It was the sinking feeling in my gut that led me to put down the brokerage statement and look into the face of my 84-year-old widowed client. “I don’t feel good about this,” I said. I then asked if she felt good about the investment, and she sadly shook her head as she looked down at her lap. That same sad day, we called the police to file a report.
Fraud against the elderly is increasing all over the U.S., but it is especially prevalent in the upper Midwest. The elderly are targeted for the same reason the famous bank robber Willie Sutton gave when he was asked why he robbed banks: “Because that’s where the money is.”
Seniors control 70 percent of the nation’s wealth, and those up to no good know that. Midwestern and rural seniors can sometimes be more trusting, which is another reason fraudsters target Minnesota seniors. As tax practitioners, we can help protect this vulnerable group from financial abuse by knowing the signs and paying attention.
Signs to look for
The Minnesota Department of Commerce recently joined a nationwide effort to protect elderly Minnesotans from fraud and other schemes and have asked tax return preparers to help identify clients who may have been subjected to financial exploitation.
They are encouraging us to look for signs of financial abuse and encourage our clients to contact the Minnesota Department of Commerce for help. Many of us received a letter in February asking for our help and providing us with signs to look for:
Missing or incomplete documentation. Has your client received full and complete documentation regarding a transaction they engaged in? Is the tax information you have been provided regarding the transaction accurate and professional?
Substantial changes in income. When compared to the prior year, has your client experienced an unusual change in interest or dividend income? If your client has experienced a significant decline in income, is it explainable? Where did the money go?
Promissory notes and gifts. Has your client been loaning money pursuant to long-term promissory notes at interest rates that are not competitive? Has your client been gifting large sums of money to questionable third parties?
Exotic instruments. Has your client engaged in investing in exotic forms of investment that they do not understand and cannot explain?
Fees. If your client employs a broker, does the broker enjoy discretion over your client’s investment? If so, does it appear from year-end statements that an excessive number of trades are occurring that may be resulting in excessive fees to the broker?
Investment advisor. Does your client employ an investment advisor? Do you believe the investments are not suitable given your client’s age and financial situation?
Capital gains or losses. Does it appear that your client is reporting an unusual amount of capital gains or losses compared to their historical experience?
Exchanges. Has your client engaged in a 1035 exchange that is not suitable and may have resulted in merely fee-generating activity for the promoter of the exchange?
In my client’s case, it was numbers 1, 4 and 7 on the list. She had sold and transferred large sums of assets to an exotic investment for which she had inadequate documentation and no year-end tax statements. We called the “promoter” from my office to ask about a Form 1099 and were told there would be none as there were no amounts to report for taxes.
Another big clue was the type of investment — something the client could not explain to me. I believe that if you cannot explain the investment to your mother, you probably should not be investing in it. You do not know or understand the risk.
My client’s case was ultimately referred from the police to the FBI. A full investigation occurred, and they have brought charges against the individual who bilked my client. While the perpetrator may be tried and convicted, the money will likely not be recovered.
It can happen to anyone
A special report, “The Crime of the 21st Century,” in Kiplinger’s Personal Finance (November 2011) highlights the issue and recommends protecting not only yourself but your elderly relatives from financial abuse. In this report, well-known celebrity Mickey Rooney — and others — testified before a U.S. Senate Committee that they had fallen victim to financial exploitation by a family member.
My client was taken-in by a smooth-talking operator who convinced her to sell her stock portfolio, cash in some annuities and invest in an alternative investment. My client, in some ways, should have been suspicious. It did not make sense to trigger large ordinary income from the annuities and large capital gains from the stock portfolio to put all of one’s eggs in one basket. And my client is sophisticated enough to know this.
It is not unusual for the elderly, who may have been financially savvy throughout their lives, to have reduced financial skills as they age. According to Robert Roush of the Huffington Center on Aging, a third of all Americans over age 71 have mild cognitive impairment or worse (such as Alzheimer’s). This makes them more susceptible to financial abuse or fraud. Couple that with a volatile stock market and low interest rates, and seniors may be more vulnerable to scams and other investment swindles seeking higher returns.
A study conducted by the Investor Protection Trust in 2010 showed that more than seven million older Americans (one out of every five over age 65) have already been victimized. Several studies indicate the annual amount being swindled from the elderly could be close to $3 billion a year. However, many cases are never reported due to embarrassment or fear, so the number may be significantly higher.
While my client’s loss was great, I have since noticed many smaller instances in which an elderly client is being taken advantage of. A couple (with the husband suffering from early Alzheimer’s) transferred stocks held in their name to a broker to “simplify things.” The broker took an account of $450,000 and managed to trade $1.3 million in five months, much to the shock of the wife. She had specifically wanted to keep things simple. She and her husband had been “buy and hold” investors since the 60s.
A 2009 study, “Broken Trust: Elders, Family and Finances,”* indicated that strangers perpetrated 51 percent of fraud, followed by family, friends and neighbors at 34 percent. Women were twice as likely as men to be victims. Given the longer life expectancy for women, this is not surprising as most victims tend to be between 80 and 89 years old, living alone.
What we can do to help
As tax practitioners, we see information that may indicate something is wrong. What we choose to say to our clients and what we can do to help them from becoming victims could save elderly clients the loss of their assets, as well as the loss of their dignity.
*Study conducted by MetLife’s Mature Market Institute, the National Committee for the Prevention of Elder Abuse, and the Center for Gerontology at Virginia Polytechnic Institute and State University.
Melanie Mogg, CPA, is a sole practitioner and educator with 25 years of experience. She is also a current member of the MNCPA Board of Directors. You can contact Melanie at firstname.lastname@example.org.