Friday, February 20, 2015

Avoiding Tax Scams

It’s tax season and the IRS is warning consumers about the many tax scams that are circulating this year. These include bogus emails and threatening phone calls. (See IRS Tax Scams/Consumer Alerts.)

Among the currently popular cons:
Email Phishing Scam: "Update your IRS e-file" 
The victim receives emails that appear to be from the IRS and include a link to a bogus web site (intended to mirror the official IRS web site). These emails contain the direction “you are to update your IRS e-file immediately.” The emails mention and IRSgov (without a dot between "IRS" and "gov"), though notably, not (with a dot). 
Don’t get scammed. These emails are not from the IRS. The IRS does not initiate contact with taxpayers by email to request personal or financial information.
Taxpayers who get these messages should not respond to the email or click on the links. Instead, they should forward the scam emails to the IRS at For more information, visit the IRS's Report Phishing web page.
IRS-Impersonation Telephone Scam
An aggressive and sophisticated phone scam targeting taxpayers, including recent immigrants, is surging throughout the country in recent months. Victims receive threatening phone calls from criminals impersonating IRS agents. The scam artists threaten police arrest, deportation, license revocation and other things.
These con artists can sound convincing when they call. They use fake names and bogus IRS identification badge numbers. They may know a lot about their targets, and they usually alter the caller ID to make it look like the IRS is calling.

Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.
Or, victims may be told they have a refund due to try to trick them into sharing private information. 
If the phone isn't answered, the scammers often leave an “urgent” callback request.
Note that the IRS will never: 1) call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill; 2) demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe; 3) require you to use a specific payment method for your taxes, such as a prepaid debit card; 4) ask for credit or debit card numbers over the phone; or 5) threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

For more details on this ongoing scam, see: IR-2014-105, Scam Phone Calls Continue; IRS Unveils New Video to Warn Taxpayers; Special Edition Tax Tip 2014-18, Five Easy Ways to Spot a Scam Phone Call.
Tax Preparer Phishing Scam
Even tax preparers are targets of con artists.
In one scam a bogus email asks tax professionals to update their IRS e-services portal information and Electronic Filing Identification Numbers (EFINs). The links that are provided in the bogus email to access IRS e-services are a phishing scheme designed to capture usernames and passwords. This email was not generated by the IRS e-services program. Disregard this email and do not click on the links provided.
For more information on this scam, see IR-2015-31, IRS Warns Tax Preparers to Watch out for New Phishing Scam; Don’t Click on Strange Emails or Links Seeking Updated Information.
Identity Theft
The IRS is also warning taxpayers to watch out for identity theft. Criminals will file fraudulent returns using someone else’s Social Security number. Taxpayers need to be extremely careful and do everything they can to avoid becoming a victim.  
The IRS offers the following tips as ways to protect you from becoming a victim of identity theft:
  • Don’t carry your Social Security card or any documents that include your Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN).
  • Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
  • Protect your financial information.
  • Check your credit report every 12 months.
  • Review your Social Security Administration earnings statement annually.
  • Secure personal information in your home.
  • Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
  • Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with.
 See  (IR-2015-7)
Avoiding Tax Scams
Tax and other telephone and e-mail cons seem to getting more and more pervasive. A week doesn’t go by that I don’t get at least one scam telephone call. Older adults are particular targets. Be especially careful with any phone call or email contact you did not initiate.  
If you do receive a worrisome call or contact, get help from someone you know you can trust. Involve your family members. Call the authorities directly yourself. Educate yourself.  Do not give out any personal information. Don't be a victim.

Further Reading
Prep for Safe Tax Filing … and for Scammers (AARP Bulletin, January 23, 2015)

Friday, February 13, 2015

Aging and Financial Decision Making - How to Protect Yourself

In January, The Center for Retirement Research at Boston College released a report, How Does Aging Affect Financial Decision Making? The report raises significant concerns about the financial ability of older investors who are suffering declining cognition. (The term “cognition” refers to the mental activities involved in tasks like learning, remem­bering, problem-solving, and using knowledge).
It is probably to be expected that cognitive decline would result in a corresponding decline in financial literacy. To me, the report’s more telling conclusion is that an older investor’s cognitive decline has “essentially no effect on their confidence in managing their finances.” 
“[L]arge declines in cognition and financial literacy have little effect on an elderly individual’s confidence in their financial knowledge, and essentially no effect on their confidence in managing their finances. Individuals with declining cognition are more likely to get help with their finances. But the study finds that over half of all elderly individuals with significant declines in cognition get no help outside of a spouse. Given the increasing dependence of retirees on 401(k)/IRA savings, cognitive decline will likely have an increasingly significant adverse effect on the well-being of the elderly.”
This combination of declining ability with undiminished confidence seems to me to be a prescription for financial loss and an open door to fraud and financial abuse.

