Working with cognitively impaired taxpayers

Editor: Valrie Chambers, CPA, Ph.D.

Tax professionals (such as CPAs) are often the first to see signs that a client is in the early stages of cognitive decline. This recognition should begin the process of communication with family members, attorneys, investment advisers, insurance consultants, and medical professionals who are more involved in the client’s care and well-being. CPAs can also have preliminary discussions with clients to plan for disability and ensure that estate planning documents are in place. Planning early in the process allows strategies to be implemented when they are most effective.

The issue of planning for disability can be raised at the annual tax interview for senior clients. Often, a client or spouse will confide with the CPA a diagnosis of dementia or other cognitive disorder. The CPA should be watchful of changes in a client’s ability to manage financial affairs. Signs that the client’s cognitive abilities may be in decline could include investments in risky securities, struggles to organize annual tax documents, an inability to access technology, or other uncharacteristic behaviors.

Clients age 70 and above often welcome discussions relating to their estate plan. The CPA can make inquiries of senior clients to identify trusted advisers and existing estate planning documents. CPAs can document existing relationships with financial advisers and trusted family members and their contact information. Inquiries as to existing legal documents including wills, durable powers of attorney, health care directives, health care powers of attorney, community and separate property agreements, and trusts may lead to discussions of changed family financial goals.

CPAs can help clients prepare a list of assets owned and accounts, including their location and other information, so that a trusted family member can easily identify bank and brokerage accounts and safe deposit boxes. The list should include digital assets and passwords to online accounts and for computers and other electronic devices. The lists should be stored in a secure location. Digital assets can include bitcoin and other cryptoassets, nonfungible tokens (NFTs), social media content, domain names, rights to music or movies, and digital photos and videos.

Many estate plans will need updating to account for ownership and access to digital assets. If the value of digital assets is significant, consider appointing a special executor who has expertise managing digital accounts. If digital assets are stored in the cloud, encourage clients to use a local storage device for ease of access. Estate documents can provide legal authority for providers to allow access to the content to a specified representative.

If there are signs of early impairment, the CPA can suggest that estate planning documents be reviewed for changes to the client’s health and family situation. Named beneficiaries of life insurance contracts, beneficiaries of retirement plans, and title of asset holdings should be reviewed and updated as needed. Consider whether a referral to an attorney is needed to update the estate plan. Taxpayers may need advice relating to Medicaid spend-down laws to implement strategies to protect the client and spouse. High-net-worth taxpayers may need help implementing wealth-transfer planning strategies.

Clients should consider setting up a revocable trust rather than relying on joint ownership for estate and disability planning. Holding financial accounts as joint tenants with right of survivorship will allow a family member to easily manage client affairs, but it can also subject the funds to additional risks. Joint tenancy funds would be subject to claims of each joint tenant’s creditors, the client could unintentionally disinherit other family members at death, and other administrative risks could arise.

The CPA can suggest financial management tools to help disabled clients continue to manage their own affairs, including encouraging clients to consider consolidating unneeded bank and brokerage accounts to simplify administration.

A CPA can consider taking steps to ease a struggling client’s burden of gathering annual tax return information and payment of tax liabilities. Consideration should also be given to obtaining a Sec. 7216 signed consent from the taxpayer to allow the CPA to share tax information and facilitate discussions with investment advisers, attorneys, or other trusted advisers. The AICPA has Sec. 7216 guidance and sample consent forms available to members at future.aicpa.org.

It is helpful to have clients authorize their brokerage firm to mail duplicate year-end tax information statements directly to the CPA. Consider requesting a client to sign a Form 2848, Power of Attorney and Declaration of Representative, so the CPA can obtain tax transcripts directly from the IRS. The instructions to Form 2848 note that the authorization can include future tax years up to three years from Dec. 31 of the year the IRS receives the Form 2848. Alternatively, a preparer can work with the taxpayer to make an online request for tax transcripts to be mailed directly to the taxpayer at his or her last address of record with the IRS. See the IRS Get Transcript tool at irs.gov.

The CPA should consider assisting clients with automating tax payments. Making timely estimated tax payments is a burden for many seniors. The taxpayer can direct that federal and state tax be withheld from retirement plan distributions. The taxpayer can also work with the CPA to request that federal income taxes be withheld from Social Security benefits. This is done by mailing a Form W-4V, Voluntary Withholding Request, to the Social Security Administration. Automatic tax payments can also be scheduled with the IRS. Payment options are listed at irs.gov/payments.

CPAs should be alert to potential financial abuse of a vulnerable senior. Urge clients not to give out personal information over the phone or via text or email. If a senior has succumbed to a scam, family members may need to maintain continued vigilance to guard against a future occurrence. It may be helpful to set up notifications or install freezes with credit monitoring companies. As a cognitive illness progresses, consider recommending that a trusted family member review bank statements online and monitor investment accounts. But remember that financial abuse can also come at the hands of family caregivers, so use care in dealing with family members until trust is justified.

If a client is judged to be incompetent, the CPA will need to work with the person appointed to manage the client’s financial affairs. A client’s representatives may wish to consult an attorney to oversee the process to determine that the individual is not competent. Criteria specified in existing legal documents or under state law will govern the transition to another person who will be legally appointed to manage the client’s financial affairs.

Fees for assisting with the additional requirements of an aging client will likely increase due to the extra time spent navigating the special tax planning and preparation process. A CPA needs to have a frank discussion with an aging client and the client’s spouse, as appropriate, about the extra measures required to prepare the annual tax return.

Assisting a longtime client through the aging process can be personally satisfying for a preparer, but it is not attained without extra effort. The AICPA has many resources to help CPAs, enhancing their personal financial planning expertise. Consulting with other members of the personal financial planning team will help ensure that the client is receiving professional advice necessary for planning purposes.