The world's leading health authorities have consistently warned us about older adults being more susceptible to coronavirus. They are at higher risk of not just contracting the virus, but also seeing their finances negatively impacted by a decrease in their financial capacity.

Financial capacity is the ability to manage your finances in your own best interest. It involves everything, from paying bills to reading a brokerage statement and weighing an investment's potential risks and rewards.

Preparing for the potential decline of the financial capacity is as important as planning for long-term care expenses or keeping an estate plan up to date. Declining financial abilities may not only result in a few unpaid bills. They can also leave older adults vulnerable to financial abuse and exploitation, drain their nest egg, and place heavy burdens on their loved ones. Given the increase in coronavirus scam incidents targeting older adults, this concern has increased, and The World Health Organization, as well as federal and local security agencies, have issued warnings about it.

Older adults themselves, along with family members and close friends, may be best positioned to recognize signs of diminishing capacity if a plan is developed. Simply watching for red flags is not enough. It is best to start planning for possible problems before warning signs appear.

Keep it Simple

Organize your finances. If your aging parents maintain complex investments and scattered bank, brokerage, and retirement accounts, chances are that you, or someone acting on your behalf, could make costly financial mistakes. Spreading assets across many different accounts also makes it tougher for financial institutions to detect fraud in these accounts. It is best to simplify finances.

Take a hard look at each account and briefly describe its purpose in one sentence. Is the account meant to generate income to help cover daily living expenses? Is it an emergency fund? Or is it a legacy the older adult plans to leave their children? Consider writing that sentence at the top of each of the most recent account statements. That can help both you and your family member to manage their money and think about how to allocate and rebalance those accounts.

Automate bill payments and arrange for direct deposit of regular income sources. Advise older family members to receive their incomes, such as Social Security, directly into their accounts. This will help them simply their finances.

Make a list of all assets along with key contacts. The list must include the older adults' financial consultants, bankers, accountants, insurance agents, and lawyers. Such a list can be a lifesaver after someone has lost capacity and they have no idea how many accounts they have, who their attorney is, or where their tax documents are.

Seek a Helping Hand

Consider whom they might trust with all the information they have just organized. As your parents age, will you or another family member help them manage their money? If not you, identify a relative, friend, or expert that could help.

If your parents are still together, make sure they both know how the home finances are managed. Financial novices could be suddenly forced to take over household money management, perhaps because a spouse has become incapacitated. These people are particularly vulnerable to making costly mistakes. Therefore, make sure they both know how to handle things in case something happens to one of them.

Next, consider getting another trusted family member or friend involved in their finances. Explain to the older adult that this does not mean they are turning over the keys of their financial life. Instead, this will help the chosen person learn how to manage their money in case they need to take some control later on. Another set of eyes will also help watch for unpaid bills or suspicious activity.

Planning Ahead

As you or any other family member begin to help older relatives out informally, it may be tempting for said relative to add either of your names to their bank account to help them pay their bills. That could work as a short-term solution, but it shouldn't be the primary long-term plan for dealing with a potential loss of financial capacity. This is an important decision that must not be taken lightly.

All older adults should have a durable power of attorney for finances. Instead of relying on ad hoc arrangements, this document allows an older adult to designate someone they trust, known as an "agent," to manage their finances. The "durable" part is key. This means the power of attorney remains in effect even if they become incapacitated. While you have financial capacity, an older adult can always change their agent or revoke the document completely.

Placed in the wrong hands, a poorly crafted power of attorney leaves the door wide open for financial abuse and exploitation. So, it's critical to choose an agent (as well as backup agents) who you and the older adult can trust completely. In addition, work with an attorney that has in-depth knowledge of elder law. The power of attorney may help minimize the risk of abuse. It can limit the agent's ability to make gifts or transfer assets to a certain dollar amount and restrict changes in life-insurance and retirement-plan beneficiaries.

The more they trust their agent, however, the more flexibility they will have to customize the power of attorney to meet their needs. Older adults who are concerned about planning for long-term care costs, for example, might grant their agent extraordinary powers, such as the ability to transfer assets to a trust. If, for example, an older adult is facing nursing-home costs of $100,000 a year, and is hoping to rely on Medicaid while preserving some assets for their spouse's living expenses, a power of attorney that grants such broader authority may be critical to ensure said purposes.

However, having a power of attorney does not give an agent the authority to handle Social Security benefits. If the Social Security Administration is alerted of the fact that an older adult may need help managing their money, it will investigate. A family member or friend can request such an investigation. Then, if necessary, the agency will select a "representative payee" to manage their benefits. Payees are generally family members or close friends. But in practice, many people never need a representative payee because their benefits are directly deposited into a bank account that's accessible to their agent under a financial power of attorney.

The time to take all these steps, of course, is well before having problems with money management. But no matter where they are in the planning process, older adults and their loved ones should keep watch for signs that financial capacity is slipping. That may be a signal to accelerate planning or reach out to trusted family members for help.

Some of the key warning signs to watch out for are the following:

  1. It is taking more time for Mom/Dad to pay the bills or perform other financial tasks than before.
  2. He/she is having trouble doing mental math, such as figuring out the tip in a restaurant.
  3. There is a noticeable loss of conceptual understanding, such as confusion about why he/she needs to make his/her mortgage payments.
  4. His/her once-tidy desk is now stacked with old, unopened mail.
  5. He/she is investing more aggressively than he/she did in the past, focusing on the potential benefits of an investment rather than the risks.

Remember, these issues are only warning signs if they represent a change from the person's prior behavior. But once you start seeing warning signs, do not ignore them. Your Popular One team is ready to advise you on how to manage this situation. Contact your Private Banker.

Copyright ©2020 The Kiplinger Washington Editors. All rights reserved. Distributed by Financial Media Exchange.