Planning Now for Diminished Capacity

Many estate plans don't account for incapacity, but there are steps you can take to protect yourself and your family.

Most of us are aware of the need to plan for what happens in the event of our passing, and at least know that we should have an estate plan in place to help distribute our assets and guide our surviving loved ones’ decisions. Those plans, however, often only apply in the event of death. What happens if you develop a critical illness and cannot manage your affairs or make medical decisions? What happens if you experience a cognitive decline which makes those things difficult or impossible? What happens if you simply no longer want the responsibility?

The need for someone to make financial or medical decisions on behalf of a loved one could last for weeks, months, or the rest of a person’s life. As with all estate planning, planning now along with those you would entrust to make decisions for you about your wishes could help provide some manner of clarity and guidance in what would be a challenging time. Without these decisions made – and legally documented – in advance, a friend or relative may have to ask the court to appoint a guardian for you, a public legal procedure that can be time-consuming and expensive. Without instructions from you, an appointed guardian may not be able to make decisions on your behalf consistent with your wishes.

Recognizing Diminished Capacity

Common Signs of Diminished Capacity

  • Changes in mental acuity and difficulty processing simple concepts
  • Memory loss
  • Inability to recognize or appreciate the consequence of decisions
  • Making decisions that are inconsistent with current long-term goals or commitments
  • Erratic behavior
  • Lack of awareness or understanding of recently completed financial transactions
  • Refusal to follow appropriate investment advice – especially when the advice is consistent with previously stated investment objectives
  • Appearing concerned or confused about missing funds in their account, where reviews indicate there were no unauthorized money movements or no money movements at all
  • New people suddenly appearing in someone’s life (long lost family members, non-family members)
  • Unexpected or unusual changes in beneficiary designations
  • Rapid unexplained or uncharacteristic gifting or spending of funds
  • Inability to recognize or appreciate the consequence of decisions
  • Appearing uncharacteristically unkempt or forgetful
  • Appearing disoriented with surroundings or social setting

Broadly speaking, diminished capacity is the loss of normal abilities to think, remember and judge. Diminished capacity can be a temporary condition caused by a physical illness, effects of a medication, vitamin deficiency, lack of sleep, stress and other reasons. It can also be the early stages of dementia. As someone loses capacity, they become less able to make financial decisions and exercise financial judgment. It’s important to note that a decrease in financial decision-making capacity is often one of the first signs of diminished capacity. A person can seem otherwise fine but not be capable of exercising sound financial judgment.

How diminished capacity presents itself can be very specific to the individual, but certain things are common signs. Loved ones and close associates are often best equipped to notice diminished capacity because they have a clear understanding of what is typical for a person and can identify behavior that may be erratic but may otherwise seem perfectly normal to a stranger.

Ways to Prepare

As many as 5.8 million people of all ages were living with Alzheimer’s dementia in 2019 according to the Chicago Health and Aging Project. Additional data from the Aging, Demographics and Memory Study show that as many as 14% of people age 71 and older have some form of dementia.1 Combined with the host of other illnesses and occurrences that could cause diminished capacity and the likelihood that someone may face diminished capacity in themselves or their loved ones could be significant. While you cannot control whether you’re faced with diminished capacity, you can prepare to help minimize the challenges faced.

When planning for potential diminished capacity, the primary considerations fall into two main groups, financial decisions and medical decisions. There are various ways to handle both sets of considerations, depending on your specific priorities and concerns. In all cases, it is important to carefully consider whom you want to appoint to make these decisions for you. It does not necessarily have to be or even need to be your next of kin or closest friend or loved one. If you have someone in your life who works in finance or medicine, you may benefit from having them appointed to handle those responsibilities, or you may simply have people close to you whose temperaments would be well suited to handling those responsibilities. It is also worth considering the age and general health of anyone you appoint to ensure that whoever is needed to step in for you is able to. Remember that who the appropriate person is at one point in your life may change over time, so be sure to revisit these documents as your life circumstances change.

Financial Decisions

Because financial decisions can become difficult in cases of diminished capacity, it is particularly important to prepare for someone else to step in to make decisions and handle your finances should the need arise. One critical step is to prepare a thorough summary of accounts, recurring bills, recurring income and any other finances of which whomever you appoint to handle your affairs would need to be aware. This list should include information on all financial accounts, including account numbers and contact information, income sources and frequency and recurring expenses, as well as information on insurance policies, including medical insurance, long-term care insurance and property and casualty insurance.

In order for whomever you wish to appoint to be able to handle your affairs, there are several legal options from which to choose. This list may not be exhaustive, so if you have any specific questions, reach out to your estate planning advisor or your Wetherby team.

  • Durable Power of Attorney (DPOA): A DPOA legally authorizes someone else to handle certain matters on your behalf and stays in effect if you become incapacitated or otherwise unable to handle matters on your own. This agreement can be structured to take effect either once a physician or a court has determined that you are incapacitated (known as a “springing” power of attorney), or it can become effective immediately upon execution of the document. In either case, once effective, the authorization granted by the DPOA is permanent until the originator’s passing, allowing the authorized agent to make decisions on your behalf.
  • Power of Attorney (POA) for a Specific Account: Power of Attorney (POA) can also be established for specific financial accounts, allowing you additional resolution in who you grant authorization to, and to what.
  • Revocable Living Trust: You can register your assets into the name of the trust with yourself as the trustee while you have capacity and maintain full authority over all trust property. Should you become incapacitated, the successor trustee steps into your shoes and manages the accounts and other assets that are registered in the name of the trust. You may also choose to step down as trustee or appoint a co-trustee, which may be a good choice if you think you may simply no longer want to manage your finances or would like assistance in doing so. Appointing a co-trustee requires capacity to make that decision. However, you can step down as trustee at any time with or without incapacity and let someone else you have chosen take over control of your finances.
  • Joint Tenants: Registering an account as Joint Tenants provides current account ownership and control to both names on the account. Because this is specific to one account, it allows you to be more particular about who controls what assets.

Medical Decisions

It is entirely possible and even likely that you may want different people to manage your finances and your medical decisions, and there are several ways to handle that.

  • Medical Power of Attorney: You can assign a person to make medical decisions for you if you are unable to do so through an Advance Health Care Directive (AHCD), sometimes also known as a Living Will. Make sure that the person you assign to make medical decisions for you has a copy of your AHCD and understands your wishes, as stated in the document. These discussions can be difficult but will go a long way to simplifying decisions for your loved ones should the need arise.
  • Physician Orders for Life-Sustaining Treatment (POLST): If you are seriously ill or have advanced frailty, a POLST may be a more appropriate choice than an advanced directive or medical POA. POLST forms communicate specific treatment wishes and share what you want during an emergency that may be likely given your medical condition and your goals of treatment with other providers. POLST forms are medical orders and must be completed and signed by a medical professional to be valid. Your health care provider completes the form after discussing what is important to you, your current diagnosis, what is likely to happen in the future and what your treatment options are.

Plan Now to Help Avoid Elder Abuse

According to the World Health Organization, 13.8% of seniors not living in an institutional setting have experienced financial abuse.2 Financial abuse costs Americans over $2.6 billion annually.3 While much of this is the result of truly bad actors, much is also the result of poor handling of often difficult situations by family members or other loved ones. Having plans in place now helps the right people be given responsibility for your finances and helps avoid even inadvertent financial exploitation or abuse.

The Senior Safe Act

Your financial advisors may be able to help avoid issues related to diminished capacity or financial abuse. The Senior Safe Act, which became federal law in 2018, provides some level of immunity to advisors who report incidents of potential financial exploitation against those age 65 or older. The Senior Safe Act allows advisors to report suspected fraud to law enforcement without the fear of being sued if they have been trained to identify and report suspicious activity. By knowing what to watch for to help identify elder abuse, who the trusted individuals are in a person’s life to look to in case of suspected diminished capacity and to whom to report suspected abuse, advisors can help to protect their clients’ safety and their finances.

While we hope you retain your full faculties and health indefinitely, planning ahead for potential diminished capacity can help make a difficult situation for you and your loved ones that much more manageable.

If you have questions about your planning options, please do not hesitate to reach out to your Wetherby team.

1 Alzheimer’s Association. 2019 Alzheimer’s Disease Facts and Figures. 2019.

2 World Health Organization. Elder Abuse Factsheet. June 15, 2020.

3 National Center on Elder Abuse. Elder Abuse Statistics and Data. 2020.

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