Damage Prevention and Control for Financial Incapacity

A virtually universal policy and practice quandary in an aging society is how to prevent the risks attendant to a loss of capacity—whether involving a loved one, a patient, a client, a neighbor, or other member of the community. Professionals, including physicians, lawyers, and bankers, report that they struggle to define their appropriate roles, if any, in dealing with an older person's diminished capacity, particularly at the nexus of financial matters. Because financial capacity is among the first to decline in individuals with emerging cognitive impairments, it can be the canary in the coal mine of impending dementia. Moreover, the consequences of ignoring these declines can be catastrophic for individuals and families. Of special concern is the risk of financial abuse and exploitation. A 2009 study of financial elder abuse by the MetLife Mature Market Institute, the National Committee for the Prevention of Elder Abuse, and the Center for Gerontology at Virginia Polytechnic Institute and State University estimated the annual loss by survivors of elder financial abuse to be at least $2.6 billion.¹ That kind of financial damage on the personal level directly affects the viability of housing, independence, health, and well-being.

Effective steps can be taken in policy and practice to respond to financial capacity issues but require awareness across the institutional and social spectrum. First, professionals should encourage individuals at risk for financial incapacity and their family members to plan ahead for the contingency of impaired financial capacity. Elder law attorneys and estate planners reach only a small proportion of the older adult population. Bankers and financial advisors are not always attentive to advising how an individual can preserve one's control over finances. Similarly, employers offering pension and savings plans frequently overlook the need for education about planning for financial management in the face of diminished capacity. For primary care clinicians, educating patients about the planning tools available for dealing with future financial incapacity may seem far afield of their role. But if so, it is a missed opportunity to advance the long-term health and well-being of aging patients.

Compare the lack of attention to diminished capacity for financial matters with the attention given to that for health decisions. State governments support tools such as health care powers of attorney and living wills and the federal government requires Medicare and Medicaid institutions to provide information and education on patients' decision-making rights.² Advance planning for financial decision making should receive the same level of systematic education and promotion. The annual wellness examinations for Medicare patients under the new health reform law provide a promising opportunity for both capacity screening and education on planning tools for financial decision making as well as health care decision making.

In addition, government agencies that provide income maintenance such as the US Social Security Administration and the US Veterans Administration have an opportunity in this regard. All produce a substantial volume of consumer resources that could easily stress the importance of advance planning for financial management.

A second step requires strengthening the planning tools. The most common device families use to help with day-to-day money management for aging parents is the traditional joint bank account. Setup is simple and a joint owner (the adult child) can pay bills for the owner (the parent), if needed. However, it also carries appreciable risk. A joint owner has the practical ability to “take the money and run” or, less visibly, misspend funds over time. Debts incurred by the joint owner (even if unrelated to the aging parent) can subject the joint account to legal action, and the most typical joint ownership includes the right of survivorship, that is, sole ownership upon death of the other owner, which may not be the result intended by the parent when multiple heirs are involved.

A little-known or used but good alternative is the multiparty account without a right of survivorship, sometimes dubbed a “convenience account.” The “helper” person, added to this type of account, essentially serves as an agent for the owner (the person at risk of financial incapacity) and can make deposits and withdrawals on the account, but in the event that the principal account owner dies, the account is dispersed in accordance with the individual's will. Legally, the helper can use the account only for the benefit of the owner and in accordance with the owner's wishes. Banking laws permit such accounts; a Uniform Multi-Person Accounts Act, revised in 1989, serves as a model for state legislatures³ and approximately half of states have adopted some version of the act. Even with the act,³ financial institutions have little incentive to recommend alternatives to the traditional joint account because it takes more time and money to train employees to explain the different kinds of accounts and forms to the customer.

Another common planning tool with more versatility than the joint account is a financial durable power of attorney. This legal document enables the principal to give legal authority to another (the “agent” or “attorney-in-fact”) to act on behalf of the principal with respect to any property or property matter specified in the document. The “durable” descriptor means that its validity endures even when the principal loses financial decision-making capacity. As a planning tool for incapacity, it is low in cost and flexible. Without it, the only alternative in the face of incapacity may be the cumbersome and costly process of court-supervised guardianship.

However, there is a disadvantage to the power of attorney. Most often, a family member or friend serves as agent, and even when well-intended, the average person seldom understands the fiduciary obligations (legal responsibilities of due care) an agent has, such as avoiding any intermingling of the principal's and agent's funds and property. More dangerous is the opportunity for agents to ignore or abuse their authority through gift-giving, self-dealing, overstepping their authority, or imprudent management. State laws generally grant agents broad authority, requiring no monitoring, and many have unclear standards for agent conduct, lacking even minimal protections for the principal.⁴

There is a good model for states to adopt, the Uniform Power of Attorney Act, substantially revised in 2006.⁵ This act maintains the simplicity and flexibility of powers of attorney, while protecting the principal, the agent, and those who deal with the agent. Some of its key provisions include (1) modernizing and clarifying the duties of the agent by providing 3 mandatory duties that cannot be changed, acting only within the scope of authority granted, in good faith, and in accordance with the principal's reasonable expectations to the extent actually known and otherwise in the principal's best interests, and providing 6 other default duties, such as acting to avoid conflicts of interest, but these duties can be modified in drafting the document; (2) requiring an express grant of authority be added to the document to engage in specifically enumerated acts that could spend away the principal's estate, such as making a gift, creating a trust, or changing a beneficiary designation; (3) protecting a third party's right to refuse to honor a power of attorney when the third party reports suspected abuse to authorities; and (4) providing an optional statutory form to reduce the need for legal services to create the power of attorney.

Currently, only 8 states have adopted the Uniform Power of Attorney Act. If widely enacted, it would enhance and clarify the law uniformly across the states. However, even with the model act, consumer information on how to be a responsible agent is needed.

A third step to target financial capacity issues is to enhance the capability of multiple professions to identify possible financial impairment. Interest in this issue has increased rapidly in the last few years. For example, the American Bar Association and the American Psychological Association have produced a guide for identifying and responding to capacity issues for lawyers, including financial capacity.⁶ The Financial Industry Regulatory Authority recently created an online curriculum to help financial advisors spot and respond to situations in which clients exhibit diminished capacity.⁷ Banks and other financial institutions are likewise beginning to train front-line staff who are in the best position to identify diminished capacity and potential financial exploitation.⁸ For primary care clinicians, training in capacity assessment has not been high on the educational agenda, but incorporating screening tools in their practices and providing educational tools for patients and families would be a first step.

In an aging society, all professionals serving older adults have an obligation to understand diminished decisional capacity, especially with respect to financial issues, and to acquire the basic skills to identify it and respond constructively to it. Failure to meet the challenge will only increase the potential for financial abuse and exploitation.