In the first part of this series, we discussed the early warning signs of diminished financial capacity in the elderly. Here, we will discuss planning strategies that can protect your loved ones from incapacity of all kinds.
With more and more Baby Boomers reaching retirement age each year, our country is undergoing an unprecedented demographic transformation that is sure to challenge our society in many ways. There is lots of talk about whether Baby Boomers will have enough savings for retirement and the strains the generation will put on Social Security and Medicare.
Yet there is another issue that is getting far less attention—the coinciding increase in the prevalence of dementia.
Along with a swelling senior population, the nation is expected to see a corresponding rise in those suffering from age-related dementia. Cases of Alzheimer’s alone are expected to double by 2050. While the cognitive decline from dementia affects nearly every mental function, many people are unaware 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. A decline in financial capacity not only makes seniors more likely to mismanage their money, but it also makes them easy targets for financial exploitation, fraud, and abuse.
Last week, we listed six warning signs of a decline in financial capacity. Here we will discuss estate planning strategies that can help protect your elderly loved ones and their assets from the debilitating effects of dementia and other forms of incapacity.
Reducing the risks
Taking steps to reduce the risks of diminished financial capacity is vital. However, 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 are aware of their own impairment, many are reluctant to ask for help, and some may even deny that there is 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 that 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 will have to go to court and petition to become their legal guardian. This process is expensive, open to the public and emotionally taxing. There is also the 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 your aging parent’s affairs—financial and otherwise—which is something they likely would not want. Professional guardianships also open the door for potential exploitation and abuse by unscrupulous guardians, which is something that is on the rise given the sharp uptick in the senior population.
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 will need to assume full control. This is where a solid estate plan comes in handy.
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 are no longer able to do so on their own.
There are a number of planning tools that can be used in an incapacity plan. However, 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 or some other debilitating impairment.
While a will is important in planning for death, your parents should also put in place planning tools especially designed for incapacity. One such tool is a 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 more efficient 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.
Having the legal authority to make your parents’ financial and legal decisions is just part of an overall incapacity plan. They will also need to put in place planning strategies designed to address their healthcare decisions and medical treatment like a 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.
Do not wait until it is 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. 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 is properly set up, maintained, and up to date.
If you notice any signs of diminished financial capacity or other suspect behaviors, you should immediately contact your Life & Legacy Attorney to address the issue. While there is 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.
This article is a service of Reflections Life Planning LLC. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you have ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.