The Risk of Declining Investment Ability

David Laibson, professor of economics at Harvard University, has studied the subject of the impact of aging on investment ability.
Professor Laibson suggests that there are two categories of intelligence that are critical to investing: “fluid intelligence” – the creative ability to analyze new information and solve novel problems, and “crystallized intelligence” – the ability, through life experience, to accumulate knowledge that helps us solve familiar problems and become better investors.  
After we reach age 20, these intelligences start moving in opposite directions. Fluid intelligence begins to decline (before most of us will even have anything to invest) while our crystallized intelligence generally improves with experience and age. During our 50s, the decline in fluid intelligence becomes dominant and our overall ability to make sophisticated decisions begins a gentle decline.
So, for many of us the peak in our ability to make the best investment decisions is during our 50s.  By the time we’re in our 80s, our ability to make good decisions is significantly compromised, particularly decisions that involve complicated new problems (like evaluating a financial product with which we are unfamiliar).This is just normal aging.
In addition to normal aging some older adults will suffer a rapid deterioration in function due to a pathological process such as a stroke or Alzheimer’s. Dementia, such as Alzheimer’s, impacts every aspect of intelligence. Unfortunately, the risk of dementia doubles every five years that we age. By the time we reach our 80s, the likelihood of having relatively severe dementia is about 20%.
The risk of having significant cognitive decline that is not dementia (“cognitive impairment not dementia” or CIND) affects another 30% of people in their 80s.  This means, says Professor Laibson, that half of the 80 year old population should not be making important financial decisions.  
For more of Professor Laibson’s thinking see Aging and Investing: The Risk of Cognitive Impairment, Forbes, October 11, 2011.   
This is not to say that every older adult will suffer a global cognitive decline, or to deny that some decision-making processes might even be enhanced in many older adults. It is rather to suggest that older adults should address the significant risk that cognitive decline may impact their financial decision-making in ways they will fail to recognize.
If you are an older adult (like me), what should you do if you understand that there is a big risk that your financial ability will decline and you want to prepare for it? How can you protect yourself and your portfolio and your well-being from loss if your skill does eventually decline?  Although each of us surely ages differently, are their some general conclusions that can be drawn?

How Can We Protect Ourselves?

Because the risk of eventual cognitive impairment is so great, we should begin to prepare for it by the time we are in our 60s. Professor Laibson suggests that everyone should consult an estate planning attorney to discuss and execute several critically important legal documents.
On the financial side these documents include a will, a financial power of attorney, and possibly a trust. On the personal care side your lawyer can also help you create legal authority for appropriate health care decision making in the event your incapacity. Don’t wait until decline sets in to do this legal planning – it involves complicated and subtle decisions that are best made while you are at maximum competency. 
Psychological preparation for aging is also crucial. You need to come to terms with the reality that you are probably not going to be operating at as high a level of cognitive functioning over your entire life. If your family relationships are good, help prepare your family for this reality as well.  
Fraud and financial elder abuse are a growing problem. Organize your assets so that you don’t purchase investments that are inappropriate for you or end up being ripped off by con artists. As you age and your risk of cognitive decline increases you might consider setting up a trust and obtaining professional management and protection for your investment portfolio.
If you continue to invest on your own, recognize that your ability to analyze complicated new financial products will likely decline with age and stay away from them. Stick with less-likely-to-go-awry investments like diversified mutual funds with low fees. With this latter kind of investment you are basically delegating decision making to the mutual fund manager.  
Avoid the two big mistakes that many investors make as they age. The first mistake is to think that dementia won’t happen to them. Accept the reality that there is a significant chance that substantial cognitive decline will affect your life someday.  The second mistake is thinking that you will recognize cognitive decline when it occurs.  “That’s a grave mistake" says Professor Laibson. "We don’t have that ability to suddenly recognize it and do the right thing just before we lose the capacity to make these decisions well.” Don’t wait.  Be prepared in advance.  
Based on my experience as an elder law attorney, Professor Laibson is providing excellent advice. Every experienced elder law attorney can relate stories about clients who purchased wildly inappropriate investments they didn’t understand with resulting sad consequences. You can preserve your financial security through acceptance of the realities of aging and the potential for cognitive decline and by preparing well in advance. 
Acceptance and advance preparation may be the wisest investment of all. 

