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Dealing with Diminished Capacity to Make Financial Decisions

Dealing with Diminished Capacity to Make Financial Decisions

Alzheimer's disease or similar organic dementias afflict over half of American seniors over the age of 85. Even among younger seniors, dementia is relatively common. Dementia is fairly easy to recognize because of altered behavior or forgetfulness. But many dementias do not come on suddenly, they start gradually. Prior to manifesting any overt symptoms, many seniors are afflicted with a condition called "mild cognitive impairment." (MCI) This condition is often difficult to recognize but may lead to significant problems for elders dealing with their own financial affairs.

Research has shown that one of the most significant impairments with pre-dementia cognitive conditions is the loss of rational decision-making when it comes to financial issues. Many of these impaired seniors may appear to be normal, but they can no longer balance their checkbook, understand complicated financial propositions or keep track of money. At this stage, they are particularly vunerable to financial predators on the phone or the Internet or to financial manipulation by family members.

Mild cognitive impairment is about twice as common as dementia. Although reports of prevalence vary, one analysis of participants in a cardiovascular health study estimated that 19% of those ages 65 to 74, and 29% of those older than 85, had mild cognitive impairment. This diagnosis can be demoralizing, because it is associated with a significant increase in the risk of developing dementia, especially Alzheimer's disease.

About 10% to 15% of people with mild cognitive impairment develop dementia each year, and at least half develop dementia within five years. Most develop Alzheimer's, and in these individuals, mild cognitive impairment is likely an early manifestation for this disease, rather than a separate condition. Less often, people with mild cognitive impairment develop other types of dementia, such as vascular dementia, frontotemporal dementia, or dementia with Lewy bodies.

Adding further to the puzzle, epidemiological studies indicate that 20% to 25% of people with mild cognitive impairment regain normal cognitive functioning in time, while others remain stable. It is currently difficult to distinguish people with a progressive form of mild cognitive impairment from those with the non-progressive type.

"Financial capacity is essential for an individual to function independently in our society," says Daniel Marson, J.D., Ph.D., professor of neurology and director of the UAB Alzheimer's Disease Center. "Diagnosis of cognitive impairment generally, and MCI and Alzheimer's disease specifically, should signal likely financial impairment and prompt physicians to encourage patients and families to seek financial and legal advance planning."

Here is a quote from another author on this subject.

"I was motivated to write and research this white paper because of what happened to a close relative of mine. She owned a successful furniture company and the income from that business positioned her well for retirement. Just after she retired, a family friend convinced her to make a large investment in a speculative business venture. This venture failed within two years and left her destitute. She was forced to return to work at age 67 as a maid at a local bowling alley to make ends meet and continued working 13 more years until her body gave out.

Her biggest fear - and the reason she worked so hard in the furniture business - was that she would have to go into a nursing home. She wanted to have enough money to pay for in-home sitters during her waning years. However, once she stopped working, her condition worsened significantly, and she began needing around-the-clock care. The few remaining dollars she managed to save as a maid were depleted in a few months, and she was indeed forced to go into the dreaded nursing home. What's more, she was required to sign over ownership of her modest home to Medicaid to pay for the expenses there. Now, she has practically nothing and is living her worst fear." Greg Rudd, CFP, is a vice president at Regions Morgan Keegan Private Bank in Birmingham, Ala. He can be reached at

One assessment tool for mild cognitive impairment, developed by the University of Alabama Birmingham, measures capacity across 20 tasks, including understanding a bank statement, balancing a checkbook, paying bills, preparing bills for mailing and counting coins and currency. Based on this assessment and other sources, here are some of the most common general symptoms that could indicate mild cognitive impairment.

  • difficulty in finding the right words for expression
  • difficulty with reading and writing
  • trouble staying on the same topic and bouncing from one subject to another
  • insecurity in making decisions, especially financial ones
  • inability to understand basic financial concepts and compare alternatives
  • inability to understand why an account changes in value
  • inability to follow a simple presentation of facts
  • inability to keep track of money or balance a checkbook
  • difficulty in making change with coins in exchange for paper money

Many state governments have recognized the financial vulnerability of seniors and have passed stringent laws governing the sale of insurance products, investments, or other financial products such as prepaid funeral plans. But such rules are easy to circumvent by ruthless and unethical salespeople.

Ultimately it is the responsibility of family members to determine whether their loved one is incapable of handling finances or not. The family must decide to institute legal arrangements that allow family members to make decisions on behalf of loved ones. The totality and control of the legal arrangement depends on the amount of impairment demonstrated by the loved one.

Many times, the family do not want to confront their parents and take away control. On the other hand, the family will often realize the necessity of doing this but not know how to proceed. A good strategy is to involve a doctor who specializes in care for the elderly. The doctor can be asked to perform a cognitive assessment specifically directed towards detecting mild cognitive impairment. If the doctor identifies a positive tendency towards mild cognitive impairment, the family can ask the doctor to support a decision to institute proper financial arrangements. Perhaps a consultation with the doctor and the loved one and the family can be arranged at this point.

