Money Management: When and How to Help Aging Family Members

My father had been a fierce “do it yourself” investor over the course of my parents’ retirement, and he would frequently get extremely nervous about spending when the market pulled back and when he perceived that they lost some of their money. But this time was different. The market was performing well. So why the panic?

Mom agreed to bring Dad into our office to have a look at their finances. My team was surprised and concerned to learn that my father had invested a large portion of both of their retirement accounts in a risky biotechnology fund that ended up with a large loss position. He had purchased this fund because it had been on an upward tear and he was super excited to join the upward trajectory. I remember him telling me he was making a lot of money on a stock fund, but I never heard anything about how things ended up. Until that day.

I had never been concerned about my family finances before. You see, my father was always a practical and watchful investor who typically purchased diversified stock mutual funds. He was my inspiration for getting into investing and money management. Dad was well read, smart and careful. But he was also human. And like other humans, he sometimes let his emotions get the best of him. In addition, my father was beginning to experience declining capacity to manage money as he aged. The fact of the matter is, at age 82, Dad was struggling to make good decisions and he was making mistakes. This was devastating news, not just because it affected my family finances, but also because of how hard it was to admit that someone you cared about was failing.

Why did this happen to my father? What are the signs that the capacity to manage money is declining? What can a loving family do in a situation like this?

A few years ago, the Center for Retirement Research at Boston College published research on the subject of aging and capacity to manage money.^[1] The research showed most Americans worry more about whether they will have enough money in retirement, and less about their ability to manage their money as they age. This may be because many of the routine money management tasks, such as paying bills and getting the tax return filed on time, are not significantly affected by aging. These routine activities use “crystallized” intelligence – or accumulated knowledge – that increases with age. Wisdom!

But normal brain aging can also lead to financial mistakes. Why? We tend to lose “fluid” intelligence as we age. Fluid intelligence is about the ability to process new information, problem solve and reason. Financial capacity is not just about routine money tasks, it is about exercising judgement – such as assessing an investment’s potential return relative to its risk, understanding what an asset is worth and detecting fraud (all aspects of fluid intelligence). Fluid ability starts to decline as early as our 30’s and by our 70’s and 80’s, fluid intelligence has waned quite a lot for many of us.

Most people can get along with crystallized intelligence and continue to manage their own routine finances well into their 70’s and 80’s. But when it comes to complex matters not in their range of expertise, like picking appropriate investments or preparing a tax return, the aging parent is at higher risk of making mistakes. Those especially at risk are aging adults who take over responsibility for managing household finances after a spouse dies or becomes incapacitated (two-thirds of the time this happens to women), or those who experience mild cognitive impairment – or worse – dementia.

A disturbing characteristic of cognitive impairment is that people are usually unaware that they are slipping. They will have both high self-confidence and impaired financial judgement. A wicked combination! Like trying to convince our parents to allow us to give up the car keys, we may find ourselves trying to convince our overconfident parents that it is time to seek out a professional advisor, CPA and/or trusted family member to assist them with their finances.

Steps to Guide the Transition into Helping Aging Parents with Finances

Step 1: Have conversations early – Maybe your parents don’t need your help yet, but now is the time to start the conversation. Talk to your parents about who they would like to handle their affairs if they become incapacitated. It is best to have them sign a durable power of attorney (POA) to legally document who will have decision making authority over their finances if/when necessary and under what circumstances. This POA should be a part of their estate plan, and must be “durable” to provide for a specified agent to handle their affairs in the event they are unable to do so due to physical or cognitive incapacity.

Step 2: Make changes slowly – The goal is to increase your support little by little and help out only when needed. For example, you may decide to routinely take a look at your mother’s checkbook to see if entries are being made or that she understands all the charges on her credit card. Getting more involved gradually makes it more likely your parents will feel comfortable sharing information with you.

Step 3: Simplify bill paying/deposits – Suggest that your parents have all bills paid automatically each month though their primary bank account. Any deposits should be made the same way as well.

Step 4: Know where your parents keep important legal documents and financial information – Know the location of documents such as marriage certificates, birth certificates, life insurance policies and estate documents.

Step 5: Take a full inventory of your parents’ balance sheet, income and insurance – Make a list of all assets, debts, income and insurance policies. Know where to find details on each of these accounts, including bank statements. Review tax returns and credit reports to get a full picture of your parents’ situation. While this can be time consuming to put together, it is better to do this early. It will become a lot more complicated when/if your parents are no longer able to help you sort this out. To help the process, consider having your parents complete our planning guide or perhaps you can use this guide as a tool to aid the discussion.

Step 6: Watch for warning signs of decline indicating that it is time for you or a professional to get more involved:

• Unopened mail begins to pile up in the house, including bills
• Complaining often about not having enough money
• House is filled with expensive or unusual purchases
• Getting calls from creditors
• Memory problems – may include not remembering how to write a check

Step 7: Consider implementing power of attorney – if your parent(s) are unable to get control of their finances, it may be time to implement the power of attorney document so that you or the designated person can make decisions on their behalf. This will likely require a certification from one or more physicians that your parent(s) are no longer capable of managing their finances due to medical or cognitive issues. You will want to review their estate documents to know how to proceed. It would also be a good idea to seek out advice from their estate attorney.

Step 8: Communicate and document your actions – It is important to keep the rest of the family informed about that is going on, especially siblings of both you and your parents. While other relatives can be supportive, you will want to reduce the risk of misunderstandings. Optimally, they will be able to assist you with your efforts. At a minimum, you will want to document everything that you do on behalf of your parents when it comes to helping them manage their money. Money unfortunately can drive a wedge between even the closest family members.

Step 9: Keep finances separate – it is not a good idea to mix your own personal finances with your parents even if it seems convenient. Loaning your parents money, for example, can be a slippery slope. A best practice is to document any loans via a loan note that states the terms under which funds will be paid back and how much is owed to you. Obviously, your parents(s) can only sign the note if they are mentally competent to do so.

Step 10: Stay involved – there is no right way to take control of your parent(s) finances. But waiting too long to get involved or doing nothing just increases the chances that your parents fall into a financial tailspin that is difficult to recover from.

It is a loving and important gesture to help those we care about when they are no longer able to help themselves. This includes helping them manage their money when they are losing the capacity to do so.

Modera can be an important part of your resource team. We help many extended families, including aging family members of existing clients. One of the benefits of having a Modera relationship, is that our firm typically has in-depth knowledge of estate plans, finances and insurance details for our all our clients and we offer assistance to clients and families in the event of incapacitation or death. We can also recommend other professionals such as accountants or elder law attorneys as needed.

Please don’t hesitate to reach out to your advisor for a little help or support. It is important that you know you don’t have to go it alone!