The Power of Financial Capacity
Financial Capacity is the ability to manage one’s money and financial assets to meet his or her needs that are consistent with the individual’s personal self-interests and values (Marson, Herbert, & Solomon, 2011). Like other measures of independent activities of daily living (managing medications, driving, using the telephone), financial capacity is cognitively mediated.
Normal Brain Aging
With normal brain aging changes, the most basic cognitive function affected includes memory and attention. Sensory declines in hearing and vision occur with normal aging. Finally, executive function, a leading role in practically all aspects of cognition, is a primary contributor to cognitive decline with age. Imaging studies of the prefrontal cortex, which controls executive function, have shown substantial decline in volume and function in older adults. Issues related to loss of financial skills and capacity may arise from the normal aging process.
Financial capacity can be cognitively demanding for older adults because it requires a multifaceted array of complex skills (Sherod et al., 2009). Clinical, social and cultural factors can influence financial capacity. Dementia is the most common clinical condition that can have a significant impact on older adults’ financial capacity. Although clinical factors like dementia may influence financial capacity, social networks can also affect how older adults handle their finances. Cultural influences associated with financial capacity can vary. Western culture values financial autonomy, while some ethnic groups rely on family or community as the center of financial decision-making.
FOUR LEVELS OF FINANCIAL CAPACITY AMONG OLDER ADULTS
- Older adults may require someone to make decisions on their behalf due to dementia, disorientation, or a mentally disturbed state.
- Some older adults are able to make basic decisions about their lives but may be too confused to balance their checkbooks or their budgets.
- Some older adults with a generally sound mind can mange their money and budget but may lack the knowledge or experience to make good investments.
- It is possible for adults 90 and older to still have the skills, knowledge, experience, memory, and ability to reason, thus enabling them to understand the upside and downside of their investment choices and assess their needs as well as their tolerance for risk.
Adapted from Brisk (2012)
Financial Capacity Impairment
Financial capacity impairment is a symptom of cognitive impairment that requires attention and management by healthcare professionals. In older adults, financial capacity impairment may be the only early warning sign of undiagnosed cognitive deficit. The sheer nature of undiagnosed cognitive impairment puts the older adult at increased risk of mismanaging their finances and financial abuse. Research has shown that older adults not able to manage their finances leads to high perceived caregiver burden, which makes them more vulnerable to abuse and financial exploitation.
Impact of Financial Capacity Impairment
Financial capacity impairment has important legal, financial and emotional implications for older adults. Emotionally, the biggest concern among older adults is their inability to live independently and autonomously. Financially, older adults with financial capacity impairment are easily exposed to financial exploitation. And, exploitation can occur from undue influence or from consumer fraud. Older adults are vulnerable to fraud committed by their caregivers, family members, legal representatives, or strangers. From a legal viewpoint, issues related to trusts and estates can become a long legal problem. Abuse of fiduciary relationship is a major legal aspect of elder abuse.
Indicators of Financial Capacity Impairment
WARNING SIGNS OF DIMINISHED FINANCIAL CAPACITY
- Memory lapses – inability to fulfill financial obligations
- Increasing disorganization and misplacement of financial documents at home
- Decline in checkbook management
- Noticeable decline in arithmetic skills
- Increasing confusion and loss of general knowledge of basic financial terms and concepts
- Impaired judgment about financial investments and use of money
Adapted from Triebel and Marson (2012).
FIVE ALERT SIGNS OF FINANCIAL CAPACITY IMPAIRMENT
- Diagnosis that causes cognitive impairment
- Cognitive impairment detected from conducting a screening test
- Changes in appearance and behavior
- Recent loss of long-time partner
- Direct reports from the older adult, family members, or caregiver of the older adult’s difficulty with financial tasks and management
(Flint et al., 2012).
Conclusion
In the United State, older adults hold approximately 34% of the nation’s wealth. The combination of wealth, cognitive decline and impaired financial capacity places a great challenge on our society. As America ages, one of the most pressing issues they face is the ability to maintain independence and autonomy.
Financial capacity is a key indicator as to whether an older adult may continue to live independently. Financial capacity impairment can have substantial emotional, financial and legal consequences. Healthcare providers haven’t viewed financial capacity as a priority assessment. But it is imperative to identify early indicators of financial capacity impairment to educate older adults and their families about the need for advanced financial planning.
The demographic shift to an older society has made it necessary for all of us to be aware of the impact of financial capacity on the quality of life. Our extended lifespans have made it necessary that older adults have the funds they require to live comfortably throughout their remaining years.
References:
Brisk,W.J. (2012). An elder law attorney’s view of the financial competence of older adults.
Generations: Journal of the American Society on Aging, 36(2), 88-93.
Caboral-Stevens,M. & Medetsky,M. (March, 2014). The construct of financial capacity in older
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Flint, L.A., Sudore, R.L., & Widera, E. (2012). Assessing financial capacity impairment in older
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Marson, D.C., Herbert, K., & Solomon, A. (2011). Assessing civil competencies in older adults
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Triebel, K.L., & Marson, D.C. (2012). The warning signs of diminished financial capacity in older adults. Generations: Journal of the American Society of Aging, 36(2), 39-45.