Monday, 12 December 2011

What to do about Losing mental acuity or outright incapacity

A reality of getting older is declining mental ability. As with the body, so with the brain. It may be more obvious with the body but small gradual or sudden drastic falling away in our ability to make financial decisions will occur. It may be due to disease or natural ageing but it happens. We need to anticipate that and plan for it.

Among the kinds of decline: short-term memory recall, a long slow progression that starts from around age 40 (see graph here in Flickr); language facility; mathematical and analytic capabilities. The result is that good financial decision-making falls off with age, even amongst those who have known and applied good financial principles for a long time.

Whether the onset is gradual or sudden, mental decline gets to be a bigger and bigger issue as one gets older. The rising prevalence of dementia and increasing life expectancy ensure that it will become ever more common for retirees to reach a point of being incapable, both legally and practically, of managing their own financial affairs.

The problem is that when such incapacity strikes, chances are we won't even be aware of it. Worse, even if we are aware, at the point when we have been medically certified as mentally incapable, we lose the legal power to do all sorts of critical things.

What a mentally incapable person legally cannot do:

make a new will, add a codicil to an existing will or revoke an existing will
prepare a power of attorney
put a bank account into joint names with children
change the beneficiary of his/her RRSP/RRIF or an insurance policy
carry out estate planning, such as reducing probate costs
give investment instructions to his/her financial advisor.

What to do about mental decline and incapacity:

  1. Mental exercise ... “use it or lose it” – The Seattle study ( followed a large group of people throughout their lives and discovered that amongst other factors a complex and intellectually stimulating environment and efforts to maintain a high level of perceptual processing speed seem to help reduce cognitive decline. The study suggested that cognitive decline observed in community-dwelling older people was mostly the result of disuse and could be reduced through training. Along with such activities as reading books, guessing at the answers of TV game shows, taking courses and doing a part-time job (paid or not), consider that continuing to manage your investment portfolio can be good mental stimulation, a challenging game that never ends.

  2. Physical exercise - “a sound mind in a healthy body” - Though the original Latin expression was more a prayer than a prescription, keeping fit can help stave off mental deterioration.

  3. Simplified portfolio and financial affairs – The simpler and more automatic are your affairs, the easier and less error prone they will be to manage, whether it is you yourself doing the job or someone else.

  4. Power of Attorney – It is a dangerous misconception that a spouse or an adult child can automatically step in when incapacity happens. A sensible step is therefore to put in place, in advance of anything happening, a Power of Attorney (POA) that authorizes another person to take financial action on one's behalf. The POA authority may be narrow or complete, with the exception that the delegate, known as the Attorney, can never make a will on the person's behalf. The authority can include banking, signing cheques, paying bills, borrowing money, hiring contractors, selling or buying real estate, stocks, bonds, consumer goods etc.

Qualities of the Attorney - There are some obvious qualities the person(s) selected to exercise the POA power should have:

  • the time and willingness to fulfill the responsibilities (BMO says the average time a person fulfills a CPOA role is four years - if you are well advanced in age, it probably isn't the best idea to name someone the same age as you, like your spouse)

  • someone in whom you have complete trust (the CPOA has wide ranging power and possible abuse of the power is a major consideration; sadly, even one's own children can sometimes be less than reliable)

  • enough financial knowledge, along with diligence and organization, to handle your affairs, or the astuteness to recognize the need for professional help (tax, accounting, legal etc)

POA Permutations - Many variations are possible in a POA to suit individual circumstances, including: when the POA starts (immediately, or upon incapacity) or stops (it ends automatically upon death but make sure it doesn't stop unexpectedly since special language needs to be in the POA to keep an immediate active when you do become incapacitated, since that event normally voids it), limits to the authority being granted, whether it is one or several people as Attorney, and whether they must act jointly or may do so separately, aka severally; and whether the Attorney must account to some third party regularly. Be careful about whether it is a continuing / enduring POA since one without that feature activated before incapacity would cease to be valid upon incapacity.

Consider using a lawyer or notary to prepare the POA – Consider how complex your finances and family situation are. The more complex, the more it makes sense to use a professional to set up the POA and avoid the nasty surprise that a home-made POA is not valid. Without a valid POA, someone will have to face the cost, time and trouble later on to go to court to apply for a POA. If there is no one around to step forward, the provincial government's Office of the Public Guardian and Trustee steps in as a last resort to manage the affairs of the incapacitated. Would it matter that a government official probably won't understand what you want done? If so, picking your own Attorney and creating a POA is the route to follow.

Watch out for – 1) Banks are apparently wont to ask people to sign their own POA forms, which might conflict with or invalidate a general POA. Try to insist on them accepting your own general POA or get words inserted that it does not alter other POAs. 2) Each province has its own variations and those slight differences might be critical. Get one for the province where you live, changing it when you move. If you spend time in the US and have US assets, a Canadian POA may not be accepted. You would need to consult a lawyer in the US state concerned.

Doing the Attorney job is work - Some may imagine that being appointed under a POA is an easy job but it is serious business, more onerous even than managing one's own affairs. There is a fiduciary duty, which obliges the Attorney to act in the person's best interest. The Attorney must avoid conflicts of interest, must keep records, must consult with the person when possible, must keep the other's assets separate from their own. As a result, an Attorney often gets paid. In Ontario, the permitted amount is 3% of monies received and paid out and 0.6% of average annual value of assets administered, though it is possible to state in the POA that the Attorney will not get paid (keeping in mind the Attorney is not obliged to accept the job either and is allowed to resign later on). It is also a good idea to name one or more substitute individuals as backup in case the first Attorney is unavailable for whatever reason.

Joint ownership and and Living Trusts as alternatives – It is possible to transfer property to joint ownership or to a trust, but those solutions have their own issues. Amongst the issues: deemed disposition rules can occasion capital gains taxes; risks of abuse by the joint owner, or dispute among siblings if only one is named joint owner (was it a gift, an advance on inheritance or merely a means to allow administration on your behalf? etc); exposure of the joint assets to the joint owner's creditors, spouse or estate; when the asset is real estate, joint ownership requires consent of the joint owner for sale, which will be problematic if you have become incapacitated, plus the provincial Public Guardian may decide to get involved; costs of tust administration if professionals are hired. Professional expert advice may help a lot to unravel the best option.


BMO Retirement Institute – videos and paper Financial Decision-making: Who Will Manage Your Money When You Can't? on mental incapacity from medical and legal viewpoints, points to consider in creating a Power of Attorney.

Sandra E. Foster, You Can't Take It With You – Common Sense Estate Planning for Canadians, 5th edition, John Wiley & Sons, 2007

Douglas Gray and John Budd, The Canadian Guide to Will and Estate Plannning, 3rd edition, McGraw-Hill Ryerson, 2002

Ontario Power of Attorney kit – pdf link from the Ministry of Attorney General

British Columbia Enduring Power of Attorney Form pdf link; Nidus Personal Planning Resource Center and Registry – centralized registry for POAs in BC with many FAQs

Alberta, Manitoba, New Brunswick, Nova Scotia, Yukon, Newfoundland and Labrador – info links but standard forms not available

Saskatchewan Enduring Power of Attorney and Common Questions at Ministry of Justice and Attorney General

Quebec – pdf link My Mandate in Case of Incapacity instruction booklet and forms at Curateur Public du Québec; prior to incapacity - Power of Attorney sample text with rules explained at Ministry of Justice

Nunavut (formerly North West Territories) – pdf backgrounder and forms

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