Cognitive Decline and Estate Planning

According to a recent Texas Tech University study, fifty years of age is the apparent peak for financial decision making. This ability begins to decline at age 60 and is significantly impacted by age 80. Even more worrisome is that people’s perceptions of their own abilities do not decline.

How should this information affect families when constructing their financial and estate plans?

Anecdotally, many of my retiree clients who are into their seventies and eighties have not shared, nor intend to share, their financial and estate information with their adult children. There are a number of reasons why they don’t share, but in not sharing family members usually aren’t aware of financial dangers arising due to cognitive decline.

A 2015 New Jersey case is enlightening. In Margaret Lucca v. Wells Fargo Bank, N.A. the bank was sued for failing to report to a state protective services agency a problem when one of the bank customers lost hundreds of thousands of dollars in a wire scam. Scammers from Jamaica called Margaret Lucca, fraudulently convincing her to wire money over several occasions.

Bank personnel noticed the unusual wire transactions, reporting them to the bank’s internal fraud department. The internal fraud department never reported the transfers to law enforcement agencies or to the New Jersey state adult protective services agency.

The heirs of Mrs. Lucca sought to hold Wells Fargo responsible for having failed to report these transactions under a New Jersey statute. That law permits financial institutions to report suspicious financial transactions to state agencies.

The New Jersey court held that the statute was enacted to protect financial institutions from claims that it violated a customer’s right of financial privacy, but did not mandate the reporting.

Therefore, while Wells Fargo could have reported the transaction, it was not liable for failing to report the transaction. While the holding in this case seems to be a logical if not obvious reading of the statute, the implications of the case and matters discussed in the opinion may have far greater import to the future of estate planning.

Mrs. Lucca’s estate plan was less than optimal. Consider if Mrs. Lucca had her estate attorney created a revocable living trust, and transferred the accounts into the trust, naming Wells Fargo as trustee. Wells Fargo would consequently serve in a fiduciary capacity for Mrs. Lucca, rather than as simply a custodian of the account.

In a fiduciary role, Wells Fargo would have been held to a higher standard. Had it not reported the fraud upon discovery, it’s likely that Wells Fargo would have been held liable to Mrs. Lucca for the losses.

More important than being liable, had Wells Fargo been acting as a trustee, it would likely have more closely monitored the suspicious financial transactions. A trustee would notice a wire transfer of such amounts to Jamaica

Perhaps another step was warranted as well. As clients age, hiring a care manager as an integral part of the planning process may serve to avert potential elder abuse. Hiring a care manager isn’t common today, but I believe will become more common as baby boomers age and retire.

A care manager may have identified the vulnerability of the client and alerted an institutional trustee, family member or others to take action. Care managers, unlike all the other members who comprise a traditional estate planning team for elderly clients, are mandated reporters. They must report suspected abuse. The same statute that absolved Wells Fargo of liability mandates that care managers and certain other categories of persons must report suspected abuse.

Had Mrs. Lucca’s team of advisors recommended a care manager, perhaps the elder abuse would not have arisen. There was no oversight or monitoring of the client’s financial activities.

Appropriate checks and balances are a key to safeguarding aging clients, but in the past have not been viewed as being within the scope of traditional estate planning. The Margaret Lucca case should not be viewed as merely a limitation on the liability of financial institutions, but rather a call to use more robust and comprehensive protective measures for many clients as they age.

© 2023 Craig R. Hersch. Learn more here

Questions About This Blog?

Contact Us For More Information