Prepare Your Finances for When You Can't Manage Them
Critical steps to take in case you become cognitively impaired
Taking care of your immediate needs while keeping an eye on the future is challenging enough. But the risk of adverse consequences begins to compound when cognitive impairment enters the picture.
That’s why you need to take a few critical steps now to protect your finances in case you become cognitively impaired when you’re older.
The prospects are pretty high. About half of adults in their 80s suffer from cognitive impairment. This group includes dementia patients, but is also largely comprised of those struggling with cognitive decline: impairment in processing speed, reasoning skills, spatial processing and the ability to solve problems spontaneously.
Cognitive impairment directly impacts financial decision-making. As Next Avenue noted in a previous post: “You might not know it, but financial capacity — the ability to manage your money to meet your needs and match your values — is one of the first things to go when you have mild cognitive impairment.”
Preparing for the possibility of cognitive impairment should be a group effort among family, friends and trusted professionals: The future can be better managed by those willing to share information and responsibilities.
The centerpiece of preparation is an Emergency Checklist, which helps track important financial and legal items. By working with advisers including financial planners, CPAs and attorneys, families should identify the location of legal documents, all financial accounts and the necessary passwords to access critical information. These details should be accessible to appointed family members and held in a secure environment by a retained adviser.
As families begin to gather information, here are three critical activities the Emergency Checklist can then set in motion:
1. Know your debt and income sources
Understanding how money is coming in and going out of accounts serves as the basis for overseeing day-to-day budgeting. Children of aging parents should know how their cash flow must be managed in the event they need to take control of bank accounts. They should generate lists of payments that are automatically debited and flag those needing special attention such as insurance or real estate bills.
Identifying income starts with a review of income tax returns, which should paint a picture of how cash flow is influenced by items such as annuities, pensions, investment income, Social Security benefits and retirement plan distributions.
Real estate ownership can be a more complicated issue, especially when it generates revenue as a rental property. While the tax return will indicate the income stream and general expenses, families will need to develop a plan around selling the property or managing it efficiently (more on this momentarily).
If debt and income sources aren’t identified, revenue can be lost and perhaps worse, unknown and unpaid liabilities can accrue penalties, damage credit scores or deplete existing financial resources.
2. Have a plan for real estate holdings
Whether it’s the family homestead, a vacation property or rental units, real estate holdings are usually among your most significant purchases. By the later stages in life, these properties are often viewed as lifestyle properties, rather than assets, which means they might inadvertently get left out of important financial discussions.
Indeed, people are often reluctant to sell real estate, even if it’s rarely used or has become a drain on cash flow. In the case of a second home or rental property, proper titling for estate plan purposes is extremely important. Families need to understand the real cost of upkeep, the long-term plan for the property and who would be responsible for overseeing it in the near-term from a financial and physical maintenance perspective.
Some of these issues may be addressed and resolved through estate planning, but before cognitive decline sets in, families must understand the basic details surrounding each property. You can avoid a lot of anxiety by sharing with family members where properties are located, whose name is on the deeds and who is expected to make major decisions about the real estate if the owner becomes impaired.
3. Assign a health care agent
A health care agent is the person appointed in a health care proxy document to make medical decisions on behalf of someone when necessary. This agent is named in a living will or durable power of attorney and should be identified when these documents are drafted. A successor to the primary agent, usually the spouse, should also be named.
The agent will be called upon to make formal decisions about resuscitation, use of antibiotics, palliative care and a host of other potential medical issues (see the Mayo Clinic’s website for valuable information on health care proxy).
Making sure that a properly executed health care proxy is at hand and up to date is critical. When cognitive impairment sets in, families will want absolute clarity regarding health care decisions.
Often overlooked is the need to review the proxy every few years; preferences about care that are formed early in life often change over time. Families will want to ensure that the proxy reflects recent preferences of the person, otherwise friends and family with the best of intentions may be forced to make decisions that don’t reflect current wishes.
Families preparing for cognitive decline should encourage open communication, organization and teamwork. No doubt, making the transition to more of a team-oriented financial support system is emotionally complicated, but it can be liberating and life-changing as well.
Taking steps early will clarify the economic landscape, allowing families to spend more time enjoying one another and less time struggling over financial management under duress.