Yes, Your Parents Need More Than a Will (and So Do You)

The Squeeze

• As our brains age, our ability to make sound financial decisions lessens a bit each year, though our confidence in our abilities does not. That’s where a financial proxy can help.
• A financial proxy requires financial power of attorney, which may be effective immediately or spring into effect as certain circumstances occur.
• Financial power of attorney lasts only while the person granting it is alive — and then an executor takes over.

Your parents have a will and have named an executor. Perhaps they’ve also signed a living will and named a health proxy. That’s wise. All set, right?

Not so fast, say financial and legal experts.

What your parents — and you — will also need is a financial proxy. In much the same way a health care proxy works, a financial proxy steps in to make decisions when the person is no longer able to do so. This can look like paying bills and enacting monthly cash flow check-ins when a person is still living independently but aging. Or it can look like deciding to sell off assets to fund long-term care in the case of severe physical or mental decline.

“We tend to think about the end but not about what happens possibly for years before,” says Marti DeLiema, an assistant research professor in the school of social work at the University of Minnesota, Twin Cities. People are “really bad about imagining their life when they’re experiencing periods of disability,” she adds. “And that is a time in life when people’s assets are really at risk.”

As our brains age, our ability to make sound financial decisions lessens a bit each year, though our confidence in our abilities does not. That gap partly explains why older adults are more susceptible to fraud. However, science has also discovered that cognitively intact older adults also show what has been termed “age-associated financial vulnerability.”

“To a lot of people who are do-it-yourselfers and do all the money management on their own, the idea of someone stepping in can be scary,” says DeLiema. But she points to the even scarier possibilities that need to be the driving motivation: “What’s going to happen if you’re in a period of cognitive incapacity or even moderate decline. What’s going to happen to your money?”

There are innumerable circumstances in which a financial proxy could be called upon: Cognitive decline can lead to forgetfulness, and people stop paying bills on time or filing taxes. A deceased spouse may have handled all the money issues, leaving the surviving spouse unsure of what to do. Or an accident that requires a long recovery period can make it impossible for a person to stay on top of financial responsibilities. 

Becoming a financial proxy

As a first step, the chosen proxy needs “financial power of attorney, which may be effective immediately [upon executing the paperwork] or spring into effect” as certain circumstances named in the document take place, explains Neel Shah, an estate planning attorney and certified financial planner at Shah & Associates. 

A power of attorney can be drawn as loosely or tightly as desired. One person might have a power of attorney to settle bills while someone else has one that allows them to manage investments and sell assets. However, no matter the setup, it’s important to note that a financial power of attorney lasts only while the person granting it is alive. (And then the executor takes over.)

“The power of attorney needs to be done when you’re cognitively healthy,” DeLiema explains. “Some people say, ‘I’ll wait, I’m only 79.’ If you’re 79, it should have been done years ago. I have one, and I’m only 35.”

Reviewing finances with a financial planner or CPA is another important preliminary step to knowing where you are now and your anticipated ongoing needs. Your advisors — both those granted powers of attorney and those establishing the documents — should be based or have experience in your state of residence, as POA laws vary widely around the country. What might work in Texas may not in New York.

Get started now

Pamella Seay, an attorney and professor of law at Florida Gulf Coast University, describes receiving a text recently from a friend whose father had just died. Seay’s family had bought the man’s house several years before in a bad market. If the house sale hadn’t happened, “he would not have been able to get into an appropriate facility,” says Seay. “He would have had to wait for Medicare to kick in. I just got chills when I got that.” 

Only advance planning for all contingencies can lead to that kind of preparation.

Having all this in place is necessary not only for your parents but for all the people who will find themselves involved in complications that come up down the line. “You may have two children who think they are both entitled to such decision-making,” says Shah. “Not having a clear plan and communicating the plan can lead to hurt feelings, at a minimum, and litigation and costly legal fees when things get worse.”

To help you get started, DiLiema — working with a team: lawyer Naomi Karp, retirement planning expert Steve Vernon, and Mingyang Zheng, a University of Minnesota doctoral candidate in social work who focuses on long-term services and support for older adults — has created a tool, called the Thinking Ahead Roadmap, which walks through the process of putting a financial proxy or advocate in place.

The right planning and people in place as financial proxies don’t make aging any easier — but they are a key factor to giving everyone in the family peace of mind and a clear path toward the best results for all.