If a person is deemed incompetent, ideally, their agent under Power of Attorney (POA) or their trustee will handle their financial matters. If the person has not selected an agent or trustee, they may end up in guardianship.
Under guardianship, an individual loses their legal rights, and their decision-making rights are restricted. The court-appointed guardian will have the legal authority to make decisions and act on behalf of the person (ward). The duration of guardianship is usually for the ward’s lifetime, though it can be dismissed if the ward improves.
Courts consider guardianship as a last resort. Read on to find out how it can easily be avoided.
How Guardianship Works
A guardian has a fiduciary obligation to act in the best interests of their ward. They must prudently manage the ward’s bank accounts, retitled as “guardian accounts,” with the expenditure of funds complying with court orders.
As a safeguard, guardians must provide the court with a description of their services and account for how they use the ward’s funds. They must periodically prepare extensive financial reports to submit to the court, including account activity.
A guardian assumes responsibility for:
- Managing day-to-day finances
- Locating all assets, liabilities, and sources of income
- Paying bills and ensuring that expenses are funded
- Identifying expenses that might be eliminated
- Monitoring for potential financial fraud
- Filing tax returns
Guardians may also handle more complex matters like asset management and real estate transactions.
As personal finance managers, we strive to help older clients avoid becoming the ward of a guardian or conservator by:
- Working with the client to make provisions for potential incapacity
- Assisting their agent under POA or trustee
- Acting as POA or trustee
Problems with Guardianship
Initial costs in the guardianship process are high. Guardians’ ongoing fees are considered higher than typical compensation for a POA agent, trustee, or daily money manager.
Unless there is an emergency situation, the court’s guardianship proceedings are often slow and may be contentious. The process will be drawn out if many people are involved, and could take even longer if a client contests the guardianship.
Guardianship proceedings are public records, so a person’s personal affairs can become public knowledge.
Individuals under the control of a guardian lose independence and the ability to make decisions about their financial affairs. The guardian assumes control, and the court directs them about permissible activities and the use of funds.
Guardians come from various backgrounds and may lack sufficient expertise regarding financial matters, including the extensive annual reporting required. And though most guardians – professional and non-professional – perform their fiduciary responsibilities honorably, there have been numerous reports of abuse and neglect.
Learn more about guardianship problems in this Washington Post article.
How Guardianship Occurs
Here are a few examples of circumstances that result in guardianship:
- Not appointing a fiduciary before losing the cognitive capacity to sign legal documents
- Not realizing that people other than family members can act in a fiduciary capacity
- Reluctance to cede control to a family member
- Complicated family dynamics with siblings disagreeing on the care of a parent or whether to trust the parent’s POA agent
- A sibling petitioning the court to be guardian for financial affairs against the wishes of other family members
- Having a springing POA instead of a durable POA can lead to challenges in activating the POA
- The resignation of a POA who was undermined (link to 2nd article)
The good news is that guardianship is not inevitable.
With pre-planning for financial matters, you can avoid becoming the ward of a guardian.
Selecting an Agent
Start by identifying people who can act as POAs or be trustees and obtain their consent. Then have an attorney draw up the necessary documents. This process may be easy, or it may prove more complicated than you expect. If identifying an agent is challenging, consider an alternative:
- Appoint a professional, like an attorney, accountant, or daily money manager, to serve in a fiduciary capacity.
- Engage professionals to do the bulk of the work for a reluctant fiduciary.
- Ask the attorney to appoint a third party to monitor the work of the fiduciary to ease your concerns or those of other family members about your finances being handled properly.
Organize Personal Finances
In addition to appointing an agent, you should make the management of your finances easier for you and your fiduciary for a smooth handoff at the appropriate time. Organize your financial records, document your money management processes, and ensure acceptance of your legal documents by your financial institution.
To learn more about avoiding guardianship, read our article Undermining a POA Could Lead to Guardianship.