By Lee Sherman
When a loved one falls ill to diminished capacity, it’s easy to succumb to despair and helplessness yourself. But, if you’re in a position to take over their finances, you’ll need to remain level-headed and ideally understand how to go about it in advance.
The exact rules vary by state but all provide for a relative or trusted friend to be designated as an agent should a doctor determine that someone has diminished capacity. Don’t make the mistake of assuming your spouse will automatically receive power of attorney. If you want this, you should specify it before you become incapacitated.
What is meant by diminished capacity?
There are quite a few conditions that can affect a person’s mental health and make it unable for them to make financial decisions for themself now or in the future. The list includes: a learning disability, delirium, mental problems caused by medication, a terminal illness, mild cognitive impairment (MCI), schizophrenia, a bipolar disorder, or full-blown dementia. Something unexpected such as a stroke may also lead to diminished capacity. If these conditions run in the person’s family, they may want to consider establishing a power of attorney in advance. This is a legal document that empowers a person to make decisions (financial and otherwise) for another person who a doctor has determined has diminished capacity.
How to take over for someone with diminished capacity
If there is no power of attorney in place, it’s still possible to take over. Ask the following questions first:
Do they know what kind of financial decisions they need to make?
Do they understand the pros and cons of each financial decision?
Can they communicate their intentions to you?
If they pass these simple tests, then they can make financial decisions for themselves. If not, the next step is a medical evaluation to determine their mental state. If you and a doctor then feel they need help, it falls to whoever has been established as power of attorney. If no power of attorney exists, then you can apply to take over their financial affairs. That may require showing proof of their diminished mental capacity and filing for the power of attorney yourself.
Once your role has been established, it’s important to make sure you stick to the rules established in your state. It goes without saying that you’ll need to only make decisions that are in the person’s best interest. But you may also be limited by the court in terms of the actual decisions you are allowed to make. For example, you may be allowed to pay their day-to-day bills but not sign off on a loan or make investments. Your financial advisor can help you better understand your options.
Establishing power of attorney is a serious undertaking that should only be done with a great deal of care. After all, how one manages their money is about as personal as a decision gets. Choose a financial advisor with experience in dealing with power of attorney.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.
