The Estate Planning Gap: “The Grey Zone”
By Larry E. Swedroe and Kevin Grogan

Most estate planning attorneys do a good job drafting documents and addressing most estate planning issues. However, there is one area where they consistently fail.  The legal documents do not address how to manage the decline of mental capability regarding financial matters, short of becoming completely incompetent. A period of gradual loss of ability can last for years, during which we can make serious financial mistakes. Most trusts do not address this, only stating what to do if we are determined to be incapacitated: we stop being trustee or we resign. This assumes that: a) we know on our own that we need to resign as trustee and we will do so willingly; or b) we will cooperate if someone else tells us it’s time to resign and will not resist if asked to do so. These are not safe assumptions.

Unfortunately, the typical trust does not tell us, or the assigned successor, when, or how to, take over during the stage of life when we are well enough to do some things financially, but too impaired for others. A typical trust designates a successor trustee and perhaps a backup or two. It also provides that the trustee (you) can resign or be removed. This is the area of danger. The point at which you might become incapacitated is not clear. It does not necessarily jump out at you, or anyone around you, at a single moment in time. A typical trust does not give anyone enough direction as to how to manage that stage of life when someone is partly competent — “the grey zone.”

If you are in the grey zone, it’s likely you will think you are capable to handle financial matters. And sometimes you are. But, there will also be times when your judgment is poor, putting you at risk of financial abuse. It’s unlikely that you would voluntarily resign as trustee of your own trust as long as you think you are capable. People in the grey zone often do not recognize when they are no longer capable. And even if they have an inkling of their own memory problems, they are often terrified of losing control. Or, they may simply be in denial. Each of these situations creates opportunity for abusers.

The typical trust may say that if you are incapacitated you can be removed as trustee. Being determined incapacitated almost always requires that a doctor (or two) make written statements on your capacity for financial decisions. But if you think you are fine, why would you go to the doctor? In fact, people with dementia, or even those in the grey zone, often refuse to be examined for cognitive decline or incapacity. This creates problems for the successor trustee who is stuck with a lack of the very documentation the trust requires for you to be removed as trustee because of mental incapacity. Predators love this: there you are with total power to give money away to anyone and you no longer have the judgment to see a scam.

We suggest that you protect your family and other loved ones from being forced into that choice by having serious discussions with your trusted others about how to spot the warning signs that signal the grey zone and reaching agreements about what they will do when they see them.

Incremental mental declines do not come with loud signals. We may forget to pay an invoice for utilities and the power is cut off. That may or may not be a signal of decline. While everyone makes “normal” mistakes, a pattern of them is a sign of decline and needs someone’s attention, someone independent of ourselves. We might do something foolish and fall for a scam. Even if it is not devastating, we will be embarrassed. But, that might not be enough to trigger anyone taking over as successor trustee. This is the danger of the “grey zone.” We can be slipping, making us susceptible to manipulation.

It is important that you have open and thoughtful communication with family members, or trusted others. Set up benchmarks for the decision as to when you would resign as trustee. We recommend that you and your successor trustee meet and create a list of warning signs of cognitive impairment. Below is a checklist we recommend you use.

  1. Unexplained changes to estate documents.
  2. Isolation.
  3. Odd changes in investment behavior such as liquidating a portfolio.
  4. A new romantic interest under questionable circumstances.
  5. Large or unusual withdrawals from an account.
  6. Prior instance of financial abuse.
  7. Sudden drop in investment income.
  8. Unpaid service or tax bills.

The following is a further list of items that members of the financial services team (such as your financial advisor) should be looking for:

  • Inability to get access to financial records (no longer coming in the mail, changed password, and so on).
  • Unusual activity in bank accounts such as withdrawals from automated banking machines when the elder is homebound, or online transactions if the elder has no computer.
  • Signature on documents that does not resemble the elder’s signature.
  • Changes to investments that have not been used in years (such as annuities).
  • Failure to remember reported financial transactions such as IRA distributions, investment sales, and so on.
  • Unusual loans against equity in property or life insurance policies.
  • New relationships expressing interest in the elder’s financial situation.
  • Missing documents like a will or stocks, bonds, mutual funds, or certicates of deposit (CDs).
  • Change of beneficiary status on investment accounts or life insurance policies.
  • Utilities or telephone disconnected.
  • Inclusion of additional names on bank and other financial accounts.
  • Changes in a power of attorney from a long-time friend or family member to a person new to the situation.
  • Refusal or reluctance of family or legal representative to spend money on care.
  • Caregiver or provider tries to isolate elder from other relationships.

You can agree with your assigned trusted others that if two or more of these warning signs are present it will be time for you to resign as trustee and manager of your finances. You can build into that agreement that you will see a physician or two, as required by your trust, when they ask you to be examined for cognitive ability.

You can also build into your estate plan that if you refuse a written request from your spouse, or trusted other, to be examined for cognitive ability by a doctor, that you will be automatically replaced as the sole trustee within 30 days.

The following is a checklist you can use as warning signs of cognitive impairment:

  1. It appears to trusted others that you are no longer able to process simple concepts.
  2. You appear to be forgetful, with short-term memory loss.
  3. You appear unable to recognize or appreciate the consequences of financial decisions.
  4. You make any decisions that are inconsistent with your long-held goals, investment philosophy, or commitments.
  5. You demonstrate erratic behavior.
  6. You refuse to follow appropriate investment advice which you have generally accepted in the past.
  7. You seem to them to be paranoid about someone taking your money or missing funds that are not missing.
  8. You lose the ability to understand recently completed financial transactions.
  9. You appear in any way to be disoriented, get lost in usual places, such as finding your way home, or you forget where you are.
  10. You forget your grooming, bathing or taking basic care of your physical needs.

Bring these lists to a meeting with your loved ones and trusted others. Your message needs to be: If you see me with three of these things (or however many you think is the right number), please get me to a doctor to determine if I’m losing my ability to manage finances. If the doctor says I’m impaired, please take over managing the trust assets. Do not wait until I’m so out of it I do not know what I’m doing at all.


Adapted with permission from YOUR COMPLETE GUIDE TO A SUCCESSFUL, SECURE RETIREMENT by Larry E. Swedroe and Kevin Grogan.  Published by Harriman House.  © 2019.  All rights reserved.

Larry E. Swedroe and Kevin Grogan are the co-authors of YOUR COMPLETE GUIDE TO A SUCCESSFUL, SECURE RETIREMENT, and directors at Buckingham Strategic Wealth and The BAM Alliance.


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