Planning for age and / or incapacity, part 1: The problem

By Barbara H. Pietrowski CPA, CFP, PFS

In the United States, the fastest growing segment of the population is those individuals who are older than 100. The largest age group in the population is the baby boomers, the oldest of whom is 56. Just looking at demographics, the fastest growing age group in the next 20 years will be those who are older than 65.

The downside of the advances in geriatric medicine is that more frail and mentally incapacitated elderly people will live longer and require more care, both physically and financially, from their families, the persons who handle their assets and the government via Medicare and Medicaid.

So there is a problem now that will be a much bigger problem in the future. Caregivers — and especially financial caretakers — often are family members.

This article discusses issues related to the management of the financial affairs of the elderly by other family members.

For many reasons, management of the assets of the elderly all too often fall under the "care" of one or more family members. I am sure the majority of children who have control over their parent's financial assets exercise their financial responsibilities properly. Unfortunately for my peace of mind, in my practice I have seen the end result of the misappropriation of assets by other family members. If a child or other relative is able to misappropriate the assets of an elderly and / or incapacitated family member, all too often there is a reduction of those assets to zero. In some cases, the impoverished senior is then thrown out on the mercy of either the state or the other children in the family. Most of the time it is impossible to recover any of the assets, and the transfer of those assets will disqualify the senior for assistance from Medicaid for 36 months or longer.

State agencies generally are concerned about the physical health of seniors and can provide assistance if a senior is being physically mistreated. However, financial mistreatment is a low priority issue. It is difficult or impossible to obtain an emergency guardianship hearing based only on financial considerations. Sometimes the elderly person is aware of the shrinkage of his or her assets but for various psychological reasons make no protest until it is too late.

Many of these types of situations occur when parent(s) grant to one or more of their children a power of attorney to handle their financial affairs as they grow older and are no longer able to make financial decisions. In a previous article, I have discussed some of the pitfalls of a poorly written power of attorney. In this article, I am going to discuss an even worse situation — giving someone a virtual right to all of your assets through a joint account.

Even if the financial assets (i.e.: stocks, bonds and mutual funds) are held in the senior's name only, they can be sold through the acquiescence of the senior or by exercise of a power of attorney and then deposited in the joint checking account. At this point, the assets may be appropriated by the non-contributing account holder with virtual impunity. Checks can be written to the joint owner, to their family members, to "cash," and to pay the personal bills of the financial caretaker and joint owner of the account.

It is sad to say, but it is difficult to prove misappropriation of assets in these cases as the joint account holder can always maintain that such fund transfers were a gift and approved by the senior account holder. If the senior is either mentally frail or intimidated by the child, there is little legal protection or redress for the person who was so misguided as to set up a joint account in the first place. Even a competency hearing may often not solve the problem. The standard for legal competency is very low. In many cases, it is simply one moment of lucidity in front of an attorney or judge.

In my opinion, a parent should never set up a joint account with a child for any reason. If there is a concern about probate and ease of transfer after death, the account can be set up as a POD (payable on death) account. Joint accounts can too easily be an invitation to financial disaster.

If no joint account is set up, then to misappropriate assets, a holder of a power of attorney needs to exercise that power. The fiduciary responsibilities of the holder of a power of attorney are set by state law. In some states, the standards of care are high; in others it is very low. But at least the power of attorney comes with some legal standard of care of the assets of the grantor. A joint account often has none.

In my next article, I will discuss some safeguards that should be used when planning for the management of the assets of individuals who may at some point become unable to manage their own financial affairs.

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