Diminished financial capacity refers to a decline in a person’s ability to manage money and financial assets effectively, including the inability to understand the consequences of investment decisions. This cognitive decline can result from serious accidents, injuries, illnesses, and aging. A recent study suggests cognitive impairment affects around 16% of adults over 65 in the United States.

Planning for these possibilities requires difficult conversations, but being prepared can help you and your family minimize problems down the road. Below, we have compiled a list of tasks to assist in creating a plan of action should you ever need it.

Organize Your Important Documents

Even though you know where your important financial documents are stored, what if a relative or friend needed to locate them in an emergency? Could they easily find everything needed to manage your financial affairs? Organize and store important documents in a safe, easily accessible location and let trusted loved ones know where they can find them if necessary. The following information and documents are typically most important for your finances:

Bank and Brokerage Statements

• Accounts and Account Numbers: Maintain an updated list of all your accounts and their respective numbers.
• Online Banking and Brokerage Passwords and PINs: Store this information securely and update it regularly.
• Safe-Deposit Boxes: Note the locations and keys for any safe-deposit boxes.
• Recent Statements: Keep the most recent bank and brokerage statements on hand.
• Mortgage and Credit Information: List all your debts and regular payments, including account numbers and the names of financial institutions that issued the loans or credit cards.

Insurance Policies

Compile all your insurance policy documents, including health, life, auto, and home insurance.

Pension and Retirement Benefit Summaries

Keep summaries of your pension plans and other retirement benefits easily accessible.

Social Security Information

Have your Social Security payment information available.

Contact Information for Financial and Medical Professionals

Maintain a list of key contacts, including:

• Doctors
• Lawyers
• Accountants
• Financial Advisors
• Insurance Agents

Provide Your Financial Professionals with Trusted Contacts

Consider adding a “trusted contact person” to your financial accounts. A trusted contact person is someone you preauthorize your financial institution to contact in specific situations, such as if your broker is unable to reach you or believes you are being financially exploited. This person will not have access to your account or money and will only be contacted under specific circumstances. Most brokerage firms (and some banks) allow you to designate a trusted contact person.

Use Social Security Advance Designation

With Social Security Advance Designation, you can choose up to three people to serve as your “representative payee” should you need help in the future. A representative payee is someone appointed by the Social Security Administration to manage your Social Security benefits if needed. This designation will not take effect unless you become unable to manage your benefits on your own. If your situation changes, the Administration will evaluate your Advance Designation to ensure the person you chose is suitable to serve as your representative payee at that time.

Consider a Durable Financial Power of Attorney

A financial power of attorney (POA) is a document giving someone the legal authority to make financial decisions for you if you are unable to do so. The “durable” designation means it remains in effect even if you become incapacitated, though you can change or cancel it if you are still able to make decisions.

Additional Tips for Planning for Diminished Capacity

1. Regular Family Meetings

Hold regular meetings with family members to discuss your financial situation, update them on any changes, and ensure they know where to find important documents. These meetings can help prevent misunderstandings and ensure everyone is on the same page.

2. Secure Digital Records

In addition to physical documents, ensure your digital financial records are secure. Use strong passwords, enable two-factor authentication, and consider using a digital vault service to store sensitive information securely.

3. Legal and Financial Check-Ups

Regularly review your legal and financial plans with professionals to ensure they reflect your current wishes and financial situation. This includes updating your will, trusts, and any other legal documents.

4. Emergency Contact List

Create an emergency contact list that includes your financial advisor, lawyer, and trusted family members. Ensure this list is easily accessible and share it with your designated contacts.

5. Simplify Finances

Consider simplifying your financial affairs as you age. Consolidate accounts, set up automatic payments for regular bills, and minimize the number of financial institutions you deal with to make it easier for your caregiver to manage your finances.

Planning for diminished financial capacity involves organizing your important documents, designating trusted contacts, using Social Security Advance Designation, and considering a durable financial power of attorney. By taking these steps, you can ensure your financial affairs are managed effectively, providing peace of mind for you and your loved ones.

Regularly review and update your plans to reflect any changes in your situation, and maintain open communication with your family and financial professionals. Being proactive in planning for diminished capacity can help prevent potential problems and ensure your financial well-being in the future.