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Financial Planning for the Possibility of Cognitive Decline/Dementia

A reader writes in, asking:

“Would you consider writing a column on options for protecting oneself from being taken advantage of in dotage if there are no children to take over the finances? We’ve done wills and named beneficiaries for all accounts. Is there a document or trust or process to hire a trustworthy professional when the time comes?”

Simplify and Automate

Firstly, while this is not exactly an estate planning tool, simplifying your finances (e.g., consolidating accounts, minimizing the number of investment holdings, automating payment of bills, etc.) can help minimize the impact of minor cognitive decline. It also makes things easier for anybody who might take over control of your finances, as discussed below.

Increasing the portion of your spending that is satisfied by automatic, guaranteed sources of income (i.e., Social Security and/or lifetime annuities) is also helpful for similar reasons. That is, once such sources of income are in place, they require no further decision-making — a marked contrast from the ongoing process of selling investment holdings to satisfy living expenses.

Durable Power of Attorney for Finances

A useful tool for planning for the possibility of dementia or other forms of cognitive decline is the durable power of attorney for finances. (Of note: I’m sticking specifically to financial concerns for the sake of this article, but a durable power of attorney for healthcare may be useful as well.) A power of attorney for finances is a document that appoints someone as your “agent” (sometimes referred to as an attorney-in-fact), and this person will have the authority to make financial transactions on your behalf.

A key point is that, in this context, it is critical that it is a durable power of attorney. A non-durable power of attorney automatically expires if you become mentally incapacitated, which is obviously a problem when mental incapacitation is precisely the concern we’re trying to address.

When drafting the power of attorney, it can be an immediate power of attorney (which grants the applicable authority to your agent immediately), or it can be a springing power of attorney (which only “springs” into effect if/when you become unable to manage your affairs due to disability or mental incapacitation). A springing power of attorney is safer in one sense (because it doesn’t grant anybody any authority until it’s necessary), but in some cases it can actually create problems.

There will generally be a specific event that must occur in order for a springing power of attorney to spring into effect (e.g., your physician must sign a document stating that you can no longer manage your own affairs). With dementia, there’s a big hazy area between “clearly mentally capable” and “clearly not mentally capable.” There’s often a stage at which a person is pretty “with it” on some days and much less so on other days. In short, there could be a point at which you could really use help, but your physician is not yet willing to sign that document — so your chosen agent cannot yet step in.

Another important point here is that some financial institutions will require their own power of attorney document to be filled out. (That is, they may not honor the power of attorney document that you and your attorney have prepared.) So be sure to check with your bank(s), brokerage firm(s), and so on in advance to see what they specifically require.

Develop Relationships Now

If you do not have a family member or friend whom you trust sufficiently to appoint to to be your agent, you can appoint a paid professional (e.g., an attorney, CPA, or CFP whom you trust).

Be aware, however, that most attorneys, CPAs, and CFPs do not provide such services, because a) doing so is quite a bit different from the typical services offered by such professionals, and b) taking on the role of being somebody’s agent comes with a considerable list of liability concerns. So don’t just expect your current attorney/CPA/CFP to be willing to take on that role when the time comes.

Instead, you will probably have to find a professional who specializes in this sort of work. Fortunately, such people/firms do exist. For instance, if you live in Chicago, you may want to begin with a search for: “eldercare CPA Chicago” or “professional fiduciary Chicago” (without the quotes).

A Few Final Notes

With regard to planning for potential dementia, if you have a living trust, it’s important to appoint a successor trustee, who can take over in the event of your incapacitation. It’s also important to note that a living trust is not a replacement for a durable power of attorney for finances, because the trustee’s authority is strictly limited to the assets within the trust. And some assets (most notably your retirement accounts while you are still alive) cannot be put in the trust.

Finally, with regard to everything above I would add that:

  1. It’s important to address these matters well in advance (i.e., while it is still quite clear to you and everybody else involved that you are still of sound mind), and
  2. It’s important to discuss these matters with an attorney who has expertise in estate planning.

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