Your parents were probably your first teachers about money. They may have helped you open your first bank account, taught you to write a check, and instilled in you the importance of paying bills on time. Now that you are an adult and they are getting older, you may find that it’s time for the roles to reverse. You may need to help your parents with managing finances, or even take over your parents’ finances altogether.
Often, the need to help a parent out with financial matters arises slowly over time, as you notice that their memory is beginning to fail. Sometimes, the need is more urgent, as when a parent suffers a sudden, incapacitating illness like a stroke. Whether or not you expect your parent to need your help with finances soon, both of you would be wise to prepare for the possibility. Here’s how to get ready—and what could happen if you don’t.
Taking Over Elderly Parents’ Finances Legally
There are some aspects of your parent’s finances that you can handle without any legal authority, like helping them balance their checkbook. But if you need, say, to manage an investment account, or even make a withdrawal from your parent’s bank account, you may find yourself stymied if you don’t have legal authority to act on their behalf. How can you go about taking over your elderly parents’ finances legally?
There are a few options: for your parents to execute a durable power of attorney naming you as their agent, for your parents to create a revocable living trust, or for you to pursue a conservatorship over your parent. Let’s briefly discuss those options and their implications.
A durable financial power of attorney allows your parent, while they have legal capacity, to choose someone (called an agent) to act on their behalf with regard to finances if they become unable to manage their own financial affairs. “Durable” means that the agent’s power continues even after your parent (called the principal) becomes incapacitated.
The agent’s power can be very broad or very limited, depending on the language in the power of attorney. The power can also be made “springing,” meaning that it doesn’t take effect unless and until the principal becomes incapacitated. The principal can revoke or amend the power at any time until they become legally incapacitated. If and when they become incapacitated and need your help, you can simply step into their shoes, financially speaking. As an agent, you are obligated to act in the principal’s best interest.
If your parent has a revocable living trust, they can place their assets in the trust, and continue to use and enjoy those assets just as when they owned them in their own name. If and when they become incapacitated, a successor trustee they have named in the trust document takes over management of the trust. The successor trustee’s powers are specified in the trust document. As with a springing durable financial power of attorney, typically it is necessary to obtain a letter from your parent’s physician confirming their incapacity (which creates your authority to step into their shoes, financially speaking). A revocable living trust and financial power of attorney are not necessarily mutually exclusive. For instance, it is advisable to have an agent under a financial power of attorney to deal with any assets that, for some reason, were not placed in the trust.
If your parent hasn’t executed a durable financial power of attorney and doesn’t have a living trust, and they become incapacitated and unable to manage their finances, the only way you can get legal authority to act on their behalf is a conservatorship. Conservatorship requires an interested person to petition the probate court for authority to manage an incapacitated person’s finances (assets in a trust do not need to go through conservatorship). The process can be time-consuming and stressful, especially if the person in need of assistance and protection doesn’t want it.
Any estate planning or elder law attorney will tell you that it is much better for an adult to be proactive and create a trust and/or execute a financial power of attorney than to have to become the subject of a conservatorship. If your parent doesn’t have a power of attorney in place, offer to go with them to consult an elder law attorney to learn more about why they should.
How to Manage Elderly Parents’ Finances
If you have the legal authority to manage your elderly parents’ finances, the next question is how best to exercise that power for their benefit. Here are some tips.
Understand Your Responsibilities.
For the most part, your duties as a trustee or agent under a power of attorney and a conservatorship will be similar, such as paying your parent’s bills and receiving and managing their income. However, you will likely have more reporting obligations under a conservatorship. Speak with an elder law attorney to make sure you know, and are fulfilling, your obligations.
Maintain a Financial Checklist.
If you are managing a parent’s finances, the importance of good record-keeping cannot be overstated. When you have been given legal authority to manage a vulnerable person’s finances, you need to be able to prove that you are acting in their best interest, including paying their legitimate debts, and receiving and safeguarding any income they may have. This is especially true if there are other family members who may question your actions or integrity. Have a paper trail that documents every transaction—or at least good digital records. Document all income and every expenditure.
Keep Your Money Separate From Your Parent’s.
If you are managing your parent’s money and paying their bills, it may seem more efficient to have their money in your bank account. This is, to put it bluntly, a terrible idea. Commingling assets in this way is an excellent way to get accused of mismanagement, or even of appropriating your parent’s funds for your own use. Even if you would never financially abuse your parent, commingling funds makes it harder to keep the good records recommended above. It may be a little more work to keep accounts separate, but it’s important to do.
Don’t Go It Alone.
Managing finances for an elderly parent can be stressful. Unlike with your own finances, you may not be aware of all their assets and debts. (That’s another reason to have your parent execute a durable financial power of attorney; they can let you know what bank accounts and bills they have). It’s helpful to develop a financial checklist so that you can be sure you’re staying on top of things.
It’s also beneficial to have the guidance of an experienced elder law attorney. While this may be the first time you’ve dealt with managing someone else’s financial affairs, an elder law attorney has guided many people through the process. They can advise you of potential pitfalls and make sure you have the resources you need to do this very important job.
To learn more about financial caregiving and managing an elderly parent’s finances, contact Estate Planning & Elder Law Services to schedule a consultation.