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Managing a Loved One's Finances: The Options

August 16, 2018

 

As parents and other loved ones age, their financial capacity - the ability to understand and make independent financial decisions - may decline. When that happens, it often becomes necessary for another person to step in and begin assisting with the finances. And while there are several ways a family member or friend can be of assistance, usually only one or two of those options are ideal. Let's look at them:

 

Monitoring and Reminders. In some cases, it is possible for a family member/helper to simply keep track of the bills of the elderly person and prompt them to take care of them as needed. This can be useful when the elderly person still has a relatively high capacity to take care of their own affairs, but should only be done when there is also a "back up" plan for the future, when the elderly person may eventually be unable to do anything for themselves, even with reminders.

 

Joint Checking Accounts. A joint checking account is a bank account that is shared by two people. Often, the account gives a "right of survivorship" to one of the members, which allows them to retain control of the account after the other member dies. Although inexpensive, this strategy is never ideal for several reasons. First, it does not allow broader financial powers to the elderly person's helper. For example, they cannot access information with entities other than the financial institution, such as utilities and wireless service providers. Furthermore, it is fraught with legal consequences, including potential tax consequences once the elderly person becomes disabled.

 

Power of Attorney. A power of attorney allows a helper to directly handle all of the financial affairs of the elderly person, usually without complication. They can (and should) normally be drawn up as "durable" powers of attorney - that is, powers of attorney that continue to work even after the elderly person becomes disabled. The only downsides of a power of attorney are: (a) there must be someone trustworthy to take on the power and (b) there is a small cost in having one properly prepared. You should never attempt to prepare your own power of attorney. The rate of error in self-prepared legal documents is very high, even for people who are well educated. The money invested in the services of a competent professional will pay for itself very quickly.

 

Guardianship. Another unfavorable, but sometimes necessary option is a guardianship. A guardianship is a legal relationship that is established by a court proceeding in which one person is given legal control over the financial and other decision making power of another, who is shown to lack capacity to take care of themselves. Guardianships are expensive, and can be easily avoided by executing a power of attorney at a time when the elderly person has the appropriate legal capacity to do so.

 

As you can tell, the key to ensuring that an elderly person's finances are taken care of as they lose the ability to do it themselves, is advanced planning. An appropriate conversation with your loved one today can help you to avoid a more expensive and complex situation in the future.

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