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Addressing Diminished Capacity: Recognizing and Protecting Against Financial Exploitation

Losing the capacity to manage your financial affairs is a frightening prospect, and watching a loved one lose capacity can be just as daunting. It seems incredible that anyone would take advantage of such circumstances, but unfortunately it is all too common.

The American Journal of Public Health found, in a 2010 study, that financial abuse was the most common form of elder abuse. Considering that the Population Reference Bureau projects that the number of Americans over age 65 will more than double by 2060, the potential danger should not be ignored. A study conducted by the MetLife Mature Market Institute found that victims of financial abuse lose approximately $2.9 billion every year; some other estimates are even higher.

It is important to note that not all older Americans lack capacity, nor is everyone who lacks capacity over age 65. People can experience a loss of mental capacity at any age due to accident or illness. Therefore, the potential victimization of individuals with diminished capacity should concern everyone, regardless of their stage of life.

It is also worth remembering that when we discuss financial abuse, we do not only mean fraud – that is, taking actions that are meant to deceive the victim and cause financial harm. Fraud certainly counts as financial exploitation, but the concept also includes pressuring or influencing victims to act against their inclinations or interest, or taking advantage of a victim’s diminished capacity to one’s own advantage.

When we think of financial abuse aimed at those with diminished capacity, we might picture a con artist or a seedy salesman as the culprit. The reality is that the access and opportunity afforded to family members, or even friends and neighbors, can often lead to abuse too. Abuse may not always be the result of a carefully plotted scheme. Family members’ emotions can run high, and fights can result in collateral financial damage to an individual unequipped to defend his or her own wishes. So what do you need to look for?

Recognizing Diminished Capacity And Financial Exploitation


Diminishing capacity is sometimes obvious and sometimes harder to recognize. My colleague Shomari Hearn wrote an article that offers advice for identifying and coping with a loved one’s cognitive decline, and there are many other resources available online as well.

One complicating factor when trying to recognize and address diminished capacity is that capacity is not binary. Many experts now recognize that capacity represents a spectrum, and it can be task specific. Some people who are not capable of handling major transactions unassisted may still be very capable of handling routine, day-to-day financial matters for themselves. In most cases, those who are most vulnerable to financial exploitation usually retain some degree of financial independence but may need to rely on someone else for their other needs (physical care, transportation, housing, etc.). This opens the door for a third party to exploit the relationship.

In addition to the complexity of a given task or decision, environmental factors may affect an individual’s capacity. Individuals who are highly functional when medicated may forget to take or resist taking their prescriptions, which can affect their ability to make sound decisions. Many older adults with full mental capacity struggle with vision or hearing loss. Those individuals may be able to make sound decisions in person with the proper accommodations, but may not be able to reliably do so over the phone, for example.

If you worry that a loved one may be the victim of financial exploitation, the Justice Department offers several red flags to watch for:

  • Sudden changes in bank accounts or banking practices, including an unexplained withdrawal of large sums of money when the customer is accompanied by an unfamiliar person
  • The addition of new names on an elder’s bank signature card
  • Unauthorized withdrawal of the elder’s funds using the elder’s ATM card
  • Abrupt changes in a will or other financial documents
  • Unexplained disappearance of funds or valuable possessions
  • Substandard care being provided or bills left unpaid, despite the availability of adequate financial resources
  • Discovery of an elder’s signature being forged for financial transactions or for the titles of his other possessions
  • Sudden appearance of previously uninvolved relatives claiming their rights to an elder’s property or possessions
  • Unexplained sudden transfer of assets to a family member or someone outside the family
  • The provision of services that are not necessary
  • An elder’s report of financial exploitation

(Source: The U.S. Department of Justice’s Elder Justice Initiative)

There may be legitimate explanations for some of these events, but if you know your loved one well, you will likely have a good understanding of when to be alarmed.

You should also stay alert for “undue influence,” a situation in which a person uses a position of power to influence someone else to do something he or she would not have done otherwise. While anyone can be a victim of undue influence, someone with diminished capacity is especially vulnerable. For instance, an adult child who does not get along with his siblings may try to persuade his mother that his siblings mistreat her and that she should trust him with her finances exclusively. In such situations, many older adults can find it hard to say no.

