It's Financial Wellness Month

Learn about the decisions that should be made about your financial management in case of mental incapacity.

Couple discussing financial planning

It is imperative to plan ahead for financial management in the event of mental incapacity due to dementia, stroke, or other situations. By selecting and creating one or more of the following options, individuals can decide in advance whom they want to handle their money and other assets and provide instructions for maintaining or spending their funds. If an individual doesn’t plan ahead, they will run the risk of requiring a guardianship (see the section on guardianship) to be able to take care of many transactions such as selling, buying or renting property, accessing investments, paying bills, purchasing needed health and long-term care and dealing with insurance and other critical financial matters.


Mentally competent individuals should consider the following alternatives. If one or more of these arrangements are created, the person may avoid guardianship. Please note that these alternatives are unsupervised and could lead to abuse if financial authority is delegated to an untrustworthy individual. Representative payees and conservatorships are an exception (see sections 2 and 6).


Tools for Advance Planning


1. Power of Attorney Accounts

A power of attorney account is a valuable financial management tool for people who have physical disabilities which prevent them from shopping, cashing checks, or paying bills, and for people who are mentally incapacitated and thus unable to handle their financial affairs. You can set up power of attorney accounts at a bank.


The owner establishes a power of attorney account who then names another person (called the agent or attorney-in-fact) to manage the money in the account. This account is similar to a power of attorney for finances document, except that the agent’s authority is limited to this one account. The owner can continue to handle the money in the account. Although the agent has access to it, the agent does not own the account, nor does the agent receive any funds left in the account on the owner’s death. The agent must use the funds for the owner’s benefit and may not use the funds for the agent’s benefit.


It may not be the best choice if the elder is beginning to mismanage funds since they still have total access to the account. It may not be the best choice if the agent is not trustworthy. Note: joint bank accounts are not recommended. The person whose name is added to the account to assist the elder person becomes a co-owner. As co-owner, they are entitled to use all the money for their benefit, regardless of who contributed it.

2. Representative Payees for Government Benefits

Persons with mental or physical disabilities or substance abuse problems that prevent them from properly managing their money may benefit from this device, which authorizes the government to issue benefit checks to someone other than the beneficiary. For example, to protect Mr. Elder, the checks might ultimately be sent to “Peter Payee for the benefit of Edward Elder. This technique is available even after the onset of incapacity and may be adequate for individuals of moderate means. Application for representative payment is usually made by the person responsible for the beneficiary’s care.


The government must contact the beneficiary’s physician to inquire whether the doctor believes the individual can manage their money. If ordered, the individual who receives the funds (the “representative payee”) must hold them in a separate account. At least four government benefit programs offer this arrangement: Social Security, Supplemental Security Income, Veterans Administration, and Railroad Retirement. This arrangement also presents some risks and should be used cautiously; there are minimal accounting requirements and few safeguards, although the Social Security Administration can require an accounting from the representative payee and investigate allegations of misuse of funds.


3. Paying Services

If the elder has adequate resources and simple needs, they can employ a private bill paying service. In addition, many utility companies offer services to elderly customers to assist them in paying bills, including direct payment plans, warning programs to notify customers before turning off services, and payment averaging plans. Some communities have money management programs that provide elders’ monthly bill payment services.


4. Durable Power of Attorney

A power of attorney for finances is a document that an individual (the “principal”) executes, naming another individual (the “agent” or “attorney-in-fact”) to handle their property and finances. A “durable” power of attorney contains language that specifies that the document is in effect when the principal is incapacitated. A durable power of attorney can be an effective tool for money management during a period of temporary or permanent incapacity. It must be created while the elder is competent, and it can have either “immediate” or “springing” powers. With “immediate power,” the document becomes effective at signing and remains effective even if the principal later becomes mentally incapacitated or disabled. With the “springing power,” the document does not become effective until, if, and when, the principal later becomes incapacitated or disabled, as defined in the document.

The principal determines the extent of the property the agent has authority and the specific authority of the agent. The power can be general and broad or distinct and narrowly defined.


Individuals are best protected by seeking the advice of a lawyer in creating a power of attorney for finances to ensure that legal requirements are met and that the individual understands the power they are delegating. Individuals with very modest estates may consider using the state legislature-created power of attorney document. This simple document permits an individual to appoint an agent to engage in various activities on behalf of the principal. Specific actions, such as making gifts, are prohibited. For a copy of the standard state power of attorney-financial form and step-by-step instructions for its completion, send a self-addressed, stamped envelope with two first-class stamps to:


CWAG

2850 Dairy Dr., Suite 100, Madison, WI 53718

608.224.0660 Toll-Free 800.488.2596


Currently, durable powers of attorney are completely unsupervised or monitored by the courts or anyone else unless monitoring is written into the document. Unfortunately, there is great potential for abuse or family arguments.

5. Revocable Living Trusts

A trust can be used as a planning mechanism to avoid problems if the individual becomes incapacitated. Trusts can prevent guardianship while assuring professional management necessary for the estate. Trusts can be modified or terminated at any time during the grantor’s life.


Each trust has a grantor (an individual who sets up the trust), a trustee (an individual who manages the trust’s assets, investing them wisely and authorizing expenditures), and a beneficiary (an individual for whose benefit the trust is created). The three parties can be the same or different people with a revocable living trust. It is often advisable for the trustee to be a neutral third party (e.g., bank) with the accounting responsibilities.


Revocable trusts can be created early with minimal funding, with a durable power of attorney then used to transfer other funds into the trust at the time of incapacity. Or, most or all of the grantor’s assets can be placed in the trust right from the beginning.


Lawyers should draft revocable living trusts. Do-it-yourself kits or products sold by trust marketing companies are often costly, are not drafted to meet the grantor’s specific needs, and often do not consider Wisconsin laws regarding property transfer, marital property, or taxes.


6. Conservatorship

A Conservatorship is somewhat like a guardianship of the estate, but there are significant differences. First, a conservatorship is voluntary, and there is no finding that the elder is incompetent to handle their affairs. The individual, while still competent, nominates the conservator. The court approves or disapproves of the selection but may not impose another person.

Durable powers of attorney have largely replaced Conservatorships. However, conservatorships do retain the advantage of court oversight through accountings.


Disadvantages of conservatorship include:

  • The expenses of setting up the conservatorship

  • A necessary court appearance.

  • The need to return to court to terminate a conservatorship

  • The right of the individual appointed conservator to challenge a request for termination or even convert it into a guardianship proceeding


For questions related to advance planning alternatives, guardianship, or protective services and protective placement, call the Wisconsin Guardianship Support Center Hotline at 1-800-488-2596. This Hotline is operated by the Coalition of Wisconsin Aging Groups Elder Law Center.