Cognitive impairment can have a huge impact on a person's ability to look after his or her money.
When someone who is usually prompt about handling finances starts forgetting to pay bills, it's a common warning sign of the beginning stages of dementia.
"Depending on the family dynamics, the person's financial adviser may be the first to notice," said Shomari Hearn, vice president of Palisades Hudson Financial Group in Fort Lauderdale, Fla.
As a financial planner serving many older clients, Hearn sometimes works with people who are in the early stages of dementia. But even when they recognize and acknowledge their own declining capabilities, many want to stay involved with their money.
"Giving someone else the power to take control of your affairs can be a bit scary," Hearn said, which is why he recommends designing a health-care proxy and power of attorney that become effective only once two physicians determine you lack the capacity to make medical and financial decisions.
This "springing" power of attorney is not allowed in every state, but Pennsylvania and New Jersey permit it. In Florida, a power of attorney must be effective immediately, giving the designated party power to act as an agent handling all a person's financial and legal affairs.
Dementia is not a disease, but a group of symptoms affecting memory and reasoning. It can be caused by many conditions, the most common being Alzheimer's.
Alzheimer's is a progressive disease of the brain that slowly impairs memory and cognitive function. People who have it can easily get lost, forget things, and have mood swings. Gradually they lose control of their bodily functions and typically die three to nine years after diagnosis, the Chicago-based Alzheimer's Association says.
The association estimates that 5.4 million Americans were living with the disease in 2014.
Not everyone sees the use of springing powers of attorney as the answer for such situations. Pittsburgh trusts and estate lawyer E. David Margolis does not recommend them.
"The challenge in using springing powers of attorney is: When do they spring?" he said. "You have to have a trigger, and it's not always a clear line as to whether the facts and circumstances are there for it to trigger."
Even having two physicians declare a person unfit is far from perfect, Margolis said.
"Which physicians? And what if they take opposite points of view?" he asked. "One of them could know the principal well and [have] seen him over the years and has a good feel for his cognitive capacity. Another one who has only seen the person once or on a bad day could reach" a different conclusion.
"Powers of attorney are fraught with problems," he said. "The fundamental problem is the power is vested in the agent to act for the principal and, if the principal is not capable of oversight, the relationship relies on the loyalty and integrity of the agent. It's hard to police a wayward agent who has power of attorney."
Springing powers of attorney can complicate matters even more at a time when a person's health is in decline.
"Anyone they use as an agent should be someone they trust completely and unquestionably," Margolis said. "I use a presently effective power of attorney. But the agent can't use it unless they have it or the principal gives it to them or makes it available."
In many cases, the person will give his or her lawyer the signed document designating power of attorney. The lawyer would turn it over to the designated party only when necessary.
Those in the early stages of dementia who choose to use a springing power of attorney need to make sure their loved ones know about the documents, Hearn said, and they should give copies of the executed documents to those they have designated to act as their agents.
"It's also a good idea to give copies of your health-care proxy and living will to your health-care providers," he said. "If your doctors know your wishes ahead of time, it will be easier for them to help ensure that your wishes are respected."