Tips for assessing capacity

Jill Sing’s client was proud as punch to have finally bought her first new car.

“Oh! I forgot to tell you!” said the elderly woman when Sing, a Victoria-based CPA, CA, CFA, CFP, and TEP, asked about charges on her client’s credit card. “I went to the dealership and this lovely young salesman with two beautiful children showed me the brochure for this car. And he was so charming that I bought it on the spot.” The credit card charges were for shipping and freight, which the client had paid to “reserve” the car.

The woman paused, and then said, “Don’t tell my daughter I did that.”

What the charming young man (hopefully) hadn’t known, and what Sing’s client had forgotten, was that she had been diagnosed with Alzheimer’s disease and didn’t have the capacity to make major financial decisions, like buying a brand-new car sight unseen. In fact, says Sing, who acts as a chief financial officer for a handful of high-net-worth families, the woman had gone to the dealership to sell her existing vehicle because she was moving into a residential care facility in Ontario, and would no longer be able to drive.

Fortunately, Sing and the woman’s daughter, who had enduring power of attorney, were able to stop the car purchase. But, the incident is an example of an area of growing concern for advisors dealing with retirees and an aging population: assessing a client’s capacity to make financial (and other) decisions.

Someone who is capable of making decisions, says Dr. Arlin Pachet, a Calgary-based neuropsychologist who performs mental capacity assessments, is a person who:

is aware of the available choices;
understands the reasonably foreseeable effects or consequences of those choices;
chooses after weighing the relative benefits and disadvantages of the choices available; and
can follow through with that choice.

Assessing capacity, he stresses, means evaluating a person’s decision-making process, rather than the choice itself. In other words, someone’s advisors or family may not like his decision to, for example, leave all his money to a particular charity, but an unpopular or unusual choice isn’t enough to have a person declared incapable.

Capacity issues hold great potential for conflict

Issues of capacity come up “almost on a daily basis” in the court system, says Holly LeVaillant, an estate and civil litigator with Mills & Mills LLP in Toronto who specializes in issues that affect the elderly, including capacity, testamentary capacity, will challenges and elder abuse. Clients may begin to lose the ability to make informed decisions about their financial and estate plans, which can make them vulnerable to abuse by everyone from car salespeople to friends and family members—and even to advisors themselves.

Family members, often children, may abuse joint accounts, explain Sing and LeVaillant, withdrawing funds for their own use or insisting that Mom or Dad “really wants” to buy them a house. They may accompany a person with diminished capacity to the local bank branch and direct them to withdraw funds from personal accounts. That should be a red flag to bank tellers, says Sing, but too often it isn’t.

“It’s very, very common for someone with diminished capacity to be brought to a bank and have explained in detail the legal effect of making an account joint, or making a gift. But just signing a document at a bank that says ‘I understand’ is not enough,” says LeVaillant. “You need to have clear evidence that [those funds were] intended by that person to be a gift. If you don’t have that, it’s very difficult, and can lead to very lengthy, very expensive litigation.”

Know the signs of mental incapacity

Even the most ethical of advisors, however, will likely encounter clients whose capacity may be in question—who just seem a little “off.” Sing, for example, noticed that, after the death of her husband, her car-buying client seemed a bit more needy. “She called often, and our relationship turned from me seeing her once or twice a year to going to her house once a month to help with paying bills and cash flow.” When the woman, who had until then been quite careful with her money, began withdrawing large sums to fund extensive renovations, Sing worried about the change in behaviour.

She was right to be concerned: behaviour changes are absolutely red flags for a change in capacity, says Pachet. Advisors, he says, are often fortunate to be in a position where they’ve known the client for a long time and can tune in to behaviour that seems out of character—like a client who is normally well put together and begins to appear disheveled or a normally conservative investor who wants to put everything into a hot new tech stock. Or it can be someone who suddenly wants to make a large bequest to a formerly estranged brother—or to make that brother her new attorney.

At client meetings, advisors can watch for other red flags that might signal diminished capacity, including: