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James Sullivan
James Sullivan
Six key components of financial plans for the chronically ill

While part of any good financial plan, these best practices take on a special urgency for ill or cognitively impaired clients, their families, and their caregivers.

December 20, 2012
by James Sullivan, CPA/PFS

When designing a financial plan for a cognitively or physically impaired elderly client, more than the cost of care needs to be taken into account. The plan itself must make allowances for a number of other factors that affect the client.

First, in almost all cases of chronic illness, someone else will be involved in the planning. The client may give his or her adult child (or children) permission to be involved in the process. This means that planning may now be done by committee. This often requires consensus-building and reaching a final decision may take much longer than otherwise would be the case.

If the client is no longer capable of making decisions, the planner may be meeting with a guardian or the person holding the power of attorney for property rather than with the client. 

Secondly, the meeting’s structure may change. If the client has suffered a stroke, the meetings may have to be longer, giving the client more time to absorb new information and respond to questions. A client with Parkinson’s disease or multiple sclerosis may be able to meet only in the morning when he or she is physically up to it, and he or she may tire quickly. Each chronic illness presents its own special challenges. Meetings may have to take place in the client’s home due to his or her inability to travel and the meeting agenda may have to be shorter than before the illness.

For a CPA planner there is another consideration—professional rules regarding confidentiality. The client should give the CPA planner permission to work with anyone designated as assisting with the financial planning. If the impairment is such that the client is no longer in a position to provide permission, the planner will likely be working with the person holding the client’s power of attorney for property. In other cases, the CPA planner may be working with a court-appointed guardian.

Too often there is a casual sharing of private financial information. Issues regarding the sharing of financial information should be clarified and documented from the beginning of the engagement.

Six best practices of financial planning for the chronically ill

For the chronically ill, a successful financial plan must have six key characteristics. These provisions apply to all financial plans, but are especially important when the client is chronically ill.

  1. The plan should be organized. This may seem to be obvious but in many cases, an elderly client has spent a lifetime acquiring a wide variety of investments left deposited in many different accounts. A client may own an array of old life insurance policies (both term and cash value policies), deferred annuities, several bank accounts, CDs, and IRAs (including some that may have been inherited). Several brokerage accounts still containing some stockholdings but not used for trading in many years (the original broker long since retired) may also make up the client’s assets.

    Decisions need to be made regarding which accounts should be closed or consolidated, what to do with life insurance and annuity policies. Absent any financial dependents or any legacy desires, some of the term life insurance policies may be canceled or sold as a life settlement. In many cases, existing deferred annuities can be consolidated through a Sec. 1035 tax-free exchange. The client may no longer have the ability to keep track of all the accounts and the people assisting the client with his or her finances can do their job better if the structure of the finances is much simpler.
  2. The plan may serve the client better if traditional life only or term certain annuities are used to generate regular monthly income. Annuities may be used to both simplify the plan and make sure there is sufficient monthly income to cover the cost of basic necessities. This makes bill payment from the account simpler as electronic deposits of the Social Security benefit and  pension and annuity payments ensure that regular, monthly bills can be paid automatically. Arrangements can also be made for regular deposits from IRAs of required minimum distribution (RMD) amounts so they are not missed (if the IRA is not annuitized).
  3. The plan should survive the death of the person primarily responsible for handling the client’s day-to-day finances. Parents never like to think of a child dying before they do—but a 70-year-old son taking care of his 92-year-old mother can predecease her. In other cases, the well spouse often dies before the sick spouse. The person watching over the finances might become incapable of carrying on, suddenly making a smooth transition impossible. These possibilities should be taken into account but are often overlooked in the planning process. A succession plan should be in place. If the person handling the finances does predecease the client, can the financial plan be picked up and understood quickly? Are the records organized? Has the plan been put in writing? Can the financial record (including the financial plan itself) be found and easily accessed? Nowadays, plans are often stored on a computer that no one can access because only the deceased owner knew the password. By making the financial plan transparent such situations can be avoided.
  4. Transparency. To minimize the chance of elder finance abuse, at least one other person should have access to the financial records in order to check the work of the person handling the finances. That person should also know where the basic financial records are and how to access them. This can be a point of contention for the person handling the finances—he or she may feel that there is a lack of trust. By having the subject raised by a third party (such as the planner or a geriatric care manager) there may be less resistance. The individual should be encouraged not take it personally; this is done in the client’s best interest.
  5. The plan should be flexible to meet the client’s changing needs. For example, some liquidity should remain for unexpected expenses—such as a sudden spike in the cost of health care. It is often easier to find a bed in a skilled nursing facility if the client can personally pay for the care for a period of time (such as six to 12 months) before having to apply for Medicaid financial assistance.
  6. The CPA planner should insist that the client’s estate plan and any trusts be brought up to date. This includes the will, the living will, and powers of attorney for property and health. Beneficiary designations on various accounts should be reviewed and updated, if necessary. All of the provisions listed above can be part of the financial plan, but if the legal documents are not in place, expensive problems can arise—for example, the need to seek guardianship if the powers of attorney have not been brought up to date or were never drafted in the first place.

All of these factors are part of any good financial plan but take on added urgency for ill or cognitively impaired clients, their families, and their caregivers.

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

* The AICPA 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. 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. For more topics such as this, join us at the 2013 Advanced PFP Conference on January 21-23, 2013 in Las Vegas. There are classes before the conference as well: Implementing PFP Services and the PFS Exam Review Class.