Thursday, February 12, 2015

Paying a Family Caregiver

[By Attorney Nicholas Lutz]

Paying a family member to provide needed care is a way for care recipients to have their needs met by someone they love and trust. But problems can arise unless the necessary steps are taken to legitimize this arrangement.

The value of the care provided by family members is tremendous. The monetary value of services provided by unpaid family caregivers to older adults has been estimated to be as high as $375 billion per year. This is roughly twice as much as the estimated amount ($158 billion) spent on paid home care and nursing home services combined.[1]

Financial Losses for Unpaid Caregivers

The cost of caregiving has economic impact on multiple levels. According to a 2011 Gallup report, the economic impact of absenteeism by full-time workers who are also caregivers is more than $25 billion annually.[2]

Some caregivers find that they cannot continue to work and take care of their loved one, and are forced to leave their job. In addition to losing their wages, caregivers who are not employed do not pay into Social Security, thereby reducing their retirement benefits. They are also unlikely to contribute to retirement accounts for themselves. In short, the financial losses suffered by unpaid caregivers can be long-lasting.

There is a solution, however, to the unpaid caregiver’s dilemma: getting paid for the care they are providing. Family caregiver contracts can legitimize an employment relationship between the care recipient and the caregiver, provide for appropriate payment for services and detail the scope and types of care to be provided.

Reasons to Avoid Under the Table Payments

For families considering a paid arrangement, there are many reasons to avoid making the caregiver payments “under the table.”

First, the Pennsylvania Medical Assistance program is likely to treat such payments as gifts. Unless there is a family caregiver contract, the presumption is that the care was provided for "love and affection and the money paid to the family caregiver will be presumed to be a gift. Gifts can make you ineligible for benefits. This means that the care recipient could be denied critically needed public benefits because there was no written family caregiver contract. (The VA has recently proposed similar gift related penalties for veterans seeking pension benefits).

Second, cash payments under the table can create major problems for both the payer and the recipient. You may be breaking the law by not paying and withholding taxes. This includes not only income taxes but Social Security, Medicare, and other state and federal taxes. To avoid problems, the care recipient must treat the paid family caregiver as an employee and withhold appropriate taxes.

A family caregiver contract will help you stay “above board” with Medical Assistance and tax authorities and avoid all sorts of negative consequences.

Family caregiver contracts are a great tool in the elder law attorney’s arsenal to help families transfer funds to a caregiver who rightfully deserves to be paid for their hard work. Because the agreement between the parties is a contract involving complicated consequences, it is important to work with a knowledgeable attorney for advice and preparation.

If you are interested in learning more about caregiver contracts or seeing if a caregiver contract is right for your situation, you can schedule a free one-hour consultation with myself or one of the other attorneys at Marshall, Parker and Weber.

[The above article was written by Nicholas Lutz an attorney with the Pennsylvania law firm of Marshall, Parker andWeber]


