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Direction for Clients Seeking to Financially Aid Loved Ones: Procedures and Potential Pitfalls

Roughly 5 million Americans are currently living with some form of age-related dementia. Estate planning and elder law attorneys are quite likely to find themselves representing a client with some degree of dementia during their careers. It is also likely that they will find themselves representing a client that needs to take over the affairs of someone suffering from failing mental faculties. Unique ethical dilemmas arise when a client seeks advice on how to help a loved one with diminished capacity.

Financial capacity questions often arise when family members learn that their loved one is becoming financially forgetful. They become concerned about their loved one’s ability to handle regular payments of bills; they may question bad financial decisions; or worry about the loved one’s likelihood of being exploited. When a client expresses the desire to step in for a loved one in a financial capacity, a lawyer must first consider potential conflicts of interest. Ethical lines may become blurred in the future if relatives challenge the validity of a power of attorney drafted for the principal by the agent’s attorney.

Ethical Considerations

Model Rule of Professional Responsibility 1.7 provides guidance on conflicts of interest. It states that a lawyer must not represent two parties that may create a conflict of interest unless the lawyer possesses a reasonable belief that they can provide competent representation to both simultaneously; the clients are not adverse parties; each client gives informed, written consent; and the representation is not prohibited by law. Maine has established that an agent’s attorney does not necessarily create a client-attorney relationship with the principal when establishing a power of attorney. However, an Ohio attorney created a conflict of interest when representing both the agent and adult with diminished capacity in a guardianship proceeding – this relationship was also found to complicate the validity of a power of attorney executed by the disabled adult.  It is imperative to understand your state’s position on representing the agent in the execution of a power of attorney.

Free CLE Webinar on Wednesday, September 12 at 12:00-1:00 p.m. ET
Elder Law Ethics: Representing Clients with Diminished Capacity

Understanding “Financial Capacity”

One definition of “financial capacity” is explained as “a medical-legal construct that represents the ability to independently manage one's financial affairs in a manner consistent with one's personal self-interest and values.” (Marson DC. Clinical and Ethical Aspects of Financial Capacity in Dementia: A Commentary. Am J Geriatr Psychiatry. 2013)  Thus, financial capacity determinations often require a combined effort of the medical and legal fields.

A client seeking to help a loved one with managing finances may not need to go to the extreme of establishing incompetency through court proceedings. Some clients may only need guidance on how to take a passive role in the goings on of their loved one’s bills and payments – creating a joint or convenience account, for instance. Others may need something in between – like a financial power of attorney.


Establishing the Lack of Financial Capacity

Often, the first step for concerned family members is to seek out the expertise of their loved one’s trusted physician. Their doctor may perform their own assessment using various capacity testing measures, or they may refer the patient to an internist, geriatrician, or neurologist that specializes in a variety of different forms of dementia. A clinical determination of diminished capacity is a significant piece of evidence when approaching a court for a legal determination on capacity.

If a client first approaches a lawyer for the purposes of taking over the financial affairs of a loved one, the lawyer must determine what steps are necessary to establish this ability. Generally, with the knowledge of a few key pieces of information, anyone can pay another person’s bills. But as the need for assistance becomes more obvious, a formal approach may become necessary.

When dealing with all legal actions, the capacity of each party is an important consideration for lawyers. Measures should be taken to be reasonably certain that the parties harbor the requisite capacity to execute the specific legal task. More specifically, when representing an agent in a power of attorney, establishing the proper capacity of the principal is a safeguard for attorneys if the validity of the document and the principal’s capacity is later questioned.

Options for Managing a Loved One’s Finances

There are several options for the informal management of a loved one’s finances. The two can open a joint checking account, which allows the client to settle debts on behalf of the person needing help. Beware, however, as any creditors of either party could seek satisfaction of debt from the funds in the joint account. An alternative option is a convenience account. This type of account works like a joint account, but funds of the loved one are out of reach of any creditors of the helping party. This account typically defaults to right of survivorship as well, so it is important for the loved one to specify their desires when opening such an account.

One formal option is the durable power of attorney, sometimes called a financial power of attorney. This legal document will permit the agent (helping party) to stand in the shoes of the principal (loved one with diminished capacity) in financial situations. Typically, each institution will want to inspect the document, so it is important to remind the client to have a copy present whenever attempting to deal with these institutions on behalf of the principal. The financial power of attorney is a powerful tool. It provides both the ability to manage the principal’s accounts and preserves the principal’s ownership rights to their property. The agent must act in a fiduciary duty capacity and can be liable for malfeasance. 

Managing a Loved Ones Finances

In Sum

Helping a friend or family member pursue the management of a loved one’s finances has its concerns. But with careful preparation and guidance, the task can be simplified. Deciding what measures to take and how complex the situation is are important considerations for the lawyer. Always remember to check your jurisdiction’s approach to the representation of an agent when the principal is unrepresented.  Be sure to know who your client is and keep their best interest at the forefront of your representation. 

Elder Law Ethics Webinar

Join Rebecca A. Hobbs, a Certified Elder Law Attorney and ElderCounsel member, as she discusses ethical dilemmas that elder law attorneys face every day when representing clients with diminished capacity and learn about protective measures an attorney can take to help limit their client’s vulnerability.

Elder Law Ethics: Representing Clients with Diminished Capacity

Wednesday, September 12 at 12:00-1:00 p.m. ET
CLE: 1 hours ethics
Pre-approved: AR, CA, NH, MO, NJ, NY, PA. Pending: CO, DE, FL, GA, IL, NC, OH, TX, WI. Attorney will self apply in states not listed. Due to distance learning program rules this course will not be accredited in: DE, KS, SC.

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