Planning for Diminished Capacity or Illness: How to prepare your spouse or agent to manage your finances

Partners in a relationship often split up various tasks and responsibilities. We find it is common for one partner to be the primary financial manager- whether this is the person who handles the day-to-day tasks such as bill pay and budgeting or the person who keeps tabs on bigger picture items such as investment accounts and tax planning. This may be because one person has a stronger interest in financial matters, or it may be that their partner has little interest in taking these tasks on. Whatever the case, it is a frequent situation where one spouse has very little idea of the regular financial management tasks that must be done to sustain the household. This can lead to a crisis in the case of an unexpected event such as diminished capacity, illness or death and can be especially problematic as folks age.

For the partner who is currently uninvolved, starting the process of learning more about what is involved in the financial management tasks can seem overwhelming. It may help to break up the learning into smaller steps. Make it a point to work through some of the routine management tasks together several times so there are lots of chances to practice and ask questions. You can document any key contacts or instructions in writing so there is a resource available for your partner to support them during a transition. It is crucial to start this process before anyone is experiencing diminished mental capacity so that all parties are clear on the plan.

Key Considerations to Prepare

We have outlined some of the major areas to consider when preparing a partner to take over financial management below. The items have been divided into regular daily tasks, tasks that are annual or less frequent as well as estate planning concerns. It may also be beneficial to consider creating a financial caretaking agreement that clearly outlines how your financial affairs will be handled, the expectations you have from your financial caretaker and what your financial caretaker needs to do for you.

Daily Financial Management

Create a list of all your financial holdings and logins. Consider using a password manager to make sure that you have safe and effective passwords. Share this information with your spouse or financial caretaker.
Consider using an account aggregation application such as Mint or Yodlee to simplify tracking of assets and keep a consolidated balance sheet.
Reduce the number of bank accounts and investment accounts to the minimum needed for simplification. For many folks, there is only need for one taxable brokerage account, one traditional IRA per person and one Roth IRA per person.
If you have any individual stocks or mutual funds at the holding company, consolidate these into a brokerage account at an independent custodian. This simplifies taxes, record keeping and makes things easier to track.
Review transactions in your investment accounts regularly with your spouse or financial caretaker. Periodically reconcile your accounts to detect mistakes or fraud and abuse.
Document the budget and cash flow resources that are used to meet your spending needs so that your spouse or financial caretaker can step in when the time is appropriate. This includes any pension benefits, social security benefits or income from investment accounts.
Involve trusted family members or friends. Have more than one person involved in bill paying or at least have occasional “check ins” to make certain an alternate person is ready to take over these duties in the event of illness or cognitive decline.

Annual or Less Frequent Responsibilities

Create a list of all key tax documents and information that needs to be gathered every year for your tax preparer. Review the list with your spouse or financial caretaker and the process for sharing information with your preparer.
Make certain you are clear on your investment policy and that it is shared with your financial caretaker- in the event you can't participate in decision making anymore.
Consider using a financial adviser even if your spouse is doing well taking care of the investments. The adviser can be on standby and step in when needed. By using an adviser early, you can gain comfort with how the adviser works. Be certain the adviser you hire will act in a fiduciary capacity, which means they must put your interests first in taking care of your assets.
Make sure your adviser has a letter of instruction should they become concerned about your ability to manage your finances as they may be the first one to recognize that you are having a problem.
Consider completing a credit freeze to help protect you from fraud and identity theft. Be sure to share with a trusted family member or friend the info needed to unfreeze your credit should a situation arise where they need to apply for credit for you.

Estate Planning Considerations

Update your power of attorney document and present it to the institutions where you hold assets to make certain they will accept your instructions.
Review your power of attorney annually to make certain the people you have named are willing to take care of your affairs when needed.
Review and update your health care directive annually. Be sure to have conversations with your appointed agent so that they are aware of their medical powers and your wishes.
Review and update any other key legal documents that are part of your estate plans annually such as your will and any trust documents.
Review all beneficiaries on retirement accounts and insurance policies to be sure they are up to date. Check titling of accounts and consider adding transfer on death (TOD) or payable on death (POD) to savings or investment accounts where appropriate.

Making a Financial Caretaking Agreement

It can be very helpful to lay out a financial caretaking agreement for someone who is single and does not have a spouse to assume the caretaking role. It can also be beneficial for those in a couple if both partners become incapacitated at some point and will need an outside party to step in to assume financial caretaking tasks. Here are some questions to think about as you prepare the financial caretaking agreement.

Considerations for you:

What is the structure of your finances and have they been simplified appropriately?
Are you using an account aggregator or have you written out explicit instructions of how your bills should be managed?
What is the investment policy that should be followed for your assets?
Who completes tax returns and when will you allow your financial caretaker access to your returns?
When will you provide viewing access to your financial information so your financial caretaker can keep an eye on your finances?
When will you provide your future financial caretaker with the ability to access your accounts?
What will trigger turning over the management of your finances to your financial caretaker?
Who else will be provided information on your finances?

Considerations for the Financial Caretaker:

How often will they look at your accounts?
How often will finances be reviewed with you?
What will be their process for writing bills, preparing tax returns, and following your investments?
How often will they provide information about your finances to others?

Planning for eventual diminished capacity, illness or death can feel daunting and scary. However, the longer you delay acting, the more likely you will be to hit a crisis in the future. We find that tackling a few tasks at a time with your spouse or financial caretaker can be an approachable way to get started on the process. Every action you take helps set you up for an easier financial transition if needed.

Liz Alf is the Principal of Clerestory Advisors and fee-only CERTIFIED FINANCIAL PLANNER^TMlocated in Minneapolis, MN. She is a member of the National Association of Personal Financial Advisors (NAPFA) the Fee Only Network and Wealthtender. She enjoys serving clients with on-going financial planning and investment management services.