Tuesday, February 3, 2015

VA Proposes Major Changes to Needs-Based Pension Program

Veterans who transfer assets could be made ineligible for pension benefits under new rules proposed by the VA.
Many of America’s 12 million veterans who are over age 65 can qualify for a monthly VA Pension if they have low income and limited net worth. If you qualify, VA pays you the difference between your countable income and an income limit that varies depending on your particular situation.
Unreimbursed medical expenses can be deducted in calculating a veteran’s countable income. This means many older veterans who would not previously have qualified for a pension may become eligible when they encounter increased medical and long term care expenses.  
For example, assume a married veteran is aged 72 in good health and has $2,500 a month in countable income. In 2015 the income limit for a veteran in need of aid and attendance who has one dependent is $2120 per month. Because his income is over the limit, this healthy veteran would not qualify for pension.
But, if due to declining health that veteran is in need of aid and attendance and is incurring $2,000 a month in related deductible expenses his countable income is reduced to $500 a month.  Upon his application, the VA would award $1,620 per month in pension to the veteran. This is the amount necessary to bring the veteran’s countable income up to the applicable monthly pension allowance.
A wide range of care related expenses are deductible. This can include costs incurred for home care, medications and health insurance premiums. Certain payments to assisted living, adult day care, and similar facilities can be deductible as medical expenses
Pension can be a crucial financial support for our older veterans and their surviving spouses. It can provide additional income so that an older veteran can pay for critically needed health and long-term care services.  It can mean that the veteran can stay at home and not be institutionalized. Or it can help pay for care at an assisted living facility. It can also provide needs-based income to the surviving spouse of a deceased veteran.
On January 23, 2015 VA proposed a number of significant changes to the rules governing eligibility for a pension allowance. The proposed rulemaking (regulations) would establish new requirements pertaining to the evaluation of net worth and asset transfers and would more clearly identify those medical expenses that may be deducted from countable income.
The proposed changes fall into three general areas:
1.    Establishment of a “Bright Line” Net Worth Limit
2.    Revision of the rules governing deductible unreimbursed medical expenses
3.    Establishment of 3 year ‘look-back” on transfers of covered assets.
The VA’s Notice of Proposed Rulemaking (NOPR) is available at

The Net Worth Limit

Governing law requires VA to deny pension when it is reasonable to require the veteran to consume some portion of his or her net worth for personal maintenance. The VA views this to mean that the Congressional intent was that the pension program benefits be paid only to those who are in need.
However, unlike other Federal needs-based programs (the Supplemental Security Income (SSI) and Medicaid long term care programs) VA regulations have not prescribed clear net worth limits for pension entitlement. VA now proposes to change this, by establishing abright line” net worth limit.
The proposed net worth limit is the dollar amount of the maximum community spouse resource allowance (CSRA) established for Medicaid purposes at the time the final rule is published. In 2015 this amount is $119,220. This limit will be indexed for inflation in the same manner as the CSRA - by adjusting it at the same time and by the same percentage as cost-of-living increases provided to Social Security beneficiaries.
The amount of a claimant’s net worth would be determined by adding the claimant’s annual income to his or her assets.
For example: A claimant has assets of $113,000 and annual income of $8,000. Adding annual income to assets produces a net worth of $121,000, which exceeds the 2015 net worth limit.
In calculating net worth VA proposes to exclude the value of the claimant’s primary residence. The primary residence would be excluded as an asset regardless of whether the claimant is residing in a nursing home or an assisted living or similar residential facility that provides custodial care, or resides with a family member for custodial care.
If the primary residence is sold, VA would not include the proceeds from the property sale as an asset to the extent the claimant uses the proceeds to purchase another residence within the same calendar year.
Note that a veteran’s assets include the assets of the veteran as well as the assets of the veteran’s spouse, if the veteran has a spouse. The same net worth limit applies when a surviving spouse is seeking pension benefits.

Deductible Medical Expenses

The law provides that VA may deduct a claimant’s out-of-pocket medical expenses from the claimant’s countable income to decrease the claimant’s income, thereby increasing the claimant’s benefit entitlement rate.  However, current regulations do not define or describe what VA considers to be a medical expense. 
This has created confusion and inconsistent determinations regarding medical expense deductions, particularly with respect to room and board deductions for various types of facilities that do not, in fact, provide medical or custodial care.
The proposed rulemaking would define and clarify what VA considers to be a deductible medical expense.  It provides definitions for several terms, including activities of daily living (ADLs) and instrumental activities of daily living (IADLs).  “Custodial care” means regular assistance with two or more activities of ADLs or assistance because a person with a mental disorder is unsafe if left alone due to the mental disorder.
The new rules would provide that generally, payments to facilities such as independent living facilities are not medical expenses, nor are payments for assistance with IADLs. However, there would be exceptions for disabled individuals who require health care services or custodial care. 
The proposed rulemaking would place a limit on the hourly payment rate that VA may deduct for in-home attendants.

