Diminished Capacity, an Adult Daughter, and $150,000 of Gifts
Ruth, 71, and Harold, 74, have been clients for 11 years. Their $2.4 million portfolio supports $86,000 of withdrawals plus $52,000 of Social Security. Ruth was diagnosed six months ago with mild cognitive impairment. Harold manages the household finances and holds a durable power of attorney, but it has not been presented to you or to the custodian. Their daughter, Karen, emailed last week asking for copies of the statements, online view access, and confirmation that 'Dad isn't doing anything risky.' Separately, Harold wants to contribute $90,000 to a granddaughter's 529 plan and $60,000 toward her wedding next June, and he mentions that the 401(k) at his former employer still names his first wife as beneficiary. Ruth's risk questionnaire, completed in 2019, says 'aggressive growth'; Harold now says she 'wouldn't understand it anyway.'
1. How do you handle Karen's request and the authority questions?
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Karen gets nothing until authority exists in writing. Answer her politely and promptly, but decline the statements and the online access, and explain why: without a signed authorization from an account owner or an accepted power of attorney, disclosure to a third party is a privacy and fiduciary breach regardless of her good intentions. Offer the constructive alternative - you will mail duplicate statements to Ruth and Harold, and they can share them.
On the POA, ask Harold to provide the executed document so you and the custodian can review it. Until it is accepted, Harold is a spouse with no more authority over Ruth's accounts than Karen has. Confirm with the firm's legal team whether the document is durable, whether it is currently effective or springing, and whether the custodian requires its own form.
Then think about capacity, because the file now contains warning signs: a new MCI diagnosis, a spouse speaking for the client, and a stale 'aggressive growth' questionnaire that no one has revisited. Follow the firm's diminished-capacity protocol: meet with Ruth alone or with Harold present but directing questions to her, note orientation and consistency, and record the observations factually rather than diagnostically. Add a trusted contact if one is not on file. If Harold's gifting later looks like a transfer of Ruth's assets for his benefit or to someone outside the household, that is a financial-exploitation question - many states require advisers to report to adult protective services, and firm policy may require escalation to compliance.
2. What do you do about Ruth's stale risk profile and the 'aggressive growth' designation?
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You cannot rely on a 2019 questionnaire for a client with a new cognitive diagnosis, and you cannot simply take Harold's word that she 'wouldn't understand it.' Both shortcuts create liability and, more importantly, both are likely to produce the wrong portfolio.
Sequence:
- Re-paper the profile once authority is settled. If the POA is accepted, Harold can act for Ruth, and the IPS should be updated and signed by Harold as attorney-in-fact with a note explaining the basis for his authority. If the POA is not accepted, you need Ruth's own signature or you stop making changes.
- Use a joint conversation, not a substitution. Ask Ruth about her goals and her reaction to a 20% decline in plain terms. If her answers are inconsistent with the historical profile, document what she said and when.
- Move to a profile that both spouses can live with. A 71- and 74-year-old couple withdrawing $86,000 (3.6%) with a $150,000 gifting program ahead does not need 'aggressive growth' - they need a portfolio that will not force sales in a drawdown. Something in the 40–50% equity range is defensible; record the reasoning, not just the number.
- Revisit annually and at any health change. Capacity is a trajectory, not a state, and the file should show that you were watching it.
3. Evaluate the $150,000 of gifts and the beneficiary issue, and tell Harold what to do next.
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Gifts. The tax mechanics are straightforward: for 2025, the annual exclusion is $19,000 per donor per recipient, so Ruth and Harold together can give $38,000 per grandchild without touching the lifetime exemption - well within limits for both the $90,000 529 contribution, split across two donors and five years under the 529 five-year election, and the $60,000 wedding gift if split across the couple and timed properly. Note that a five-year election uses future exclusions if either of them dies within the window.
The real question is the balance sheet. Withdrawing $150,000 takes the portfolio from $2.4 million to $2.25 million while withdrawals stay at $86,000, lifting the withdrawal rate from 3.6% to 3.8% on a smaller base, at ages 71 and 74. That is not reckless, but it is not free. Run the projection with the gifts, confirm a two-year spending reserve remains intact, and put the gifting plan in writing so a repeat of the $60,000 does not become an annual expectation.
Beneficiary. Naming a former spouse on a 401(k) is an emergency. Under ERISA, a spouse other than the current spouse generally cannot be the beneficiary unless the current spouse consents in writing, witnessed by a notary or plan representative - so the current designation may be invalid, or, worse, valid under the plan's own records. He needs the plan's beneficiary form in front of him, a call to the plan administrator, and an estate attorney. Under the SECURE Act, a non-spouse beneficiary like an ex-spouse generally must distribute within ten years and cannot do a spousal rollover. Do not let this wait for the next annual review.