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Taking over a loved one’s financial affairs can be tricky
By Alan G. Orlowsky, J.D., C.P.A.
Lisa K. Shanker, JD, CPA, contributed to this article and is an attorney of counsel to Orlowsky & Wilson, Ltd.
Ellen was alarmed when her 83-year-old husband Barry hired a contractor to repair the couple’s roof. The contractor had knocked on the door one day, convinced Barry that he needed work done on the roof, persuaded Barry to fill out and sign a loan application to pay for the work, and took a check as a down payment.
The roof did not need repair. The contractor, who now had the couple’s personal and financial information, vanished.
This wasn’t the first time Ellen noticed that Barry’s (not their real names) good judgment was slipping. Sometimes he didn’t know what day or month it was, and he’d forget important appointments. More than a few times he locked himself out of the house and car, and he even occasionally forgot his children’s names and where they lived. Ellen knew she had to take control of their financial affairs and prevent Barry from making a potentially disastrous mistake.
The couple met with their attorney and drew up powers of attorney for property and health care, which gave Ellen the authority to make all the couple’s decisions without Barry’s participation or consent, as long as Barry’s doctor considered him mentally impaired. Ellen then obtained a letter from the doctor to that effect.
Ellen was one of the lucky ones, because Barry (and his doctor) cooperated with her. Many people aren’t so fortunate — their loved ones resist giving up control, and family members are forced to initiate guardianship proceedings, which can result in deep embarassment, strained relationships, and costly legal fees.
Such scenarios are more common than you might think. With baby boomers now in their 50s and 60s, and life expectancies increasing dramatically, there will likely be an increase in cases where a spouse or other family member must take legal action to protect an incompetent loved one as well as the family’s financial interests.
First and foremost, you should ensure that your spouse or elderly loved one is in a healthy and safe environment, is receiving good nutrition and medical care, and is maintaining social interactions.
Secondly, have a heart-to-heart talk with your loved one. You may want to have other family members present — especially adult children — but try to resolve dissention or disagreement among yourselves before approaching the mentally impaired individual. Try to persuade that individual to yield control of the family’s financial affairs and to sign powers of attorney if he or she hasn’t already. This may be difficult, because many people, especially those who have been “in charge” all their lives, are afraid to give up their independence and let others make decisions for them.
If the individual is uncooperative, before you go to court you should seek help from a neutral third party to mediate, such as a trusted professional adviser, psychologist, clergy member, or family counselor.
If the kind-and-gentle approach doesn’t work, you may have to engage an attorney. In most cases, going to court to have a loved one declared incompetent is very messy and depressing, which is why you should try everything in your power to avoid it.
Under Illinois law, the legal term “disabled person” is used to describe an individual who is mentally impaired, incompetent, or incapacitated. A disabled person is “one who is 18 years or older who is not fully able to manage his person or estate because of mental deterioration, physical incapacity, or mental illness.”
To have an individual declared legally disabled requires a guardianship proceeding in a court of law, and an actual finding of disability by the judge. If legally found disabled, these individuals would be deemed unable to manage their own affairs, which would include signing a contract, will, trust, or power of attorney. You or another relative or trustee would be appointed to assume responsibility for that individual’s affairs. Once declared disabled, there is usually no going back.
This legal process is both difficult and costly for all parties. Unless there is overwhelming proof — such as medical records, doctors’ testimony and witnesses — it is not easy to gain a finding of disability. Elderly people have off days, and at age 83 few don’t have a touch of dementia. But that usually is not enough to find them incapable of managing their affairs.
They may appear completely competent on the day of the hearing and you could find yourself being painted as the callous spouse with ulterior motives. Assembling witnesses and medical testimony costs time and money, as does good legal representation. And judges typically do not wish to rob elderly people of their independence.
Even if you have the best of intentions, it’s natural to feel some guilt and pain as the person who is taking his or her spouse to court. No one wants to see a life-long mate impaired, much less prove it to the world. Moreover, if the judge disagrees with you and finds your spouse competent, there is usually no further recourse available to you.
Although legal action is the less preferable course to take, it is often better than failing to take any action. Elderly people are frequent targets of scams and frauds, and can be unduly influenced by unethical parties. You and your children have a lot to lose by failing to protect your estate.
You cannot stop an adult from making rash and harmful decisions. And even the most well-planned estates and the most harmonious of families can be tested by the ravages of old age. But quick and thoughtful intervention with the help of experienced legal and financial advisers will help minimize the damage.
Let’s face it, at some point before our deaths many of us will become physically and mentally unable to manage our own affairs. We hope this does not occur until a ripe old age, but knowing that it might occur at any time, it is best to plan for it now while we are healthy, fully cognizant and still able to make smart decisions.
Many elderly people avoid such planning until they are urged to do so by their children. Even then, some tend to deny that they will ever need help managing their affairs; and others react in a hostile way toward their children, fearing they’ll lose control of their lives. The consequences of failing to plan for the possibility of your own incompetence, however, can be devastating to your family, not to mention your own well-being.
The best planning tools are standard estate planning documents: healthcare power of attorney, durable power of attorney, and living trust. Assuming that you execute those documents while you’re still competent, they ensure that you alone determine how and by whom your estate will be managed during your lifetime, in case of your disability, and after your death.
Without those documents in place, if you do become incompetent, it may require costly court action to determine who will manage your affairs and in what manner.
The first of the three estate planning tools named above is the healthcare power of attorney. This power allows your appointed agent to make medical decisions for you when you are deemed unable to do so yourself. You may also choose to give this person the power to terminate life support in a terminal illness.
The durable power of attorney comes into force and effect when your physician or other individual(s) of your choosing certify in writing that you are incapacitated. The power of attorney allows your attorney-in-fact — the person you designate — to handle those personal financial matters outside the control of the trustee of your trust, as discussed below.
One purpose of a revocable living trust is to shelter your assets from probate and estate taxes. But it also lets you choose a successor, who will take over management of the trusts’s assets if your chosen physician certifies that you are incapacitated. The trust can dictate how the successor trustee must manage the trust assets. Ultimately, this trustee distributes your assets at your death, pursuant to the terms of the trust.
If you care about your family, their well-being, and the legacy you ultimately leave behind, you should plan your estate now, before your capacity diminishes.
Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 28 years. Alan works with individuals in Chicago and surrounding areas including Northbrook, Gurnee, Glenview, Libertyville, Lake Forest and Mundelein. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.
Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver, 2000), and has written numerous articles on the subject of estate planning. If you or a family member is in need of a seasoned attorney with a wealth of experience in estate planning, guardianship, contested estates, special needs & more, contact Alan Orlowsky by email or call 847-325-5559.