As our loved ones age, we are often faced with uncertainty surrounding the future. Being the trusted person to care for an aging family member can be a daunting responsibility. With old age comes the potential for uncharacteristic behavior, including missing payments, struggling to balance a checkbook, difficulty with decision-making, and so on. A tough reality is that these ‘diminished capacity’ scenarios are unfolding with increasing frequency across households as the baby boomer population ages and life expectancy continues to rise. For individuals experiencing cognitive decline, such as those living with dementia, diminishing financial competence is often among the first symptoms to emerge. Not only are these situations stressful, but they can also lead to unforeseen issues like unwanted fees, legal disputes or exposure to fraud. One way we can prepare to protect the overall well-being of our loved ones is putting a comprehensive plan in place well before symptoms of diminished capacity occur.
Planning for a time when a family member may be unable to handle their own financial affairs is never a fun undertaking; however, we have found that it can be a huge help to families. As financial advisors, we partner with tax and estate planning professionals. We do this because these professionals specialize in areas of expertise that fall outside our own; in partnering, we can better serve clients in all aspects of their financial situation. The most effective financial plans materialize when clients and their full team of professional advisors work together towards a client’s financial goals. Planning for the possibility of diminished capacity represents just one of these goals, however, it is a critical detail of any financial plan. We recognize the importance of planning for the long-term implications a diminished capacity scenario has on our clients’ financial and overall well-being.
Have you created a plan to support your aging loved ones in decline and protect their assets? Get to know your options:
A living trust is a very common recommendation to clients who wish to manage their property and assets while allowing trusted family members access to the account in the case of diminished capacity. A living trust is created by a written document that establishes a fiduciary relationship between the owner of the trust and a trustee, which means the trustee must act in a manner he or she reasonably believes to be in the best interest of the owner. In this trust document, the creator of the trust (trustor) establishes the trust’s terms with the trustee, who is often the same person in the case of a living trust. An additional trustee can be added and named either co-trustee or successor trustee. Co-trustees assume fiduciary duty upon execution of the document. Successor trustees, on the other hand, step in when the trustor/trustee can no longer do so due to limited capacity, resignation, or death. A living trust offers several advantages in relation to other estate planning options:
- Transparent: With living trusts, everything is documented upfront, and there is a clear path of action for the creator of the trust and the beneficiaries.
- Autonomous: Most living trusts are revocable, meaning the trustor can cancel or make amendments to the agreement.
- Less hassle: Assets which remain solely in one individual’s name generally cannot be transferred elsewhere upon incapacity without a court order, and that process requires extensive time and money. A person lacking capacity who has transferred assets into a living trust and has signed a Power of Attorney (more on this later) avoids the cost and hassle of a legal proceeding.
Although the costs to establish a living trust are not insignificant, the benefits down the line far outweigh the time and money spent up-front. A living trust is a very effective method to ensure an elder loved one peace of mind.
A Power of Attorney is a legal document that grants an individual (Attorney-In-Fact) the right to act on the primary owner’s (Principal) behalf in the case of diminished capacity. The Attorney-In-Fact is legally obligated to act as a fiduciary in the best interest of the Principal—just like the trustor/trustee relationship with a living trust agreement. While there are many different types of Powers of Attorney, we recommend using a Durable Power of Attorney when planning for a potential diminished capacity situation for a few reasons:
- Clarity: Some Power of Attorney documents require licensed physicians to verify incapacity if there is a suspected issue, which can quickly turn into complicated—sometimes hostile—situation. A Durable Power of Attorney document is effective upon execution and generally expires when the Principal dies, removing the significant potential for turbulence in the process.
- Preparing for 70½: When you are first subject to taking required minimum distributions (RMD) from an individual retirement account at age 70½, a Durable Power of Attorney can be an effective way to manage and make decisions surrounding your retirement savings.
The options we’ve discussed in this article are just a few of your options when planning for potential diminished capacity, but every situation has different nuances. There is no cure-all financial plan—just like there is no cure-all medical solution for cognitive decline. The most important aspect, however, is having regular conversations with your advisors and family members to ensure you are preparing for life’s unexpected.
Having a plan in place now will allow your family to focus on the health issues at hand, rather than being distracted by financial complications. Although it’s never an easy conversation to have, the sooner you address the potential of diminished capacity, the better off all parties involved will be.