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Failure to Properly Document Assistance to Elderly Parents Causes Serious IRS Problems

Failure to Properly Document Assistance to Elderly Parents Causes Serious IRS Problems
May 26, 2015 weberlaw

The average age of the U.S. population is rising as baby boomers move toward retirement.  This demographic trend will mean increased demands on elder care and nursing home systems.  While many adult children attempt to personally care for their aging parents, a senior’s impaired cognitive skills or diminished mobility often necessitate professional services.  When adult children attempt to fulfill a caretaking role for a parent’s physical needs, the time devoted to providing supportive care can interfere with the grown child’s ability to work or operate a business.

Although a relative or friend serving as an adult caregiver can be compensated for providing care to elderly family members, planning is needed to structure the arrangement accurately and keeping careful records.  The case of Estate of Olivo v. Commissioner demonstrates the importance of obtaining legal advice when structuring arrangements to compensate an adult child for the sacrifices associated with providing services to an aging adult.

In the Olivo case, an adult son was challenged by the Internal Revenue Service (IRS) after taking a $2.5 million deduction for the costs of the care he provided to his elderly parents.  After Olivo’s mother died, the son deducted the following amounts on a tax return submitted to the IRS:

  • $44,000 for costs of estate administration
  • $55,000 for attorney fees and accounting services
  • $1,250,000 for ten years of lost profits from his business

The taxpayer owned a small business, and he contended that he lost substantial income every year because he had to take care of his elderly parents rather than operate and grow his business.  While the son’s argument might have been reasonable to a degree, his failure to keep adequate records to document his deduction proved to be a serious problem.

While some portion of the deductions taken by the taxpayer might have been legitimate, any decision to take on the IRS is daunting without meticulous records.  When the IRS sought documentation to establish an agreement for services between the son and his parents and to quantify his time investment, the taxpayer could not provide any time records, invoices, agreements, or other supporting documents.  This complete absence of records even extended to his actual time spent handling administration of his mother’s estate and the cost of preparing her tax return.

Although there are permissible ways to provide monetary compensation to an adult child who manages the affairs and estate of an elderly parent, proper estate planning is required.  A trust that made the son the trustee might have constituted a legitimate mechanism to compensate the son for providing services to his parents.  The best way to avoid this taxpayers $2.5 million mistake is to seek legal advice from an experienced estate planning attorney who can set up a caretaking plan that includes reasonable compensation and legitimate tax write-offs.  An attorney also can assist you in understanding the recordkeeping requirements.

If you have questions about estate planning issues, we welcome the opportunity to talk to you and answer your questions.  We invite you to call the Kansas Estate Planning Lawyer at the Weber Law Office at (316) 265-7802 or to submit an inquiry form through this website to schedule your initial consultation.