Transfer of Asset Penalty

Current regulations do not prohibit a claimant from transferring or disposing of assets before applying for pension. But VA considers such transfers to be inconsistent with Congressional intent that pension be a needs-based benefit program. 
The proposed rulemaking would establish a presumption, absent clear and convincing evidence showing otherwise, that asset transfers made during a 36 month look-back period were made to establish pension entitlement.  A penalty period, not to exceed 10 years, would be calculated based on the assets transferred during the look-back period to the extent they would have made net worth excessive. The penalty period would begin the first day of the month that follows the last asset transfer.  The applicant would be eligible to receive pension benefits after the penalty period.
Transfer penalties would be applied to transfers of a covered asset. The rulemaking defines ‘‘covered asset’’ to mean an asset that was part of net worth, was transferred for less than fair market value, and would have caused or partially caused net worth to exceed the limit had the claimant not transferred the asset.
The ‘‘covered asset amount’’ would be the monetary amount by which net worth would have exceeded the limit on account of a covered asset if the uncompensated value of the covered asset had been included in the net worth calculation. The covered asset amount is the amount that VA proposes to use to calculate the penalty period as described below.
Thus, the penalty period would not be based on the entire transferred amount but only on the portion that would have caused the net worth to exceed the eligibility limit. This means that some transfers may not create any penalty period at all. Note also that a smaller covered asset amount results in a shorter penalty period.
The rulemaking also defines transfers to include any asset transfer to or purchase of any financial instrument or investment that reduces net worth and would not be in the claimant’s financial interest were it not for the claimant’s attempt to qualify for VA pension by transferring assets to or purchasing such instruments or investments. The proposed rule singles out annuities and trusts in this regard. 
The “look-back period” means the 36 month period before the date on which VA receives either an original pension claim or a new pension claim after a period of non-entitlement. VA notes that it specifically chose to impose a three year look-back similar to SSI rather than the five year look-back period that applies to Medicaid long-term care benefits. 
The penalty period imposed due to transfers may be as long as ten years. To calculate the penalty period VA follows a formula similar to that used by the SSI program. VA’s formula would determine a  penalty period in months by dividing the covered asset amount by the applicable maximum annual pension rate (MAPR) under 38 U.S.C. 1521(d), 1541(d), or 1542 that is in effect as of the date of the pension claim, divided by 12 and rounded down to the nearest whole dollar. The MAPRs are located on VA’s Web site at
For veterans and surviving spouses, VA would use the maximum annual pension rate with the applicable number of dependents at the aid and attendance level in effect as of the date of the pension claim. If the claimant is a child, the annual rate is the child alone MAPR.
Beginning date of penalty period. When a claimant transfers a covered asset or assets during the look-back period, the penalty period begins on the first day of the month that follows the date of the transfer. If there was more than one transfer, the penalty period will begin on the first day of the month that follows the date of the last transfer.
VA would recalculate the penalty period if all of the covered assets were returned to the claimant before the date of claim or within 30 days after the date of claim. Once correctly calculated, the penalty period would be fixed, and return of covered assets after the 30-day period provided would not shorten the penalty period.
Other changes in the proposed regulation, such as implementing statutory changes pertaining to certain pension beneficiaries who receive Medicaid-covered nursing home care, implementing statutory income exclusions, and implementing a non-statutory income exclusion pertaining to annuities, codify current practice.

My Two-Cents

On the positive side, the proposed regulation would clarify some issues that lead to inconsistent decisions for similarly situated claimants. And it should reduce the claim review discretion that can allow for unequal treatment of similarly situated claimants. The added clarifications, definitions and the relatively clear net worth limit should promote more uniformity and consistency in pension entitlement determinations.
On the negative side, the addition of the asset transfer prohibitions and penalties will create a significant new barrier for many veterans and add complexity to the filing and processing of claims. The proposed rule regarding annuities and trusts that “would not be in the claimant’s financial interest but for the claimant’s attempt to qualify for VA pension” seems particularly vague and problematic.  
The transfer penalty rule will mean that eligibility for VA needs based pension programs will become similar to that for SSI and Medicaid long term care benefits. The added complexities suggest that veterans will be even more in need of planning assistance prior to applying for pension. 
The rulemaking is VA’s response to a June 2012 Government Accountability Office (GAO) report on Veterans’ Pension Benefits.
At this time these rules are only proposed, not final. VA is accepting comments until March 24th
I anticipate that VA will receive lots of comments and that some changes will be made to the proposed regulation. But the transfer penalties will almost certainly survive. 
After VA has a chance to consider and respond to comments I expect it to issue its final rulemaking. But the timing is unclear. It could be a while before these changes are implemented.   

Further Reading