While financial and legal professionals may be helpful in dealing with an individual’s diminished capacity, it is essential to properly vet them. Individuals in their 70s and 80s are often targeted for “free lunch” seminars and unsolicited sales pitches. While treating someone to a free lunch does not automatically signal bad motives, those invited to these events should be especially wary of “hard sell” approaches.

When you consider working with a professional, for yourself or on your loved one’s behalf, never assume that someone with professional credentials or certifications is inherently trustworthy. Instead, find out what those certifications mean. Is the certification process rigorous? What is entailed and which organizations, if any, supervise the practitioner’s professional standards? You should also be sure that anyone providing advice to your loved one observes a fiduciary standard – meaning he or she puts the interests of the client first.

You should also be on the lookout for “affinity fraud.” It is unfortunately common for fraudsters to use a shared affiliation, such as religious beliefs, to build unwarranted trust with their targets. A financial professional who attends your loved one’s church or lives in her neighborhood deserves just as much scrutiny as a complete stranger. The CFP Board offers a guide specifically aimed at combatting fraud and abuse aimed at older individuals.

Preventing And Stopping Financial Exploitation


The CFP Board found that only 5 percent of seniors reported financial abuse. There may be a variety of reasons for this low number. First, of course, is that those with diminished capacity sometimes struggle with memory or self-expression, both of which can make reporting abuse difficult.

However, diminished capacity is not the only culprit. Shame or embarrassment may keep victims from coming forward. Also, if the person exploiting the victim is a family member or other loved one, the victim may want to protect the abuser, even at the victim’s own expense.

Another factor may be fear. In online interviews with adults over 62 conducted by The Boomer Project, “loss of independence” was the most commonly listed fear. Much as giving up a driver’s license can be especially difficult because it represents a loss of independence, admitting that you can no longer handle your financial affairs carries an emotional weight beyond its practical significance. Some victims of financial exploitation may fear that asking for help will eventually result in a total loss of financial control.

Although all these factors pose challenges, reporting abuse is still essential, both for individual justice and to stop abusers from moving on to other victims. Financial advisers, lawyers and other professionals may have a duty to report diminished capacity in cases where they believe an individual is at risk of harm; however, ethics standards mean that professionals must balance these considerations with confidentiality concerns. A family member or loved one is often in a better position to report potential abuse when the victim is unwilling or unable to do so.

Most states and some larger municipalities offer adult protective services. Such programs will generally accept referrals online, at a toll-free phone number or both. For example, the Colorado Attorney General has partnered with AARP to provide assistance to Colorado residents facing financial exploitation. The AARP “ElderWatch” phone line can also put callers in touch with the appropriate agency to file a complaint. Depending on the nature of the financial exploitation, it may be appropriate to involve law enforcement.

The best defense against financial exploitation is to take steps against it long before capacity becomes an issue. If your loved one is still capable, consider encouraging him or her to set up a durable financial power of attorney, along with other documents, such as a health care directive, that will empower a trusted individual or individuals to make decisions on his or her behalf. Obviously, appointing someone to this position gives him or her a great deal of power, so it is essential to be careful during the selection process. However, at least in this case, your loved one will be in control of choosing to grant this power, instead of someone wresting it away when he or she is most vulnerable.

If your loved one is no longer capable of executing such documents, it may make sense to consider guardianship or conservatorship. In some states, the terms guardianship and conservatorship are used interchangeably. A legal guardian is authorized to make personal decisions, such as choices about housing and medical care, on behalf of an individual who no longer has the capacity; a conservator is appointed to make financial decisions. Both are court-appointed positons, so the process can be complicated and will take time.

Few of us enjoy thinking about a future in which we, or those we love, are unable to manage financial affairs without help. But thinking and talking frankly about such matters in advance can leave you and your loved ones better prepared and less vulnerable to those who do not have your best interests at heart.

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