THE REALITY OF FINANCIAL ABUSE OF THE ELDERLY
It doesn’t always look like control or cruelty – sometimes it’s disguised as ‘help’. Here’s how to identify it for what it really is.
Financial abuse is often not recognised by the elderly person who is subjected to it, nor identified by outside parties, because it is often committed by close family members and trusted individuals.
There is a wealth of literature and articles on cognitive decline and how it affects most people as they age. The fact that most of us will experience memory loss to a greater or lesser extent, slower cognitive reactions, and a risk of losing our ability to understand the value of money, and even becoming confused about different denominations of money, places us all at risk of potential future financial abuse.
It is our responsibility to protect ourselves against our future selves and to protect our loved ones who will be left behind when we pass on from the same threat. Failing to do so may lead to financial ruin and hardship for them.
In fairness to the “abusers”, who are often the children of the financially abused, we as parents have been guilty over many years of making children not only dependent on us but also creating a sense of entitlement, where they believe they have the right to almost insist on financial help.
The next step in later life is a follow-through, where they help themselves to funds, assets, holiday homes, free accommodation, the spare vehicle, etc., especially after one of the parents has passed away. The excuse is generally: “But dad (or mom) said I could, or dad (or mom) agreed, or dad (or mom) gave…”
This is all good and well, as long as the parent understood the agreement and acknowledgement 100%. If there was any lack of understanding, the self-enrichment can be construed as financial abuse. Irrespective of how small it is.
Financial abuse is often subtle and less obvious. In some cases, the abuse can even be perceived as helping the surviving parent.
I am currently dealing with a situation in which my client passed away and left his entire estate to his spouse, who is over 80 years old and has been diagnosed with dementia.
She now needs to move to a frail care facility at substantial expense. My client and his wife built up fair-sized estates. His wealth consisted mainly of investments and liquid assets, whereas his wife owns a property complex consisting of business premises and a residence.
Their son historically rented a business unit from them and paid an undisclosed rent. The father managed the rental income and the property in general. The mother had very little influence or involvement in their combined financial affairs. The son has now moved into the main residential unit.
The estate is still being wound up, but some distributions have begun to flow to the mother. It is clear that cash flow will be an issue, considering her frail care and medical expenses.
When we discussed the mother’s cash flow and financial management, the rental of the property came up. The son committed to pay R15 000 per month in rent. That sounds great, and his siblings seem to be in agreement. However, this will be challenged and may cause a heated debate among all parties (except the mother, who plainly does not understand what’s going on).
My reasoning is that the property is worth R 7 million, and a R 15 000 per month rental equates to a yield of 2.57%. Property rental yields are generally accepted to be higher than 5% and closer to 7%. To be fair to his mother, he should be paying rent between R 30 000 (on the low end) and R 41 000 per month (on the market rate).
Can the above situation be construed as financial abuse? The above situation raises three concerns:
Mom is being short-paid. (We still need to see if, in fact rental will be paid).
Mom’s estate is bleeding capital, which will affect the inheritance of future beneficiaries and there is a real risk that capital will be depleted if she lives longer than five years. The additional (fair) rental will prevent or at the very worst delay this.
Sars may deem the below-market rental a gift and impose a donations tax on the portion of the rent below market rate.
My recommendation is to sell the property and apply the proceeds to meet mom’s cash-flow requirement. In this scenario, she will not suffer any financial hardship for the rest of her life.
What are the typical forms of financial abuse that one must be mindful of?
Taking advantage of a person’s inability to understand financial decisions:
“Borrowing” money (that doesn’t get repaid). Family members and close friends are sometimes guilty of this. They also accept freely when a “don’t worry to repay it” comment is made.
Accepting gifts. The elderly are very generous, and they often underestimate the value of handouts.
Not being honest if the incorrect money denomination is paid. The first sign of my mother’s dementia was when she continuously mistook R200 notes for R50 notes. This is a challenge where the elderly still do their own shopping and use cash.
More serious cases:
Having an elderly person sign contracts such as the transfer of property or vehicles.
Having an elderly person buy or hand over significant assets like expensive jewellery and heirlooms.
Abusing a power of attorney to take charge of a person’s financial affairs. Many GPOs are invalid and can be challenged because the elderly person lacks the cognitive capacity to enter into such an agreement. A GPO becomes invalid as soon as the grantor of the GPO no longer has the cognitive ability to recall the GPO.
Having an elderly person change his/her beneficiaries on life assurance contracts and living annuities.
Having an elderly person change his or her will while they don’t have the cognitive ability to realise what they are doing.
Carers
I highlighted carers because this is potentially one of the most common areas and risks of financial abuse.
Using the bank cards of the elderly person they care for to pay for household shopping. Often, more goods than necessary are bought. Drawing cash for elderly people creates a whole new set of problems. Older people like to have cash on hand, even if they cannot fully identify with it anymore.
Where carers pay contractors and service providers on behalf of elderly people, all sorts of misappropriation of funds can take place, especially if services are paid in cash.
There is a tendency for private carers to be nominated as beneficiaries on the living annuities of the elderly people they care for. In many cases, this is questionable.
Financial abuse is often accompanied by physical abuse if demands are not met. Family members must be aware of any changes in the behaviour of the person being cared for and take note of any injuries.
The potential abuse list can be extensive. My message is for family members to be aware of the reality and keep an eye out for any form of financial abuse. Don’t be afraid to ask suspects direct questions and to request proof of expenses and payments where applicable.
Ways to prevent or make financial abuse more difficult
Use a trust
Assets and capital can be applied and distributed in accordance with the rules set out in the trust deed, with oversight by the trustees.
The trust can be set up as a testamentary trust, therefore saving the set-up and management costs of an inter vivos trust. Costs will only become applicable after the death of the settlor.
Where it involves property, no transfer duty will be payable if a trust is nominated as the beneficiary.
To avoid the time lag associated with a testamentary trust, a “sleeping trust” can be created while the planner is still alive. Only a minor administration fee and a basic accounting fee will apply until the assets are transferred to the trust (registered as an inter vivos trust) on the planner’s death. This is particularly useful where a living annuity nominates a trust as beneficiary.
As referred to above. Nominate a trust as the beneficiary of your living annuity, especially if your beneficiaries are not investment savvy. Choose your trustees wisely.
Use a life annuity as part of retirement income
This removes investment risk and provides a guaranteed lifelong income for either the annuitant or for both the annuitant and his spouse. This way, financial abuse of the capital is eliminated. However, the monthly income will still be at risk of abuse by outside parties.
Enter into a discretionary mandate with an investment specialist (DFM)
This is particularly useful when you no longer have the willingness or ability to make investment decisions. The investment portfolio will be managed in the future in accordance with the mandate you entered into with specified risk parameters. This can take place on both voluntary funds and compulsory funds.
To ensure that you and your spouse are protected from financial abuse, it will pay to find a trusted team to look after your affairs. This team should include a legal expert, a competent financial planner and a tax expert.
Get this in place while you still have all your faculties so that you can determine how your financial and fiduciary affairs should be handled in the future.
Don’t let your financial life follow any possible cognitive decline. Plan now for a secure financial future.
Take care.
