Account Management Options for Persons with Dementia or Diminished Capacity

September 25, 2019, by Mac Frasier

A new diagnosis of Dementia can lead to many questions for both patients and caregivers. After the inquiries about medical care and treatment options the focus generally turns towards the management of a patient’s financial assets. In early stages of dementia that patient may be able to contribute in the planning process and still sign legal documents. In fact, the Alzheimer’s Association states, “As long as the person has the legal capacity (the ability to understand and appreciate the consequences of his or her actions) he or she should take part in the legal planning.”

Mac Frasier, Director of Planning for Oakworth Capital Bank, describes below three of the most commonly used techniques and the pros and cons of each. Before pursuing one or more of these options you should consult with your legal and financial advisors to determine which is best for your specific situation.

Joint Account

The simplest option for someone to pursue would be to add a Joint Owner to an account which would allow that person to make distributions and participate in the management of the account. An example would be a mother adding her daughter to a checking account, so that the daughter could pay the bills of the mother. While this is an easy option as with many things in life the easiest option is often times not the best. By changing the account to a joint account, the caregiver could potentially use the money for their own purposes without recourse, not to mention this could open the account up to the creditors of the caregiver. In addition, at death the account belongs to the person added to the account and does not fall to the estate. Given the cons associated with this option, most financial professionals would not recommend using it.

Durable Power of Attorney

Another choice that is often considered is having the patient appoint a Power of Attorney to act on their behalf. A couple of terms you should be familiar with when discussing Power of Attorney are:

Principal – The patient and person responsible for appointing the Attorney-in-fact or agent

Attorney-in-fact or agent – Person assigned by the Principal to make financial and other decisions when the person with dementia is no longer able. This person is usually a spouse, partner, trusted family member or friend. The agent must act as a fiduciary for the Principal.

Fiduciary – A person with a legal obligation to act in the best interest of another person (Principal)

There are several different Power of Attorney types but with respect to dementia it is recommended to use a Durable Power of Attorney which will remain in place even after the Principal is incapacitated and no longer able to make decisions. Another advantage of the Durable Power of Attorney is that the agent must act as a fiduciary.

Although this can be a good option, there are a few things to contemplate before signing Power of Attorney documents. When considering using a Power of Attorney please be aware that it must be established before the Principal becomes incapacitated. Also, some financial institutions may require additional documentation to verify the validity of the Power of Attorney. Be sure to provide the appropriate financial institutions with a copy of the Durable Power of Attorney after it is created.

Revocable Living Trust

The last option to consider would be to set up a Revocable Living Trust which would allow for management of a patient’s assets during their lifetime and orderly distribution of their estate after their passing. Before discussing a Revocable Living Trust, you may want to familiarize yourself with these terms:

Grantor or Trustor – The person who creates and funds the trust. This person is also responsible for assigning the trustee or trustees.

Trustee – The person or persons responsible for the management of the trust. The trustee may be a person or a financial institution such as a bank. The trustee has a fiduciary responsibility to the trust. A best practice would be to assign a trustee and successor trustees who can take over in the event a trustee is unable / unwilling to serve.

Because the Revocable Living Trust can bypass probate and allows the trustee to more efficiently manage property in multiple states it is a common option for persons with larger estates. Like the Agent for a Power of Attorney a Trustee must act as a fiduciary when managing the trust.

In order for a Revocable Living Trust to be a viable account management option it must be established and funded before the patient is declared incapacitated. It should also be noted that not all assets (i.e. IRAs) can be placed into a Revocable Living Trust and there may be additional costs associated with creating the trust.

Due to the fact that most patients will own assets in a variety of account types, planning for incapacity often requires using multiple account management options. For example, a Revocable Living Trust may be best for a patient’s taxable investments while the Durable Power of Attorney could be more appropriate for their retirement assets. You should consult with your legal and financial advisors to determine which is best for your specific situation before making any changes to your accounts or estate plans.

The Pros & Cons

Joint Account

Pros

  • Easy to Establish
 Cons

  • New joint owner has access to the funds without restrictions.
  • Joint ownership exposes the account to creditors of the joint owner.
  • Not all assets are available for joint ownership (i.e. IRAs)
  • Upon death, ownership falls to joint owner

Durable Power of Attorney

Pros

  • Stays in effect for the life of the Principal
  • Does not require a triggering event to become effective
  • Agent has a Fiduciary duty to the Principal
 Cons

  • Must be in place in advance of incapacity
  • Financial Institutions may require additional paperwork to confirm the validity of the Power of Attorney
  • Terminates at the death of the Principal

Revocable Living Trust

Pros

  • Trustee must act as a Fiduciary
  • Bypasses probate at the death of the Grantor
  • Good for managing property in multiple states
 Cons

  • Must be funded in advance of incapacity to work
  • Not all assets can be moved into the trust
  • Additional costs may be incurred in creating the trust and re-registering property