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James Sullivan
Declining financial capacity can lead to financial disaster

Are your clients’ parents losing their financial capacity? Look for these six signs.

November 19, 2012
by James Sullivan, CPA/PFS

Financial capacity among older Americans has gained attention recently with the increase in financial abuse of the elderly. Declining financial capacity can make the elderly more susceptible to fraud. It can also lead to financial disaster if the elderly person is more confused by financial concepts and increasingly lacks judgment regarding financial matters.

Financial capacity is defined as “the capacity to manage money and financial assets in ways that meet a person’s needs and which are consistent with his/her values and self-interest.” (Marson, Hebert and Solomon, “Assessing Civil Competencies in Older Adults with Dementia: Consent Capacity, Financial Capacity, and Testamentary Capacity,” Forensic Neuropsychology: A Scientific Approach, Oxford University Press, 2011). 

Unfortunately, financial capacity is one of the first skills to deteriorate for someone with Alzheimer’s disease. Recent research has found that “impairment of financial capacity usually occurs very early in the course of cognitive impairment at a time when both patients and family members may be largely unaware of encroaching deficits in financial skill.” (Widera, Steenpass, Marson and Sudore, “Finances in the Older Patient With Cognitive Impairment,” Journal of the American Medical Association, February 2011).

The initial onset of Alzheimer’s can be subtle, and by the time it is clearly recognized by friends and family, it may be too late if the elderly individual has already been subject to financial fraud or made a substantial error in financial judgment.

For adult children who see their parents infrequently during the year, a visit during the holidays is a good time to check for signs of deteriorating financial capacity.

This provides an opportunity for CPA/PFS practitioners to raise financial capacity issues with clients who have elderly parents or other relatives they are concerned about. If the client is going home for a visit there are a variety of indicators of declining financial capacity he or she can look out for and, if necessary, discuss with parents. By making the recommendations outlined below, practitioners can build stronger ties with their clients.

What are the signs?

In a recent article, Kristen Triebel, Psy.D., and Daniel Marson, J.D., Ph.D., identified six signs of diminished financial capacity:

  1. Memory lapses
  2. Disorganization
  3. Declines in checkbook management skills
  4. Arithmetic mistakes
  5. Conceptual confusion
  6. Impaired judgment

Of course, going home for the holidays can be emotional enough without layering on issues related to the parent’s apparent decline of financial capacity. Families also differ in their willingness to talk about the issues raised here. Many parents refuse to talk about their finances with their children. But these challenges can be severe enough that they cannot be ignored.

Rather than raise concerns during the visit, the adult child may merely note them for later discussion. Some children will take the extra step of calling a geriatric care manager (GCM) to discuss their concerns and ask that an assessment be done to ascertain what the next steps should be. The GCM can often act as the go-between for parents and children, reducing the emotional tension.

Observation is key

On a visit home, adult children should look for indications of the warning signs of declining financial capacity:

Warning Sign

Indications

Memory lapses

Forgets to pay bills or pays bills late contrary to prior behavior; keeps poor records of financial transactions.

Disorganization

A formerly well-organized individual loses track of bills and other financial records. Has difficult time locating important financial documents and has stacks of loose mail and financial statements.

Declines in checkbook management skills

Forgets to enter transactions; enters incorrect details and makes numerous arithmetic errors; fails to update balance.

Arithmetic mistakes

Frequent errors in basic skills of adding and subtracting (the fancy term is “dyscalculia”), especially in checkbook.

Conceptual confusion

Difficulty in understanding financial concepts and terms he or she used to be very familiar with.

Impaired judgment

A new interest in “get rich schemes” and noticeable change in willingness to take risk; “erratic, unusual, or uncharacteristic purchases, withdrawals, or gifts.” New vulnerability to “telephone or mail fraud schemes” and “problems with impulsivity” when it comes to spending money, according to Triebel and Marson.

(Adapted from “The Warning Signs of Diminished Financial Capacity in Older Adults,” Generations—Journal of the American Society on Aging, p. 39-45, Summer 2012).

Keep in mind that individuals who were disorganized or handled their finances poorly when they were young usually carry the same habits into old age. Of course, the adult child can assist a parent with improving those behaviors (for example, online banking can help a parent become more organized and keep better track of his or her bank accounts).

Sometimes helping a parent simplify his or her finances by closing and consolidating accounts can make a big difference. It is a change in long established behavior for the worse that the child is looking for—the well-organized parent becomes disorganized and forgetful. Being home for the holidays may also give the adult child a chance to discuss other important financial topics with parents:

  • Wills, advance directives, trusts, final wishes for burial, powers of attorney, whether beneficiary designations need to be updated, etc.
  • The type of Medicare supplement program the parents own. An analysis may show they have too little protection or the plan is more than they can afford and a change to a less expensive plan may be required. This is especially important to prevent a parent from dropping the needed coverage because of affordability. Again, parents may be reluctant to discuss the issue. In some cases, the parent may have forgotten to pay the monthly premium and been dropped from coverage, ignoring letters from the insurance company (many companies offer a service to inform a third party such as an adult child if the premium payment is late, providing time to make up the missing payment before coverage is dropped).

The goal is to increase adult children’s awareness of their parents’ financial well-being. Dealing with one or two of the issues raised during a trip home may be as much as the adult child and parent can handle. The important thing is for the adult child to observe and note any problems they see. Raising the topic—unless it is an urgent matter—can wait for a less hectic time of the year.

Clients appreciate when CPA/PFS practitioners make an extra effort. New client questionnaires often ask about the number of financially dependent children or whether clients have a special needs child, making additional planning necessary. Clients should also be asked about the  likelihood that a parent may become a financial dependent due to chronic illness and increased care costs or due to other financial factors such as a reduction in the value of a retirement nest egg. The clients may have no idea at the time the questions are asked—but it will give them plenty to think about.

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James Sullivan CPA/PFS, is a financial planner located in Naperville, Ill., who specializes in working with individuals suffering from chronic illness and their families.

* The AICPA’s PFP Section provides information, tools, advocacy, and guidance to CPAs who specialize in providing tax, retirement, estate, risk management, and investment advice to individuals and their closely held entities. PFP Section members, including PFS credential holders will benefit from a new publication, The CPA’s Guide to Financing Retirement Healthcare, and other elder planning information in the Resources section and in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp.All members of the AICPA are eligible to join the PFP section. CPAs who want to demonstrate their expertise in this subject matter can apply to become a PFS credential holder.