The office of trustee serves as an important bulwark against financial elder abuse. However, the most common revocable trust typically has the husband and wife as initial co-trustees, with the surviving spouse subsequently serving as sole trustee for an indefinite period, often until death. This arrangement was reasonable when the incidence of dementia was relatively low. With increasing life expectancy, many more survivor trustees will experience cognitive decline in various stages, making them particularly vulnerable to financial elder abuse with consequences for themselves and their families.

This article argues that the problem is real, increasing in magnitude, and not properly addressed by vigilance deputized to financial institutions. Instead, a functioning trustee is the best defense. We propose age limits for trustees as a default option, with alternatives such as periodic cognitive evaluations for those who wish to serve beyond the age limit and the ability for beneficiaries to waive the exam requirement. To avoid any misunderstanding, we do not suggest that age limits should be statutory but determined by the settlors in the instrument if they find them useful.

A competent trustee is the best defense against financial abuse.

The Growing Challenge of Cognitive Decline

The prevalence of dementia in the United States is alarmingly high, particularly in Eastern and Southeastern states. Maryland reports a 12.9% prevalence rate among individuals aged 65 and older, while California alone has approximately 720,000 individuals living with Alzheimer's dementia (1). This demographic shift presents a significant challenge for trust management, as many trustees may experience cognitive decline while still in control of substantial assets.

The risk is compounded by anosognosia, a condition common in dementia in which individuals are unaware of their own cognitive impairment. When combined with the Dunning-Kruger effect, where individuals with low ability overestimate their competence, this can lead to a dangerous situation where declining trustees stubbornly cling to their roles (2).

Financial Vulnerability and Early Warning Signs

Research indicates that financial decision-making deteriorates years before a formal diagnosis of cognitive impairment. A study on the financial consequences of undiagnosed memory disorders revealed that credit scores decline and delinquency rates increase for mortgage and credit card accounts in the years preceding a dementia diagnosis (3). The probability of mortgage delinquency rises by 11% two years before diagnosis, and credit card delinquency becomes 21% more likely in the same period. These early-stage impairments often go unnoticed, leading to significant financial losses and increased vulnerability to exploitation.

The Threat from Within: Financial Adviser Misconduct

Cognitive decline poses a significant risk, especially if the threat comes from an unexpected corner. According to the paper "Market for Financial Adviser Misconduct," approximately 7% of all financial advisers have been disciplined for misconduct, with some firms reporting rates as high as 15% to 30% (4). The reported numbers underestimate the true magnitude of the problem. Repeat offenders are common, with one-third of advisers with misconduct records reoffending, making them five times more likely to engage in further misconduct compared to others.

Despite firm-level discipline—where about half of advisers are fired following misconduct—44% of these advisers find new employment within the industry within a year, often at firms with similarly poor records. This cycle of reemployment suggests that certain firms may "specialize" in hiring advisers with misconduct histories, often targeting less sophisticated clients, thereby perpetuating the issue across the industry.

Regulatory Gaps and Their Consequences

Current regulatory frameworks, such as the SEC's Regulation Best Interest (Reg BI), aim to raise the standard of conduct for broker-dealers (as opposed to financial advisors). However, critics argue that these measures fall short of providing comprehensive protection for investors. The ambiguity surrounding what constitutes acting in a client's "best interest" allows for potential conflicts of interest to persist, leaving vulnerable trustees and beneficiaries at risk (5,6,7,8).

Reg BI does not eliminate all conflicts of interest, and the debate continues over whether the rule provides enough protection for investors. Meanwhile, legal and regulatory battles continue as the SEC and the Department of Labor refine and enforce their respective standards.

The Inadequacy of Current Safeguards

While financial institutions have been deputized to combat elder financial abuse, the effectiveness of these measures remains questionable. The article "Deputizing Financial Institutions to Fight Elder Abuse" casts doubt on the impact of permissive laws like the 2016 Model Act, which allows financial professionals to intervene when they suspect financial exploitation of elders (10).

The authors argue that while some reductions in reported abuse have been observed, particularly in cases involving high-value assets, the impact is uneven and potentially unsustainable in the long term. The article questions whether simply allowing professionals to act, without mandating their intervention or providing meaningful incentives is enough to curb elder financial abuse effectively.

The RLT-CCT: A Proactive Approach

The proposed Revocable Living Trust with a Cognitive Continuity Test addresses these challenges by incorporating a Cognitive Continuity Clause. This provision requires trustees to either:

1. Submit to a cognitive evaluation acceptable to the settlors every 2 years upon reaching age 80 or
2. Transition control to a pre-designated successor trustee within 6 months

The cognitive evaluation can be waived if the beneficiaries all agree.

