Lawyers may throw around the term “diminished capacity” in dealing with elders because they have to be aware of elders signing things they may not understand. Lawyers are supposed to protect against that. Financial advisors use the term in a general way, suggesting that some people with this may need help from trusted others in financial decision-making. And generally, we see that the term is unclear to many and is poorly defined in the press, literature and even among professionals.
Elders may have loss of financial decision-making capacity
Ample research exists on capacity for financial decision-making for people who have been diagnosed with Alzheimer’s disease. And we know that there is a long ramp-up in the development of Alzheimer’s disease and any other form of dementia. During the time symptoms of dementia first appear as problems with short-term memory and the time a person can be formally diagnosed with dementia by a physician, a lot can go wrong. It can take years for a diagnosis and may never actually are diagnosed.
There are some basic principles everyone with aging parents should be aware of when it comes to diminished capacity. They are summarized in my book, Working With Aging Clients, and the description applies to anyone with aging folks in your life, not just lawyers and other professionals. Here’s how it breaks down:
When it comes to the capacity for financial decisions, there is significant impairment in the earliest stages of Alzheimer’s disease. Mild impairment in other aspects of life does not track with mild impairment for managing finances. In other words, impairment for making good and safe money decisions is the first thing to go when cognitive decline is developing. And we also understand that the risk of developing dementia increases with age, regardless of how intelligent or accomplished a person was earlier in life.
What does this mean for you, if you have an older parent who is in charge of the family trust, investments or real estate? It means you need to keep watch and plan early for protecting your aging loved one from dangerous mistakes.
How do you do that? How do you tell Mom or Dad, with mild memory loss that they may lose their marbles later on and you don’t want them to mess up their finances? You surely can’t say that. This has to be strategic! We see this dilemma at AgingParents.com quite frequently and often we hear from the adult children after the parent has already gone off the rails and created many problems, or been financially abused. Here are some things we suggest with families earlier in the process.
- Family meetings, carefully planned and respectfully conducted can help aging parents and others in the family to look at reality and worst case scenarios. Talk about what would happen if the aging parent was impaired with say, a stroke, which is easier for them to face than the prospect of dementia. No one wants to face that dementia can happen to them.
- Get permission for the adult child most responsible in the family to be in communication with the aging parents’ financial advisor and estate planning attorney. Financial institutions as well as individual planners, and lawyers have strict privacy rules. They won’t talk to you unless they have the client’s permission. Don’t wait around until your aging loved one refuses what would otherwise be reasonable for them. Dementia down the road can make them very unreasonable, saying “no” to everything.
- Ask your aging parents to review their estate planning documents, again with the “in case you had a stroke and couldn’t talk or think” scenario as your excuse. The lawyer who drafted documents for them could be gone by now. Get a new one if needed. And above all, avoid the common issue that just one parent is appointed to act on the other’s behalf in case of diminished capacity. Two parents can both be impaired at the same time, a situation we see all too often. No one is appointed to step in easily when this occurs. Barriers exist in the legal documents, such as having to see two physicians to before Mom or Dad can be removed from power. And Mom or Dad think they’re fine and won’t see even one doctor let alone two.
A most important takeaway here is that mild memory loss, sometimes referred to as “mild cognitive impairment” (MCI) is not actually mild. It is a huge red flag that financial decision-making capacity may already be significantly impaired. This diminished capacity sets older folks up for financial abuse, bad and dangerous financial decisions and can destroy wealth in a very short time. It doesn’t matter if your “mildly” impaired father or mother was a bank president, an accountant, a professor of economics, or a wealth manager. None of these protect us against Alzheimer’s disease forever. We are all vulnerable.
Taking some preventive steps at the first signs of danger is smart, and will save both adult children and their parents from nightmare scenarios down the road. Above all, do not dismiss your aging parents’ forgetfulness as normal aging. Essential intelligence does not diminish with age. Failing to remember to pay bills is not normal aging. Failing to keep track of what’s coming into accounts and what’s going out is not normal aging either. Rather, those are some hints of a person losing the ability to keep track of finances. That is an aspect of the complex, multi-layered thing we call diminished financial capacity. It’s up to the family to see it and respond wisely and proactively.