It’s one of the toughest conversations an adult child will have with a parent: helping mom or dad to understand- and accept- it's time to relinquish control of their finances.
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The discussion is often fraught with emotion: anger, embarrassment, sibling rivalry and fear, just to name a few.
Moreover, it’s the kind of thing that tends to creeps up on you. Until the day it smacks you in the face. You drop by mom’s place and notice mail carelessly piled on the table; much of it appears to be bills. On the kitchen counter you find a bag stuffed with receipts and there’s cash scattered around. This is totally out of character for your neat-freak mom who insisted you straighten your room before you could go out and play. She taught high school algebra for 30 years. Now her apartment is a disorganized tangle of paperwork.
What’s going on? Life, unfortunately. With increased longevity, comes cognitive decline. In a nutshell, just as we experience with our physical bodies, as we age, our brains don’t function as efficiently as in the past. According to the National Endowment for Financial Education (NEFE), “almost half of all Americans who are past the age of 85 will experience some form of dementia.” In the words of NEFE spokesperson Paul Golden, “It’s an inevitable and natural part of the aging process.”
The danger is not that it might take your parent longer to finish a crossword puzzle, but that mom or dad is no longer capable of making sound decisions about everyday financial matters. And this can quickly drain any savings. When they aren't capable of staying up to date on their finances, parents risk losing their insurance coverage or have debt collectors knocking at their door. They are also much more vulnerable to being victimized by identity fraud or taken advantage of by scam artists. In her book, The M Word, financial planner Lori Sackler writes of a client who “had to take over the financial affairs of his 80-year old mother quickly when he discovered that she had lent money to a distant relative for a real estate investment without any documentation and without understanding the risks.”
There are many warning signs that it might be time to step in with parents' finances: dad can’t remember where he banks, or he struggles to do simple math calculations. According to the NEFE, 47% of seniors have trouble managing their bills.
But just because there are warning signs, doesn't give family members the right to jump in and take over parents' finances.
“Most people assume their family members get a free pass and have the right to [step in and take over] for them,” says Merrell Bailey, an estate planning and elder care attorney in Orlando and a member of NEFE’s board of directors. “No one has the right to do things on your behalf unless you give them a durable power of attorney.”(1) The key is that in order for a durable power of attorney to be legally enforceable, the individual must be in full control of their mental faculties at the time they sign the document.
In other words, the plan needs to be in place before the parent becomes incapacitated.
“If it’s too late, the only option is to get a guardianship,” says Bailey. This involves the court deciding who will manage dad’s financial affairs. “It’s expensive. There are filing fees, an attorney must represent you. It’s devastatingly public and emotionally difficult. Once it’s set up, it lasts until the person dies.” It’s also time consuming for the guardian, who has to periodically appear in court to produce documents accounting for the income the elder has received and how it was spent.
Unfortunately- an understandably- this is a topic that both parents and children are in serious denial about. NEFE recently wrapped up a major survey of more than 2,000 American adults that shows 70% says there are “major barriers” preventing families from discussing this issue. Bailey says she has elderly clients who tell her, “I bring this up all the time, but my adult children won’t talk about it.” On the other hand, she also hears from adult children who say their parents won’t discuss it. Frankly, surrendering control over something as basic as financial affairs is another sign of “getting old” or, worse, “losing it” and it can be a frightening admission for both sides in the discussion.
If you’re the adult child, it can be heartbreaking to admit that the person you looked up to your entire life and who took care of you, now needs you to take over. If there are multiple children in your family, there’s a good chance those old childhood competitions will reappear. Which one of you will be “The Chosen?”
As difficult as this process is, it’s in everyone’s best interest to reach a resolution. Doing nothing is not an option.
And as Bailey points out, the “convenience” of technology has made things even more difficult. Mom may have stopped receiving paper statements from her bank and starting paying bills online, but who knows her user name? Password? Even if you know where she banks, you have no way of accessing her account. Of course, without a durable power of attorney, you can’t access her account!(2) You have no legal authority to deal with her bank- or brokerage account. Privacy laws prohibit the bank from discussing her account with you, no matter your relationship. You’re going to have to go to court and get that guardianship. As mentioned, that takes time and money.
So how do you begin to approach this delicate topic?
Golden advises you make sure parents knows it is their plan. “They get to specify how and who will be in charge. [Make sure they understand] that it will be put in place if- and only if- it is needed. In the meantime, they remain in control. Stress that the sole purpose is for their own security.” Depending upon your family dynamics, it might take some doing to convince siblings to set aside past rivalries for the sake of what’s in the best interest of mom or dad.
You’ll need to identify- and probably consolidate- assets. Where are the bank accounts? What are the numbers? Do the same thing with any investments your parent might have. Credit card accounts. What sources of income do they have, such as a pension, Social Security, retirement accounts, etc. You’ll also want the names of and contact information for their doctors. Do they have health insurance in addition to Medicare? Long-term care insurance? Set up a schedule for bill-paying. What gets paid monthly? Quarterly? Annually?
Above all, don’t expect to solve all this in one meeting. Communication among all family members- especially with your parent- is critical. This will take time, finesse, discretion and compassion. But in the long run, you and your parent will have greater peace of mind know that if the day comes when Mom or Dad cannot handle financial matters on their own, they have a plan in place to take over. One that they approved.
1. Do not confuse this with a plain old “power of attorney”- a document that is generally used for convenience and is temporary. For instance, you might give your brother power of attorney to pay your monthly bills while you’re on a 2-month sabbatical in the Alaska wilderness. You could send your payments in yourself, but it would be a hassle. (Moose are so undependable.) When you return home, the power of attorney ceases and you take over again.
In contrast, a ”durable power of attorney” means you permanently assign legal power to another person to act on your behalf when the time comes that you are no longer physically or mentally capable of acting on your own behalf.
Look at it this way: If you fell off a cliff during your sojourn in Alaska and were permanently brain-damaged, the “power of attorney” you gave your brother would cease to have any legal standing. He could only continue to pay your bills if you had given him a “durable power of attorney.”
2. A durable power of attorney is used with assets that are covered in a will. If your parent has a trust, then the “successor trustee” would be the individual with legal authority to take over.