Powers of Attorney

A power of attorney is a legal instrument which grants unto another person -- the agent -- the authority to act as a legal representative and to make binding legal decisions, medical treatment decisions and financial decisions on behalf of the person granting the power. It should be noted that a power of attorney is limited in its scope to the powers granted within the document. A power of attorney can have very limited scope and only give the agent the authority to conduct a one-time action. Or a power of attorney can have wider scope and allow an agent to conduct all financial affairs on behalf of the grantor including gifting and the ability to enter into real estate transactions. A power of attorney may also authorize certain individuals to make medical treatment decisions on behalf of the person granting authority.

A power of attorney can in no way take away the personal rights of anyone creating the document. As long the person granting authority is considered competent to manage his or her own legal affairs, the document can be canceled at any time. It is important to remember that cancellation of a power of attorney will not stop someone with that power to continue to conduct business on behalf of the person granting authority. If the agent is never notified or is intent on abusing the power, there is no government or community mechanism in place to stop him or her. This means that all original copies of the power of attorney must be accounted for and taken back if it is canceled.

Here are the common types of powers of attorney

General Power of Attorney or Non--Durable Power of Attorney
This is the form that is most often used when someone who is competent authorizes another person to transact business for the competent person. These documents are typically used if someone is indisposed and must make some sort of financial transaction and elects a trusted person to act as a power of attorney. If the person granting power of attorney becomes incompetent to handle his or her own legal affairs or dies, a general power of attorney is no longer in effect and is automatically canceled.

Durable Power Of Attorney
Most states have adopted the Uniform Durable Power of Attorney Act, which allows a power of attorney with the proper language to continue in effect even though the maker of the document has become incompetent. This document is very useful when handling the affairs of someone who has become impaired in decision-making. Unfortunately, it also gives broad powers to the agent to act without any direct oversight from an incompetent maker.

It should be noted that a power of attorney does not take away the right of the maker of the document to make his or her own decisions. Even though that person may be incompetent, that person's decisions concerning his or her property or actions are still valid. The only way to take away this right is for a court to declare the person incompetent and to appoint a guardian. There may be situations where this court action is necessary to ensure the safety of the person who is not acting rationally or to protect others from this person. We will discuss guardianship and conservatorship in a section below.

Generally, mild cognitive impairment does not mean that a person is incompetent to handle his/her own her affairs. If it appears that a loved one is heading down the road to further incompetency, legal documents such as a durable power of attorney should be drawn up. Once a loved one is considered incompetent, a power of attorney cannot be created and other means of dealing with impaired decision-making must be instituted such as guardianship or conservatorship which will be discussed below.

Inherent in any power of attorney is a fiduciary responsibility to act for the person creating the authority as if the agent were the maker and were implementing prudent financial decisions for himself. Any agent not acting as a responsible fiduciary could take advantage of the incapacitated person who made the power of attorney. In addition, without oversight, an unethical agent could make off with all of the assets. If there are other family members involved, this could result in nasty family disputes and court proceedings.

Great caution should be taken when creating a durable power of attorney. Many people do not think of the consequences of such a broad-powered document and create these arrangements in too much haste. It is extremely valuable to consult a knowledgeable and impartial third party such as an attorney when creating a durable power of attorney in order to avoid the pitfalls mentioned here.

Springing Power of Attorney
A "Springing" Power of Attorney becomes effective at a future time. That is, it "springs up" upon the happenings of a specific event chosen by the power of attorney. Often that event is the illness or disability of the maker. For a person wishing to retain the most control of his or her affairs, a springing power of attorney is best.

Health Care Power of Attorney
Some states authorize a special form of "Springing" Power of Attorney called a Health Care Power of Attorney. The Health Care Power of Attorney is a document that designates someone to speak for the patient, authorizing certain medical treatment, when he or she can't, and it takes precedence over a living will. This is because health care providers consider a consultation with a proxy a better alternative than relying on a living will, since medical treatment or conditions may have changed since the will was signed.

The health care power of attorney can be used in situations where someone is suffering from a terminal illness or is in a persistent vegetative state. Thus, this document can take the place of a living will which is typically used for these situations. Specific instructions can be given to the agent concerning what to do and what treatments to prescribe under these conditions. The advantage of using a power of attorney over a living will is the same as mentioned above. A living will is a document representing the wishes of the person who cannot communicate. A power of attorney represents a trusted individual acting on behalf of the person who cannot communicate. Having a live person make decisions under conditions with various outcomes not foreseen in the living well is an advantage not only to the family but to the treating physicians.

It's important for the patient to give the health care power of attorney to someone he or she believes will follow his or her wishes. The patient can also exclude certain people from making decisions. If the patient can communicate the document has no effect. Also the document can be revoked at any time and is not binding on the patient. This healthcare power of attorney arrangement will be discussed in greater detail below.

Specific Powers in the Document
A person who casually downloads a standard durable power of attorney document from the Internet and fills it out and has it notarized may be making a big mistake. Once the person who creates the power of attorney is no longer competent, the document cannot be changed. For those persons needing eldercare, certain powers are needed. These include the power to engage in real estate transactions and the power to gift. These powers are not inherent in a typical simple durable power of attorney. In some states, the language granting these powers is very specific and must be properly written in the document.

The powers mentioned are extremely important when the principal maker ends up in a nursing home, cannot make his or her own decisions and is receiving Medicaid. No Medicaid planning can take place without the ability to make real estate transactions and to gift. It is extremely important that an attorney is involved in drafting a power of attorney that will be used for Medicaid planning purposes in order to make sure it is valid when the time comes.