A study published in the American Economic Review, “Cognitive Decline, Limited Awareness, Imperfect Agency, and Financial Well-Being,” finds that most seniors in the United States have an agent they trust in mind to take over their finances in the event of cognitive decline, but most also fear that the transfer of control will come either too early or too late.
Too Early or Too Late
It’s not news that seniors are more likely to experience dementia as they get older. This can lead to bad financial decisions, neglect of investments and bills, and becoming victims of fraud. The study is based on an on-line survey completed by approximately 2,500 customers of the Vanguard Group. In a summary published by the Center for Retirement Research at Boston College (the study itself is only available to members of the American Economic Association and libraries), the authors report that most respondents had a likely agent to step in when needed and had a high level of confidence in that individual or institution. Most expected a child or in-law to be their agent with a smaller number expecting to rely on siblings or financial institutions.
The vast majority of survey respondents did not want their chosen agent to step in immediately upon beginning to experience cognitive decline, instead wanting them to wait until their dementia had progressed to some extent. On the other hand, they also did not want their agent to wait until they totally lost their ability to function. Given this somewhat indefinite timing for the transition of financial control, a majority of respondents were concerned that it would occur either too early (24%) or too late (35%) because they would not recognize their own decline, the agent would not be aware of it in time, or they themselves would resist giving up control.
But Can the Contemplated Agent Step In?
While the vast majority of respondents had a financial agent in mind to take over in the event of their cognitive decline, the survey appears not to have asked whether they had taken steps to appoint that agent through a durable power of attorney or trustee appointment. Without taking that step, they they can almost guarantee that the timing won’t be right, since the agent would have to take the significant step of going to court to be appointed conservator in order to step in.
Further, the study may only be partly reflective of seniors in general. Participants were customers of Vanguard Group who were 55 years old or older, had at least $10,000 invested at Vanguard, and who could participate in an online survey. Those with less assets and no Internet access might be less likely to have a financial agent available in the event of cognitive decline.
Financial Control and Personal Autonomy
But what is the right time to give up financial control? The survey respondents did not want to give up financial control too early — at the onset of cognitive decline — or too late — when they’ve totally lost the ability to manage their finances. The respondents appropriately recognize that the timing almost impossible to pinpoint. They also recognize that there is some risk in not giving up control too early, possibly losing 18% of their wealth. Given that in our society, money is power, most respondents were willing to take this risk in order to maintain their autonomy.
While handing over the financial reins to someone else, whether an individual or a financial institution, can feel like a huge loss of control, this may be less so than in the past. In his book Growing Old in America, about aging in colonial America when most wealth took the form of land, the historian David Hackett Fischer describes how elders held onto the family farm, keeping their children dependent well into middle-age. Of course, many fewer Americans then made it into old age, so for many the family farm passed earlier.
Fischer describes one intrafamily agreement under which Henry Holt at age 74 transferred the homestead to his unmarried son, William, with the proviso that he take care of both parents for the duration of their lives. The agreement, what today we would call a “family care agreement,” was quite detailed spelling out what this meant even to the number of candles and amount of hard cider they would be provided. It stated that if William failed to supply “any one article aforementioned,” the property would revert back to his parents. Clearly Mr. and Mrs. Holt were reluctant to give up control of their wealth.
A Possible Solution
While most wealth in colonial America consisted of the family farm, that is not true today. This makes it much easier to share control, neither holding on to it completely until it’s too late, nor giving up all control and autonomy too early. The easiest way to share control is through a revocable trust, naming one’s chosen agent as a co-trustee. This way, the grantor of the trust can maintain control, but the co-trustee can be aware of their finances and step in seamlessly if needed. Since these trusts are revocable, the grantor can always change their mind, altering the terms of the trust or removing the trustee and appointing someone else if they lose confidence in the first person or due to life circumstances that individual can no longer serve as trustee.
The Vanguard study does an excellent job of describing the challenge facing seniors today, but offers no solutions. That’s up to the seniors themselves, their families, and their estate planning attorneys.