70% of wealth transfers fail.¹

Every time I talk about estate planning and wealth transfer, I mention this stat. It always gives people pause, then they ask the first question that comes to everyone’s mind. “Why?”

First, it’s important to define failure. Failure in this case is the removal of assets, involuntarily, from the control of the beneficiary. The three reasons for the removal are quite interesting and speak to both the financial and non-financial aspects of wealth transfer.

They are:

• Trust and communication breakdown: 60%
• Failure to prepare heirs: 25%
• All other causes, including taxes: 15%²

Today and in the coming years, I think there is another reason wealth transfers will fail that will become more common. That reason is financial exploitation.

What is financial exploitation?

Financial exploitation can be defined as the misappropriation or misuse of an older and/or vulnerable adult’s funds.³ In 2022, more than 100 individuals lost $1 million or more due to call center fraud alone.⁴ More broadly, nearly 89,000 victims aged 60 or older lost a total of $3.1 billion dollars as a result of financial exploitation.⁵

While the near-term damage and embarrassment financial exploitation can cause is certainly important, the longer-term impact it can have on an individual’s wealth transfer plans can be extremely damaging.

Assets lost through financial exploitation not only decrease the amount of wealth that may be passed on to the next generation, but may also complicate several healthcare, control, and beneficiary-related items related to wealth transfer.

These are assets that may have been earmarked to help a grandchild go to college, help a son or daughter fund a home purchase, help family members enjoy a parent’s previous success, or pay for long-term care expenses or other medical expenses for the owner.

Common scams

So, how can we prevent financial exploitation from jeopardizing our long-term wealth transfer plans? First, it’s important to be aware of the common scams that can befall us.

Tech and consumer support scammers took advantage of nearly 18,000 victims over age 60 in 2022 by preying on peoples’ unfamiliarity with technology such as online banking and new payment methods.⁶ These scams often come in the form of a call, email, or text letting the recipient know that their computer, device, or account has been compromised. The scammers who sent the message simply wait and hope the recipient clicks the link or calls back to gain access to their personal information.

Tip: Check the email address of the sender. A closer look may reveal a slightly altered address.

Confidence/romance scams occur when a criminal adopts a fake online identity to gain a victim’s affection and confidence. Humans are social creatures whose desire for intimacy and companionship led to $419 million in losses for roughly 7,000 Americans over age 60 in 2022.⁷

Tip: Use only trusted dating websites and be aware that fraudsters will often attempt to move communications off reputable sites as quickly as possible.

These are only two of the more common scams. If you’re interested in learning about others, the FBI publishes an annual Elder Fraud Report that lists everything from tech support fraud to botnet scams and provides details, definitions, and tips on how to avoid being scammed.

Remember, it’s not just elderly people who are potential victims: All of us, at any age, can be vulnerable to these scams. And as I discussed in a previous article, the growth of artificial intelligence (AI) technology is exacerbating the problem.

Risk factors

While people of all ages are at risk of being financially exploited, it is true that many older adults have certain physical and cognitive risk factors that increase the likelihood of falling victim to scams.

For example, when individuals need assistance with daily living activities such as with shopping or preparing meals, they face the risk that their caretaker could gain access to their person’s finances.

We often think about dementia when it comes to financial exploitation, but it’s important to understand that a person doesn’t necessarily need to have severe dementia to put them at risk. Dementia exists on a continuum, and it can be difficult to assess as it progresses.

Even in cases of mild dementia, where no formal diagnosis can occur, people may communicate well, but exploitation can still occur. In fact, research has shown that, over a four-year period, a decline of 15% in memory recall was associated with a 12% drop in wealth, and a 10% decline in total cognitive ability was associated with an 8% drop in wealth.[i]

These risk factors show how important it is to consider how we can keep older adults engaged, fulfilled, and involved in their communities.

Guard against exploitation through careful estate planning

From an estate planning standpoint, there a several steps we can take to guard ourselves – and our future heirs – against the damaging impacts of financial exploitation.

First, investors should name a trusted contact for their investment accounts. Many investors haven’t done this even though the election is easy to make, can be changed at any time, and does not require the assistance of tax or legal advisors.

Investors should also consider designating a durable power of attorney, which allows families to plan ahead should medical emergencies, cognitive decline, or other situations occur in the future. Creating a trust for one’s property may also be advisable. A revocable trust provides asset protection and can be modified in the future. Once the property is in the trust, it will be managed in accordance with the guidelines laid out in the trust. The grantor may also designate a co-trustee to add a separate unbiased voice to the trust’s management. Finally, establishing and documenting healthcare directives allows investors to memorialize their wishes for healthcare-related decisions.

All the documents outlined above are instrumental in helping prevent elder abuse and financial exploitation. By creating a written record of your financial- and health-related wishes, trusted individuals will be empowered to legally fight for you and your rights.

The importance of early planning and ongoing communication

As I mentioned above, the cognitive continuum is one where a lot of gray area exists. There may not be definitive signposts showing when a client moves from one point to the next. That’s why it is critical to start planning and putting these trusted individuals in place sooner rather than later.

Furthermore, consistent communication among advisors, clients, and family members is key to ensuring the necessary steps are being taken. Advisors and family members should be prepared to bring up specific scenarios, ask tough questions, and have open, honest dialogue regarding cognitive decline. This allows clients to thoroughly consider their goals when they are of sound mind and body, while also helping advisors and family to recognize when things change or seem amiss.

Lastly, I think it’s important to talk about cognitive decline and financial exploitation more openly in general. Sharing stories about how these scams may have affected others is a great start. While it can be a difficult subject to discuss, without open dialogue around how financial exploitation might affect one’s financial, life, and estate plans, the likelihood of failure only increases.

Interested in more information on financial exploitation or trends in estate planning? Check out our 2024 Wealth Planning Trends.

Tax information contained herein is not intended or written to be used, and it cannot be used by taxpayers for the purposes of avoiding penalties that may be imposed on taxpayers. Such tax information and any estate planning information is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice.