Financial Planning Focus – Preparing for Diminished Financial Capacity

March 28, 2017
By Andrea Brashears-Lusk, CFP®

As defined by the Consumer Financial Protection Bureau, “diminished financial capacity” is a legal term used to describe the decline in a person’s ability to manage money and financial assets to serve their best interests, including the inability to understand the consequences of investment decisions. Financial capacity is one of the first abilities to decline with cognitive impairment. It incorporates core skills such as conducting cash transactions, understanding debt and loans, paying bills and maintaining sound judgement to avoid financial exploitation. Although diminished financial capacity can occur at any age, it happens more frequently with seniors. Since cognitive impairment can happen without warning, it is beneficial to organize your financial affairs sooner rather than later.

There are several planning techniques you can implement to prepare for diminished financial capacity.

Get Organized
We recommend that important documents be stored in a safe place and be readily accessible in case of an emergency. Documents should include: bank and brokerage statements; mortgage and credit information; insurance policies; Social Security payment information; contact information for medical professionals; and retirement benefit summaries. Also keep a log of your current debts, account numbers and passwords in a safe place. Do not keep outdated documents with sensitive information lying around and shred this material before throwing them away. Share emergency contact information with appropriate parties, such as financial professionals, and update when necessary.

Find Someone You Can Trust
You may want to consider creating a durable power of attorney. It goes into effect immediately, authorizing the person you choose to act on your behalf. A durable power of attorney remains in effect until death, regardless of capacity. As a result, your agent can act in the event of temporary or permanent incapacitation. An alternative is a springing power of attorney which becomes effective upon incapacitation. As with any power of attorney, you retain the ability to change or cancel it as long as your decision making is not impaired.

You should prepare an advanced healthcare directive along with other estate planning documents. This document will specify what actions should be taken for your health in the event that you are unable to make that decision for yourself. As with a power of attorney, you will appoint an agent to act on your behalf. Your agent should be someone you trust to handle your affairs. Many people chose a relative, friend, or professional as an agent. The selection process for finding someone to act on your behalf should be handled prudently. Unfortunately in some cases, those whom you think you can trust do not always have your best interest at heart.

Update Your Documents
It is essential to periodically review beneficiary designations of life insurance policies, retirement accounts, and transfer on death accounts. Any time a major life event takes place such as marriage, divorce, child birth or death of a beneficiary, it is important to review these designations to avoid inadvertently leaving assets to an unintended recipient. For example, if you are divorced, and your divorce agreement does not include naming your ex-spouse as a beneficiary of a life insurance policy, you will want to update your beneficiary designation to coordinate with the agreement. Similarly, plan on updating wills and trusts to reflect your current wishes and estate planning needs. Review insurance policies to determine if coverage is adequate. Keep your advanced healthcare directive updated with respect to your views and beliefs.

You should plan on updating all documents as necessary, while cognition remains. It is important to be clear with your family and person(s) designated as power of attorney, what your most recent wishes are with regard to disposition of your estate. Your agent may be able to make changes to documents on your behalf, although this may be dependent upon the date and provisions of your power of attorney.

Plan Ahead
There are so many unknowns in life. What type of health issues will I develop with age? How long will I live? While we may not have all of the answers, we can plan ahead and be prepared for what is inevitable. Address your planning issues now so you can minimize the impact of diminished financial capacity.

Please contact us if you have any financial planning issues, needs or concerns that you would like to address.