Plan to Protect Financial Resources From Yourself

Safe Door ShutAfter three decades as a financial planner, I’m seeing more and more clients reach, not just retirement, but their final years. An issue that becomes especially important at this stage of life is how to protect your financial resources from an unexpected threat—yourself.

One of my saddest professional experiences came several years ago when one of my long-time clients, a woman in her late 80’s with no family and few close friends, abruptly fired me. Because Mary had no one else, I had helped her in many ways beyond the usual client/planner relationship and even reluctantly agreed to serve as her trustee and power of attorney in case she became incapacitated.

At what proved to be our final quarterly review meeting, Mary initially seemed confused. I was able to reassure her about the stability of her finances, and she seemed clearer by the time we finished. Three weeks later, I received a handwritten letter from her: “You have my finances in a mess. I can’t get to my money. You are fired.”

I was stunned. Yet ethically I was required to comply with her wishes by moving her holdings to another broker.

Several subsequent conversations demonstrated that Mary was suffering from periodic memory loss and delusion. Had she been disabled by a sudden accident or a stroke, I could have stepped in. Yet, because her decision to fire me was made at a time when she was arguably still competent, my hands were tied.

Since this experience, I have confirmed the wisdom of avoiding a potential conflict of interest by never serving as a trustee or power of attorney for a client. With the help of suggestions from several other planners, I’ve also learned some strategies to help you protect your assets from yourself.

One tool is to sign a statement authorizing your financial planner to contact someone you designate, perhaps a family member or physician, if the planner becomes concerned about possible irrational behavior. While this would not prevent you from firing an advisor, it would provide a method of discussing the issue and also involve another person in the decision.

Another possibility is to put your assets into either an irrevocable living trust or a Domestic Asset Protection Trust (in a state like South Dakota that allows them) with someone other than yourself or your planner as trustee. As the beneficiary, you would have the power to fire the trustee, but concern about an irrational firing could be mitigated to some degree by having a corporate trustee. In addition, with a DAPT, the beneficiary would not have the power to amend the trust without the agreement of the trustee. This would give some protection against self-destructive choices by a beneficiary who was gradually losing competency. One disadvantage of this approach is cost, so it isn’t an option for everyone.

Perhaps the most important strategy is to create a contingency plan in the event of mental decline. It could include arrangements for your financial planner to consult with family members or other professionals such as physicians, social workers, and counselors. For those without close family members, the plan might authorize the financial advisor to call for an evaluation, by professionals you choose in advance, if your behavior appeared irrational. This team approach might alleviate fears about being judged incompetent by the person managing your assets.

The possibility of mental decline is something no one wants to consider. Yet it’s as essential a financial planning concern as making a will. As you build financial resources for old age, it’s also important to create safety nets to protect those resources from yourself.

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One Response to Plan to Protect Financial Resources From Yourself

  1. Kathy August 18, 2014 at 10:40 am #

    So true. My family is experiencing this now as mom goes in and out of clarity. There is a trust acct that holds the bulk of her money and I am joint on other accts to pay bills, but she has to transfer money from trust acct to joint accts for me to do this. She is lucid enough to at one and the same time decide she totally trusts me with the money (as do my siblings, fortunately) but wants to maintain control over her trust. So, when she is hospitalized as she has been for long periods, twice, since Dec and loses clarity from meds and surgery, we get stuck in a bind unable to get money from the trust to cover her bills, particularly assisted living which is a huge chunk of change.

    It is a strange state of affairs I never comsidered, this in and out of lucidity not because of alzheimers but because of cognitive impairment from medications, surgery, making stuff up from loss of hearing, fear and the thoughts it produces, possible minor strokes, etc. As you pointed out, a cut and dried situation would make it easy, but this here one moment, not quite the next situation makes it hard as doctors are hard pressed to designate her as incompetent.

    I hope you write more on how to handle this. Thanks!