financial abuse from people that the elder knows personally, or from people within the elder’s own family. Elders report financial abuse from strangers much more often than financial abuse by people they know, because of the shame that an elder commonly feels when he or she is victimized by someone familiar. In addition, the elder may not report EFA from a family member because she does not want her family member to go to jail or face public embarrassment. She may believe that admitting she is vulnerable will result in being placed in a nursing home.

Estate Planning Approaches to Combat EFA

According to Ms. Lewis, preventative “legal” approaches that address the problem of EFA within estates include 1) using more than one agent, or co-agents, in the durable power of attorney for property document designed to take care of an incapacitated elder client’s business and legal affairs; 2) requiring annual accountings of estate financial records; 3) placing most of the elder’s assets in a Revocable Living Trust (RLT) and having the trustee that takes care of the medical and personal needs of the client also control the funds within the living trust; 4) utilizing a detached, non-family, third party trustee, such as a trustee from a bank, to serve as the RLT trustee. This trustee may also serve with another professional co-trustee, such as an attorney with duties to act in the best interests of the client.

Although any of the legal approaches that Ms. Lewis outlines may be important, attorneys must not overlook a more fundamental approach to preventing EFA, related to requiring annual estate accountings but more expansive.

Borrowing From the Corporate Sector: Incorporating Financial Transparency Into the Elder’s Private Estate

Abusers of all types, including financial abusers, are like vampires— they cannot survive the light of day. Our free market corporate financial system has understood this for a long time. The business term “financial transparency,” according to the Securities and Exchange Commission (SEC) definition, “means timely, meaningful and reliable disclosures about a company’s financial performance.” It is a crucial requirement for informed investment in companies. It is also necessary for exposing, and therefore preventing, fraud and other forms of corruption.

The alert estate planning attorney does not always have to reinvent the wheel when developing effective techniques to guard against EFA. Borrowing from tested concepts fundamental to our financial system, estate planning attorneys should strive to develop greater financial transparency in their elder clients’ private estates to help guard against EFA. In the case of private estates, greater financial transparency will not result from disclosure of financial records to the public, but will instead result from periodic disclosure to, and monitoring of the records by, a CPA firm, disclosure to the elder’s estate planning attorney, and disclosure to appropriate stakeholders within the family who may be pre-selected by the elder client.

Estate planning attorneys understand that the most effective tools needed to assist their clients are not always legal tools. In helping elder clients, the estate planning attorney should strongly consider working with the client’s CPA firm (or helping the client to find an appropriate CPA firm) to ensure that a fundamental, appropriate filing and bookkeeping system is installed or maintained in the client’s home, or where the elder’s financial records are kept. This is an essential first step to bringing financial transparency, and its ability to prevent theft of assets, to the elder client’s private estate. But fortunately, installing a more professional recordkeeping, filing, and bookkeeping system in an elder’s home need not be difficult.

As communication and computer technologies have progressed, more professionals are working flexibly out of home offices and are willing to visit clients where they live. As a result, professionals such as secretaries, bookkeepers, and even CPAs who are willing to help reliably manage and maintain home finances on site are available for reasonable fees.

A typical arrangement would include a lower-cost secretary or bookkeeper (with a solid résumé and good references) helping the elder get his financial records and files in order, then setting up the accounting on a computer accounting program such as QuickBooks ®. The information keyed into the accounting program can be shared with a CPA firm at a pre-set interval, such as monthly or quarterly, where an off-site accountant or CPA looks over the figures and makes any accounting adjustments necessary.

Professionals and families should not avoid this approach, thinking that it is too expensive. The secretary or clerical worker needed to manage files and input data often costs less monthly than the expense of a housekeeper. Accounting firms can typically deal efficiently with QuickBooks data from home accounts, and keeping the records and accounting accurate on an ongoing basis may make year-end accounting and tax preparation much simpler and less expensive.

In this way, getting unbiased outside third parties into the elder’s home to keep the books, monitored by a CPA who must follow a strict code of ethics and who is trained to spot financial irregularities, can provide a strong deterrent to the type of financial crimes plaguing elders. Having this type of oversight is like installing an alarm system in a home—most criminals, when confronted with the signage and warnings of an alarm system, will look for easier pickings. Likewise, it is only a more hardened—and rarer—criminal that would risk taking funds from an elder’s estate that is being tracked by a bookkeeper and monitored by a CPA.

An attorney who desires even greater financial oversight of his client’s estate may utilize other existing financial tools. For mid-size or larger estates, the attorney may require in the estate documents that a CPA perform a reasonably priced annual “compilation,” where the CPA prepares financial statements from the client’s financial records to help ensure financial transparency. For larger estates, an attorney could draft into the estate documents a requirement that a CPA firm prepare annual “reviewed” financial statements which require greater CPA inquiry into the client’s accounts and records, but which also may cost significantly more. Annual audits may not be needed except in very large or complex estates, as they may come with a significant price tag.

Any annual financial reports required by the estate planning documents should be evaluated by other professionals in addition to those at the CPA firm, such as the estate planning attorney, any involved outside trust officers, and key stakeholders within the family pre-selected by the client. With all of these trained or interested eyes watching the elder’s estate, opportunities for EFA may be significantly limited.

Ongoing professional maintenance of the estate may even convey additional benefits. Sarah Chisholm, a Texas CPA and corporate chief financial officer with both public company audit experience and private estate experience, states, “Ongoing maintenance of a private estate’s accounts by an unbiased licensed professional such as a CPA or estate attorney allows for an accurate valuation and location of all of the estate’s assets during the estate’s existence, and at the time of estate settlement.”

Attorneys who work with elders should recognize that a holistic approach may meet their clients’ needs best. In addition to drafting appropriate estate planning documents, estate planning attorneys should recognize that theirs is a “peace of mind” profession which may require additional client support after the documents are drafted. Estate planning attorneys are in an excellent position to work with other professional colleagues such as CPAs to ensure that their elder clients will not become victims of EFA. Elders should select an estate planning attorney who will employ a broad level of understanding to meet their needs.

Please contact us with any questions and to learn how we can help with your estate planning in Winston-Salem, North Carolina.

References:

Kristen Lewis, The Crime of the 21st Century: Elder Financial Abuse, American Bar Association Probate & Property Magazine. Vol 28, No. 04. July-August 2014

Financial Abuse Costs Elderly Billions, NBC News (2014), http://www.nbcnews.com/id/41992299/ns/business-consumer_news/t/financialabuse-costs-elderly-billions/#.VBhufEhjDAY

Telephone Interview With Sarah Chisholm, Chief Financial Officer, Kolkhorst Petroleum Company (September 15, 2014)