May 31, 2022
Estate Planning
· Personal Family Lawyer
Don’t Let Diminished Financial Capacity Put Your Elderly Loved Ones at Risk
With more and more Baby Boomers reaching retirement age each year, our country is undergoing an unprecedented demographic transformation that’s been dubbed “The Greying of America.” This population shift stands to affect many aspects of life, especially your relationships with aging parents and other senior family members.
By 2060, the number of Americans aged 65 and older is projected to nearly double from 52 million in 2018 to 95 million, which will account for 24% of the total population. And as early as 2030, the number of those 65 and older is expected to surpass the number of children (those under age 18) for the first time in history.
Coinciding with the boom in the elderly population, the number of Americans suffering from Alzheimer’s and other forms of dementia is expected to increase substantially as well. The Centers for Disease Control (CDC) estimates that the number of Americans with Alzheimer’s disease will double by 2060, when it’s expected to reach 14 million—more than 3% of the total population.
A Decline in Financial Capacity
Although Alzheimer’s is the most common cause of dementia in older adults, it’s not the only one. In fact, the National Institute on Aging estimates that nearly half of all Americans will develop some form of dementia in their lifetime. And while the cognitive decline brought on by dementia affects a broad array of mental functions, many people aren’t aware that one of the first abilities to go is one’s “financial capacity.”
Financial capacity refers to the ability to manage money and make wise financial decisions. Yet cognitive decline brought on by dementia often develops slowly over several years, so a diminished financial capacity frequently goes unnoticed—often until it’s too late.
“Financial capacity is one of the first abilities to decline as cognitive impairment encroaches,” notes the AARP’s Public Policy Institute, “yet older people, their families, and others are frequently unaware that these deficits are developing.”
Ironically, studies have also shown that the elderly’s confidence in their money management skills can actually increase as they get older, which puts them in a perilous position. As seniors begin to experience difficulty managing their money, they don’t realize they’re making poor choices, which makes them easy targets for financial exploitation, fraud, and abuse.
Watch for Red Flags
The University of Alabama study “The Warning Signs of Diminished Financial Capacity in Older Adults” has identified six red flags to watch for:
01 | Memory lapses: Examples include missing appointments, failing to make a payment—or making multiples of the same payment—forgetting to bring documents or where documents are located, repeatedly giving the same orders, repeatedly asking the same questions.
02 | Disorganization: Mismanaging financial documents, and losing or misplacing bills, statements, or other records.
03 | Declining checkbook management skills: Forgetting to record transactions in the register, incorrectly or incompletely filling out register entries, and incorrectly filling out the payee or amount on a check.
04 | Mathematical mistakes: A declining ability to do basic oral or written math computations, such as making change.
05 | Confusion: Difficulty understanding basic financial concepts like mortgages, loans, or interest payments, which were previously well-understood.
06 | Poor financial judgment: A new-found interest in get-rich-quick schemes or radical changes in investment strategy.
Managing Diminished Financial Capacity
If you notice your parents or other senior family members displaying any of these behaviors, you should take steps to protect them from their own poor judgment. It’s vital to address their cognitive decline as early as possible, not only to prevent financial mismanagement and exploitation, but also to ensure their overall health and safety.
There are several estate planning tools that can be put in place to help your aging parents and other senior family members protect themselves and their assets from the debilitating effects of dementia and other forms of incapacity. In part two of this series, we’ll discuss the specific planning tools available for this purpose, and provide some guidance on how to address this sensitive subject with your elderly loved ones.
Reducing the Risks
Taking steps to reduce the risks of diminished financial capacity is vital, but stepping in to help manage an aging parent’s money without threatening their sense of independence and privacy can be a real challenge. Even if they’re aware of their own impairment, many are reluctant to ask for help, and some may even deny there’s a problem.
Ideally, you should address the potential for dementia and other forms of incapacity with your senior family members well before any signs of cognitive decline appear. Waiting until they start showing signs of dementia will only exacerbate the complications and could even invalidate planning efforts.
Start by having a heart-to-heart conversation with your loved ones about the risks involved with incapacity, and how estate planning can help protect them. Approach the subject with care and compassion. Reassure them that your goal is to make certain they retain as much control over their lives as possible—and talking about the issue early on is the best way to do that.
For example, you should let your aging parents know that if they become incapacitated without proper planning, you’ll have to go to court and petition to become their legal guardian. This process is not only quite costly and emotionally taxing, but there’s a possibility that the court could appoint a professional guardian, rather than a loved one such as yourself.
A court-appointed guardianship would mean that a total stranger would control all of their affairs—financial and otherwise—which is something they likely wouldn’t want. Professional guardianships also open the door for potential exploitation and abuse by unscrupulous guardians, which is something that’s on the rise given the sharp uptick in the senior population.
However, unless you have the legal authority to make your parents’ financial decisions, your ability to manage their money will be seriously limited. You might be able to work together with them for a while without such authority, but at some point, their cognitive impairment will likely reach a stage where you’ll need to assume full control—and that’s where estate planning comes in.
Put a Plan in Place
The best option would be for your aging loved ones to put in place a comprehensive plan for incapacity as soon as possible. This way, they can choose exactly who they want making their financial, medical, and legal decisions for them if and when they’re no longer able to do it on their own.
There are a number of planning tools that can be used in an incapacity plan, but a will alone is insufficient. A will only goes into effect upon death, so it would do nothing should your elderly parents become incapacitated by dementia.
While a will is important in planning for death, your parents should also put in place planning tools specially designed for incapacity. One such tool is durable financial power of attorney. This document would give you (or another person of their choosing) the immediate authority to make decisions related to the management of their financial and legal affairs in the event of their incapacity.
The downside of financial durable power of attorney is that it sometimes is not accepted by banks and other financial institutions, and you might still end up needing to go to court to get control of your parents’ affairs.
A revocable living trust is a MUCH better estate planning tool to transfer control of your parents’ financial assets to you without court intervention should they become incapacitated. A revocable living trust, created while your parents have capacity, can plan for the transition of their assets to your care and control in a way that feels safe and secure to them. Bring your parents to meet with us for a Family Wealth Planning Session to learn more about how this would work.
Yet having the legal authority to make your parents’ financial and legal decisions is just part of an overall incapacity plan. They’ll also need to put in place planning strategies designed to address their healthcare decisions and medical treatment like medical power of attorney and a living will.
We can help your aging parents and other senior family members develop a comprehensive incapacity plan, customized with the specific planning vehicles to match their unique needs and life situation.
Don’t Wait Until It’s Too Late
While incapacity from dementia is most common in the elderly, debilitating injury and illness can strike at any point in life. For this reason, all adults age 18 and older should have an incapacity plan. Moreover, such planning must be addressed well before cognitive decline begins, as you must be able to clearly express your wishes and consent for the documents to be valid.
Given this urgency, you should discuss incapacity planning with your aging parents right away, and schedule a Family Wealth Planning Session with us to get a plan started. If your senior family members already have an incapacity plan, we can review it to make sure it’s been properly set up, maintained, and updated.
Of course, if you notice any signs of diminished financial capacity or other suspect behaviors, you should immediately contact your us to address the issue. While there’s no way to prevent age-related dementia and other forms of cognitive decline, make sure your parents and other senior relatives know that they can use estate planning to have control over how their lives and assets will be managed if it does occur.
