While helping her dad balance his checkbook, Angela noticed several missing check numbers and a final balance that was very different from the balance the bank provided.

Things got worse when she and her dad logged in to his online banking page. There were mysterious recurring charges that he seemed to know nothing about.

Angela quickly realized that her dad’s Alzheimer’s disease was progressing to the point where she needed to assess his mental capacity for making financial decisions.

“Dad had been a high school math teacher his entire career. And he always managed all of the household expenses for himself and my mother while she was still alive,” Angela shared. “The thought of having to take control of his finances broke my heart. And I worried about how he would react. But I worried more about what would happen if I didn’t step in.”

As family caregivers, our responsibilities extend beyond assisting older parents or family members with activities of daily living.

At some point, many of us have to start making big decisions about our loved one’s mental capacity in order to protect them from fraud, injury, or financial ruin.

The process of taking control of their finances can be emotionally and logistically daunting. Staying focused on the goal—preserving their savings so they (and we) can continue to afford their long-term care costs—helps us through the thorny parts of this financial journey through caregiving.

What does capacity mean when it comes to making decisions?

Forgetting to make a few entries in a check register or spending money lavishly may not be signs of incapacity. But spending that diverges from their normal patterns may be a red flag that a parent or older family member’s ability to make sound financial decisions is slipping.

To understand whether their financial behavior truly represents an inability to make good decisions, it’s important to understand what “capacity” means.

Capacity generally refers to whether a person has the mental ability required to make a decision. A person with good capacity should behave in a way that shows they understand:

• Their current situation 
• The decision they need to make
• The consequences of making a specific choice

Additionally, they should be able to explain the reasoning behind the choices they make and communicate it to others. Their reasoning should be free of justifications or elements that appear bizarre or sound like a product of delusional thinking.

Financial capacity is one of the most important types of capacities for older adults.

Often they’re living on fixed incomes. And as their caregivers, we know that they have ever-increasing healthcare costs. Some have significant savings amassed. And scam artists tend to prey on the vulnerability of older people with age-related, cognitive impairments. According to the FBI, scams targeting adults 60 and older caused over $3.4 billion in losses in 2023, up 11% from the previous year. And the average victim of elder fraud in 2023 lost $33,915.

Because the ability to make good financial decisions is so important, states have enacted laws to determine the legal standard that applies with regard to determining a person’s financial capacity.

Factors that can impact capacity

By law, capacity is considered on a decision-specific basis. When judging a loved one’s capacity, it’s important to consider two things:

Type of decision

Some decisions are complex, while others are relatively simple. For instance, balancing a checkbook would likely be considered a more challenging task than simply writing a check. So we need to take into account the type of decision an older family member is making when judging their capacity.

A person may be capable of making relatively simple decisions while being incapable of handling complex ones. To continue with the above example, if our loved one can still write a check, but is incapable of accurately balancing their checkbook, this could cause them to overdraw their account and write bad checks.

Current health status

A person’s capacity can fluctuate due to their health. At times, they may be fully capable of making decisions regarding financial matters, while at other times, they may be unable to make the best decision. This is common in people suffering from Alzheimer’s or other forms of dementia.

It’s important to try and address any health issues affecting capacity before declaring an older family member incapable of making financial or other decisions. This could involve improving health by treating illness or disease or by trying to resolve vision or hearing issues.

If these measures don’t lead to better decisions, a designation of incapacity may be necessary to protect our loved one’s finances.

How to determine if a loved one has full capacity

As we spend time with the person we’re caring for, we can look for red flags that demonstrate they’re no longer able to make their own decisions about their finances. 

Spending habits

• Repeatedly withdrawing money from a bank or elsewhere and then losing it
• Spending large amounts of money—all at once or bit by bit—on items advertised on TV, online, or sold by telephone solicitors, especially when they have no need for, or can’t afford the items
• Making risky investments or gambling with money they need to live on
• Giving away money that they need to support themselves

These are a few of the signs that indicate our loved one is having difficulty or is incapable of making prudent financial decisions. The common theme to look for is spending or investing money in ways that directly threaten their ability to support themselves or to live independently. 

Trouble completing tasks

Another indicator that an older family member has diminished mental capacity is if they attempt to perform a legal task (for example, signing a will), and the legal professional they’re working with believes they lack the capacity to perform that task. In this case that legal professional may be obligated to refuse to certify the documents.

It takes a legal judgment of incapacity to gain the official authority to control our loved one’s finances. Before we can legally declare them incapable of managing their own affairs we need to get an assessment of their mental capacity.