This approach serves multiple functions:

• It establishes an objective criterion for initiating the evaluation process, mitigating potential claims of discriminatory treatment.
• It provides a clear, predetermined mechanism for trustee succession, potentially reducing litigation related to trustee removal.
• It allows competent trustees to continue serving while offering a dignified exit strategy when necessary.
• It adds an extra layer of protection against potential financial exploitation by advisers or other bad actors.

Legal and Practical Considerations

Implementing the RLT-CCT requires careful drafting to ensure compliance with state trust laws and to withstand potential challenges. Key considerations include:

• Consent and Disclosure: Ensuring all parties (settlor, trustees, and beneficiaries) are fully informed of the CCT provisions at the trust's inception.
• Evaluation Standards: Specifying the type and rigor of cognitive evaluations to be employed, potentially referencing established medical standards.
• Confidentiality Provisions: Structuring the handling and disclosure of evaluation results to protect the trustee's privacy while fulfilling fiduciary obligations.
• Successor Trustee Designation: Detailing the process for designating and potentially updating successor trustees over time.
• Dispute Resolution: Incorporating mechanisms for resolving disagreements over evaluation results or the necessity of trustee transition.

The concept draws upon established legal principles from other domains, such as mandatory retirement ages for judges, term limits for corporate board members, and age-based restrictions in professions like aviation and medicine.

Addressing Potential Challenges

Practitioners implementing RLT-CCTs should anticipate and prepare for potential legal challenges, including:

• Age Discrimination Claims: The Age Discrimination in Employment Act is not typically applicable to trustees. The CCT's provision for continued service pending evaluation provides a strong defense against such claims.
• Privacy Concerns: Structuring evaluations as conditions precedent to continued service, rather than mandatory disclosures, may help navigate privacy laws.
• Challenges to Evaluation Validity: Specifying widely accepted, standardized cognitive assessments in the trust document can bolster the defensibility of evaluation results.

Conclusion

The RLT-CCT represents a proactive approach to the long-recognized issues of potential trustee incapacity and financial exploitation. As our population ages and the prevalence of cognitive impairment increases, innovative legal structures like the RLT-CCT become crucial in protecting trust assets and beneficiary interests.

By addressing cognitive decline explicitly within the trust instrument, providing additional safeguards against financial malfeasance, and offering a clear framework for trustee succession, we can enhance trust administration stability and provide clarity for all parties involved. While implementation requires careful consideration of applicable state laws and thorough client counseling, the potential benefits of the RLT-CCT in reducing future litigation, protecting vulnerable individuals, and guarding against financial exploitation make it a valuable tool for estate planning practitioners to consider in our aging society.

A podcast that summarized the points of this article is available here:

References

1. Dhana K, Beck T, Desai P, Wilson RS, Evans DA, Rajan KB. Prevalence of Alzheimer's disease dementia in the 50 US states and 3142 counties: A population estimate using the 2020 bridged-race postcensal from the National Center for Health Statistics. Alzheimers Dement. 2023 Oct;19(10):4388-4395. doi: 10.1002/alz.13081. Epub 2023 Jul 17. PMID: 37458371; PMCID: PMC10593099.
2. Dunning D. The Dunning–Kruger effect: On being ignorant of one's own ignorance. InAdvances in experimental social psychology 2011 Jan 1 (Vol. 44, pp. 247-296). Academic Press.
3. Gresenz, Carole Roan, Jean M. Mitchell, Belicia Rodriguez, R. Scott Turner, and Wilbert van der Klaauw. 2024. “The Financial Consequences of Undiagnosed Memory Disorders.” Federal Reserve Bank of New York Staff Reports, no. 1106, May. https://doi.org/10.59576/sr.1106
4. Egan M, Matvos G, Seru A. The market for financial adviser misconduct. Journal of Political Economy. 2019 Feb 1;127(1):233-95.
5. U.S. Securities and Exchange Commission, Regulation Best Interest and the Investment Adviser Fiduciary Duty, SEC.gov (Oct. 2024), https://www.sec.gov/news/press-release/2020-89
6. FINRA, SEC Regulation Best Interest (Reg BI), FINRA.org (Oct. 2024), https://www.finra.org/rules-guidance/key-topics/regulation-best-interest 
7. FINRA, SEC Regulation Best Interest (Reg BI), FINRA.org (Oct. 2024), https://www.finra.org/rules-guidance/key-topics/regulation-best-interest 
8. U.S. Securities and Exchange Commission, Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors, SEC.gov (Oct. 2024), https://www.sec.gov/investment/staff-bulletin-standards-of-conduct-for-broker-dealers 
9. Jo Mhairi Hale, Daniel C. Schneider, Neil K. Mehta, Mikko Myrskylä, Cognitive impairment in the U.S.: Lifetime risk, age at onset, and years impaired, SSM - Population Health, Volume 11, 2020.
10. Carlin, Bruce & Umar, Tarik & Yi, Hanyi, 2023. "Deputizing financial institutions to fight elder abuse," Journal of Financial Economics, Elsevier, vol. 149(3), pages 557-577.