Estate Planning: Do You Need a Financial Caregiver?

Why You Need a Financial Caregiver

If creating an estate plan is part of your new year’s resolutions, be sure to name someone as a financial caregiver in those plans.

Much like a health care power of attorney will assist with medical decisions, a financial caregiver is a power of attorney who can legally offer assistance about property and other financial matters. These caregivers are especially important when people grow older and may not have the same mental facilities as they did before.

Patrick Simasko, an attorney who specializes in elder law and estate planning in Mount Clemens, Michigan, says the power of attorney documents are a critical part of estate planning.

“The will is the least important, especially when (you’re) alive,” he says. “You need to have the two separate documents, a medical power of attorney and a financial power of attorney. I see a lot of married couples who think, ‘I don’t need a financial power of attorney. My name is on all the accounts.’ But they’re not. IRAs are not, deeds to houses might not be. You absolutely need two separate ones, and one for mom and dad.”

Types of powers of attorney. Dean Hedeker, principal of Hedeker Wealth, a wealth management and financial planning firm in Lincolnshire, Illinois, says there are two types of financial power of attorney – immediate and springing. The immediate power of attorney is effective after signing, while the springing power of attorney goes into effect based on the person’s incapacity. How that’s defined is dependent on how the power of attorney is set up. It can be based on a physician’s judgement, or based on a family member and physician’s judgement, for example, he says.

Picking the right person is critical, says Nancy Doyle, author of “Manage Your Financial Life.”

“Give a lot of thought about who that key person could be. It depends a lot on your stage of life,” she says. “It could be an adult child, a best friend, a sibling. … It has to be someone you can work with because you are handing over the management of your financial life to someone.”

Picking the right person comes down to trust. “These people have a fiduciary responsibility and the law imposes on them the highest standard, and presumably they will pay the bills and do what they’re supposed to do,” Hedeker says.

And it doesn’t need to be someone with a financial background, although that helps. “It just needs to be someone who is an intelligent, honest person who can ask questions,” Simasko says.

People with small family units might also consider appointing a financial institution if they don’t feel comfortable choosing a family member or friend, Hedeker says.

When people are choosing the person who will be their power of attorney, it helps if the person drawing up the estate plan can organize and simplify the financial plans ahead of time. Preferably the person who is appointed financial power of attorney and the person drawing up the estate plan will have gone through what’s important and what isn’t, Doyle says.

However, if the person drawing up the plan isn’t comfortable doing that, it’s important that he or she leave clear directives to the chosen caregiver regarding how to manage the person’s property, including how to pay bills, says Steve Martin, director at BKD Wealth Advisors in suburban Chicago.

“It’s good to have a plan on how everything is going to be paid for, such as how to pay for long-term care,” Martin says.

Keeping an eye on the caregiver. Considering elder abuse is a significant problem, having someone who will have oversight over the financial caregiver can help with checks and balances.

“They should be accountable to someone else,” Hedeker says. “Maybe that person could be one of the ultimate beneficiaries of the estate.”

Simasko says financial exploitation of the elderly is common, whether it’s a financial advisor selling the wrong products or investing in an imprudent way, or that a financial caregiver is making unusual withdrawals. While a financial caregiver should be able to spot exploitation by the financial advisor, at the same time, a trusted financial advisor could be a second set of eyes on the financial power of attorney.

“The financial planner can say I understand the niece is taking over power of attorney; we’ll watch to make sure there are not $50,000 distributions to the Corvette dealership,” he says.

The financial caregiver is in charge of paying the bills and other property management, but one thing they shouldn’t do is co-mingle their personal funds with the person they’re caring for, Simasko says.

“They can’t borrow money under the power of attorney and invest in inappropriate things. (The caregiver) needs to use that money for the person’s benefit,” he says.

Unless conditions were set up in writing ahead of time, financial caregivers shouldn’t pay themselves out of the estate, either.

“They can’t enrich themselves,” Hedeker says. “They can get paid for their work as long as that’s agreed to ahead of time.”