Mental capacity

A medical provider, like their primary care physician, a geriatric psychiatrist or psychologist, or a social worker specializing in elder care, should perform this assessment. It involves cognitive tests and interviews to determine if our family member lacks the ability to make sound decisions due to conditions like dementia or Alzheimer's.

Acting promptly to set up guardianship or conservatorship once mental incapacity is confirmed can help prevent financial exploitation or mismanagement of their affairs.

What to do if a parent is no longer capable of making sound decisions

There are two ways to legally take control of an aging parent’s financial affairs. We can appoint a guardian/conservator or we can appoint a financial power of attorney. Let’s look at both of these options and the steps to put them in place. 

Initiating guardianship/conservatorship proceedings

A clinical designation of impaired capacity does not provide the same authority as a legal designation of incapacity. If the medical assessment confirms diminished capacity, we then need to petition our local court to be appointed legal guardian of our family member or conservator over their affairs. This process involves:

• Filing a petition with the probate court detailing our family member’s incapacity
• Providing medical evidence and statements from doctors
• Attending a court hearing where a judge will evaluate the situation

It’s wise to seek legal help in order to obtain a legal incapacity designation.

Obtaining financial power of attorney

If the medical assessment indicates that our loved one is still capable of managing their own affairs, now would be a good time to ask the family member to grant us financial power of attorney (POA) while they still have legal capacity.

This allows them to voluntarily appoint us as their agent to handle financial matters if they become incapacitated.

This is what Angela ended up doing with her dad. “When he saw the state of disarray that his bank account was in, I could tell that he felt embarrassed.

So I gently said, ‘Dad, if you want, we can draw up a power of attorney that will let me take care of all of your finances.’ He hesitated for a few seconds, but then said he would really appreciate that. So I got right on it.”

The key steps to putting a financial POA in place are:

• Consult an elder law attorney to properly draft the POA documents.
• The family member we’re caring for reviews and signs the documents in the presence of a notary.
• Submit the signed POA to all relevant financial institutions.

With a financial power of attorney, we can legally manage assets, pay bills, file taxes, and make financial decisions for our parent's benefit without court involvement. The process requires careful documentation and legal counsel to ensure our parent's rights are protected.

We don’t even have to wait until we see signs of questionable financial decisions to initiate a financial POA with the family member we care for. By getting it in place early, we can prevent poor financial choices before they’re made.

Verify capacity to sign a power of attorney

If the family member we care for has a form of dementia and has not yet completed a financial POA, it may not be too late to initiate one. We can talk with a lawyer to discuss whether our family member is considered to have the capacity to sign a POA declaration. 

TIP: The Alzheimer’s Association offers information that can be helpful when engaging in legal planning with regard to helping manage an aging family member’s finances.

Things to consider when taking control of a loved one’s finances

Protecting an aging loved one’s financial well-being is a big responsibility. It’s common to feel push-back from the person we’re caring for, as well as other family members. Here are three tips to make this transition as smooth as possible. 

1. Talk with family members. To get everyone on the same page, it may be helpful to call a family meeting to discuss concerns about our family member’s mental capacity, and the possible implications of doing nothing to prevent ongoing poor choices (eg: no oversight could mean less money in the estate to cover long term care costs and less money to distribute to beneficiaries after our loved one passes). These tips on How to Talk to an Aging Parent About Their Finances can be helpful when preparing to address the topic with our parents.

2. Talk with a financial advisor. We can also work with a trusted financial advisor who can provide expert, impartial advice on how to manage the family member’s finances moving forward. Transparency in any decision-making is key to getting family buy-in and building trust.

3. Prepare for increased demands. Managing another person’s finances takes time and patience. Setting up automatic bill payments can save time every month. But there will be other financial activities to tend to:

• terminating unwanted subscriptions
• filing taxes quarterly and/or annually
• managing disbursements from retirement accounts
• keeping an eye on investment performance

Again, a financial advisor or accountant can provide assistance with some of this. While managing a family member’s financial affairs will add to our already full plate, it will also add to our peace of mind. And that’s something that all family caregivers can use a little more of.

For related reading, check out How to Reduce the Financial Stress of Caregiving.

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At RubyWell, we’re paving a path to financial stability for all family caregivers. Our Family Leave Finder provides state-by-sate info on family leave laws. Soon, family caregivers will be able to make the most of a loved one’s health insurance benefits with our Medicare Advantage Benefits Navigator. And ultimately, we're developing compensation solutions so that every family caregiver can be a paid caregiver. If you’d like to be among the first to hear about future products, join our waiting list.

I hope this article has been helpful for you. Feel free to share it with family or friends who are caring for aging family members.

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