When a loved one is dealing with issues that make it difficult to manage their finances, you may see the need to step in.
But, how do you go about it?
You can become an informal financial caregiver, offering support on an as-needed basis, or move into the position of a formal financial caregiver.
Here's how both work:
What is an informal financial caregiver?
As an informal financial caregiver, you help someone with different aspects of their financial life without having control over the situation. You might, for example, review their financial statements, join them in meetings with their financial advisor or make sure their bills are paid.
In some cases, you can become a "trusted contact" on the person's financial accounts and get notified about issues, such as suspected fraud. A "convenience account" could also be an option, which gives you permission to deposit and withdraw funds on someone else's behalf without being an account owner.
How to become a formal financial caregiver
If the situation reaches a point – perhaps due to health or memory issues – when you need to take over someone's finances, you'll have to become a formal financial caregiver – also known as a fiduciary.
Taking on the role of managing a loved one's finances often involves obtaining legal authority, such as a power of attorney (POA), or becoming a court-appointed guardian or conservator. These roles grant you the authority to make financial decisions on behalf of the individual, ensuring that their financial needs and preferences are adequately addressed, Shawn Carpenter, founder and principal of financial investment firm Center Mark Capital, said in an email.
Here's a closer look at the four different options:
1. Power of attorney
If the person in need of financial help is willing and able to grant you legal authority over their money and property, they can put a power of attorney (POA) in place. A durable POA grants you immediate authority, while a springing POA can go into effect in the future. The latter allows the person to manage their finances until they can no longer make sound decisions. At that point, the authority will transfer to you.
2. Guardian or conservator
If the person isn't able or willing to put a POA in place, the situation can be taken to court. If the court decides that the person can't manage their money or property, it can designate a guardian or conservator (possibly you) to do so.
If an individual wants you to have control only over part of their money and property, they can place those assets into a trust and name you as the trustee. A revocable living trust can also be put in place to give you authority over the trust if they become unable to manage it.
4. Veterans Affairs fiduciary or Social Security Administration representative payee
If you need to manage a person's VA or SSA benefits, the VA or SSA must appoint you as the fiduciary.
"Once you have the legal authority, the next critical step is to develop a comprehensive financial management plan. This plan should be tailored to fit your loved one's unique financial situation and include a realistic and sustainable budget based on their income and expenses," Carpenter says.
What are the duties of fiduciaries?
When managing someone else's money, you have the following four main legal duties to perform.
1. To act in the person's best interest
As a fiduciary, it's your responsibility to make decisions that are in the best interest of the person whose money you're managing. That means you need to ignore your interests – and those of other people. When possible, ask the person what they want, or try to figure it out from their past decisions and communications.
2. To manage the money with care
The law also expects fiduciaries to manage another person's money using great care, good judgment and common sense. For example, you should pay bills and taxes on time, collect debts owed to the person, keep necessary insurance policies up to date and take reasonable measures to protect their money and property.
"One of the most important things is understanding the tax impact of various investment accounts and the withdrawal rules if money is needed to pay for the loved one's care," Liz Gillette, certified financial planner and founder and senior advisor at Curio Wealth, said in an email.
"There could be significant unexpected penalties at play if the caregiver isn't aware of the moving pieces," she adds.
3. To keep their money separate
You are also entrusted with keeping the person's money separate from yours or anyone else's. Avoid joint accounts and never deposit their money into your accounts or use your money to pay their expenses. You also need to sign documents as the person's agent, rather than as them.
4. To maintain good records
"Maintaining highly accurate records of all financial transactions and decisions is not only a best practice but also a critical component in maintaining trust within the family and with the individual you're supporting," Carpenter says.
You'll need to maintain a detailed list of all the person's income and expenses, keep all of their receipts and avoid using cash when possible.
"Managing a loved one's finances is a delicate balance between ensuring their independence and financial stability. This role requires empathy, diligence and an informed approach," Carpenter says.
He adds that it's important to seek legal and professional advice when necessary to ensure you can manage the responsibility effectively.