Financial capacity is one of the first abilities to decline as cognitive impairment appears, whether due to the slowing down in older age or a more specific dementia diagnosis. Anyone with an elderly parent should be prepared to face the challenges that can come with diminished financial capacity. The first step in preparation is to understand what you and your mother or father may be facing. Quite literally, financial capacity refers to a person’s ability to manage money and financial assets in ways that meet a person’s needs and which are consistent with his/her values and self-interests. Financial capacity includes basic skills like identifying and counting money, understanding debt and loans, handling cash transactions, paying bills, and maintaining judgment to act practically and avoid exploitation. Given that, for most of us, the loss of some financial capacity is inevitable, these are some risks and how to prepare your family:
Financial Management Challenges – most often, the ability to handle the day-to-day money management becomes a challenge. This may mean that things like handling incoming checks and bills or balancing the checkbook become difficult. In these instances, bouncing checks, not paying bills when they are due, and not filing tax returns are commonplace. It goes without saying that this can cause a multitude of problems (not to mention, extra cost).
Fraud/Financial Exploitation -- more and more we are hearing about occurrences of financial fraud, with older adults being the most targeted victims. Financial fraud and exploitation can come in many forms, including but not limited to theft of checks (Social Security, pension, etc.), theft or unauthorized use of ATM or credit cards to access funds, and tax fraud. Many times, a trusted friend, family member or caregiver is the one taking advantage of the older adult.
What can you do to prepare to help you and your aging parent avoid these potential risks?
- Make sure to have an update General/Financial Durable Power of Attorney naming a trusted family member or friend in place.
- Consider having a Revocable Living Trust drafted that names a successor to handle things in the case of financial incapacity; appropriate assets should be titled in the name of the trust.
- Get your aging parent to communicate with his or her current/future Power of Attorney and/or Successor Trustee (and appropriate family members or friends) about money goals and values. In addition, make sure all of his or her financial information is documented and organized in the case that someone needs to assist with financial matters in the future (consider a tool like our Personal Record Keeping Document and Letter of Last Instruction for this purpose).
- Help facilitate an introduction between your parent’s current/future Power of Attorney and/or Successor Trustee (and appropriate family members or friends) to his or her financial team (financial planner, CPA and estate planning attorney). Make sure that each member of the professional team has authorization to talk to (1) other members of your professional team and (2) family members or friends that might assist in the future.
- Make sure that the chosen financial planner has a written Investment Policy Statement in place for managing your love one’s investment portfolio. This written document outlines goals, risk tolerance, asset allocation preference and needs related to your parent’s investments.
By working with a professional and personal team to plan ahead for the possibility of financial incapacity, you give yourself and your loved ones the best chance to avoid the risks to future financial independence.
This is the second in a monthly post (2nd Thursday of each month) that will address Elder Care planning topics. If you have a specific question or issue you’d like addressed, please contact me at Sandy.Adams@CenterFinPlan.com.
Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.
Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.
The information in this material does not purport to be a complete description of the issues referred to herein. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. C14-009365