Dementia poses financial risks

Another condition of aging, mild cognitive impairment, is characterized by cognitive problems that are greater than those associated with normal aging, but are not as severe as dementia. Data are not available for the prevalence of this condition in Canada, but rates reported for the United States range from 9.9% to 35.2% for adults aged 70 or older.

While age is a significant risk factor for cognitive impairment, the condition is not restricted to the elderly. Some 16,000 Canadians under the age of 65 are currently living with dementia. Accidents or other illnesses such as a stroke could strike at any age, resulting in temporary or permanent impairment of cognitive capabilities.

What would happen to your personal finances if you could no longer make rational decisions due to loss of cognitive powers? To ensure that your affairs would be managed as you would wish, you need to plan now, when you are of sound mind.

Begin by determining how you would want your personal finances handled, and by whom, if you lost the ability to make financial decisions.

You should address this topic with your partner, and consider scenarios where one, the other, or both of you become cognitively impaired. This is a good opportunity to review your family financial affairs together. Both partners should maintain a good grasp of the family's current financial status and know what it takes to manage the household finances.

One popular approach is to appoint a trusted family member to handle your financial affairs if you became mentally unable to do so. Another route is to name a trust company to take on this role (for a fee, of course).

Planning for cognitive decline also involves making decisions about your personal care if you became mentally incapable (shelter, clothing, health care you would receive, who would make decisions for you, etc.). Again, couples should discuss their options together, though their choices may differ.

Naturally, you should obtain the agreement of whomever you wish to take on the responsibility to make decisions for you in the event you are no longer mentally capable.

To ensure your wishes are respected, it is important to formally document these decisions about property and personal care.

A continuing power of attorney for property is a document that names the person(s) whom you authorize to act on your behalf regarding property and financial affairs if you are no longer able, and may include limitations and specific instructions such as the types of investments that can be made. If you are 65 years of age, setting up an alter ego trust and appointing a trustworthy person to manage your assets inside the trust may be an option.

A power of attorney for personal care is a document that names the person(s) whom you authorize to be your substitute decision-maker if you are no longer able to make decisions regarding your personal care. It may contain detailed instructions, including the level of personal and health care you wish to receive in specific situations.

Note that the legal term used for a power of attorney varies across Canada as each province and territory has its own laws in this area. For example, the term "mandate" is used in Quebec.

A will is another document that should be prepared while of sound mind.

While do-it-yourself wills and power-of-attorney forms such as the free kit offered by the Ontario government are available, retaining a wills and estates lawyer to prepare or update your will and powers of attorney is advisable to ensure that the documents meet legal requirements, properly express your wishes and will be followed without issue. Alter ego trusts are complicated, and should be prepared by a lawyer with expertise in this area.

If you do not have a will, and become mentally incapable of making one, your estate will be distributed according to the estate law in your province, not your wishes.

Without a power of attorney for property in place, if you become mentally incapable, outside parties will decide who will handle your personal assets. Your family may be required to apply to the Public Guardian and Trustee or the courts to be named the guardian of your personal assets, says Raquel Kaplan Goldberg, a wills, trusts and estates lawyer at Kronis, Rotsztain, Margles, Cappel LLP in Toronto.

According to Goldberg, this legal process is much more expensive and time-consuming than setting up a continuing power of attorney for property, and much less flexible in terms of how your assets can be managed.

Whoever is your attorney for property will need to compile a complete picture of your current financial status if called upon to handle your affairs. To this end, a detailed, up-to-date inventory of your financial assets such as bank accounts, insurance policies and investments is indispensable.

Don't forget to include key information about your digital life such as social-media accounts and passwords. The inventory and other relevant documents such as your will and powers of attorney should be stored in a safe location which your attorney can access when needed. This is not your safety deposit box since your attorney would need your power of attorney in hand to be allowed to access the box -- a real Catch-22.

The probability of suffering dementia increases with age. If you have reached your sixties, it would be prudent to review your personal and financial affairs, and revise them as necessary to minimize the risk of making poor, and possibly catastrophic, decisions. Simplification is key. For example, a do-it-yourself investor might decide to retain a financial advisor, or switch from trading stocks to a simple fund-based buy and hold strategy.

Learning more about health conditions that can affect cognitive abilities should be part of planning for cognitive impairment. It could mean earlier detection and treatment and a better outcome. You may decide that there are lifestyle changes you should make to reduce your risk of cognitive decline.

Reliable information about these health conditions is available from numerous sources including health-care professionals, relevant government agencies and trusted health organizations. Some also offer education, support and counselling for the affected and their caregivers. For example, the Alzheimer Society maintains a library of videos about Alzheimer's disease and how to support someone with the disease and their caregiver and family. It also has resources to help financial advisors better serve clients affected by dementia.