The popular financial press is pretty crowded, just like the blogosphere. Yet every once in a while, an article says something pretty simple that's also really important, something that connects strongly with issues we see time and again in our practice.

Last week, Howard Gold published that sort of piece on Marketwatch.com: "The biggest retirement risk no one talks about".

The article discusses ways in which the cognitive effects of aging can make it difficult to make effective investment decisions.

Gold quoted David Laibson, a behavioral finance specialist at Harvard, to the effect that

...between those who have full-blown dementia and other kinds of cognitive impairment, "we're talking about, in total, half the 80-year-old population that is not in a position to make important financial decisions"

Thoughtful estate planning can't prevent the collateral effects of aging, but it can mitigate those risks with two relatively simple, familiar tools: a revocable trust and a power of attorney.

Revocable trusts are commonly used as "will substitutes" -- easily amendable "road maps" for how a person wants their wealth distributed when they're no longer living. A revocable trust needn't be funded during a person's life, but it can be. Gold's article shows why for many families, that might be a really important wealth preservation step.

The reason is that the typical revocable trust is written so that the "settlor" or person who creates the trust is the initial trustee. Revocable trusts almost always have provisions allowing a successor trustee to replace the settlor as original trustee if the settlor resigns or becomes incapacitated, as well as when the settlor (eventually) dies. The successor trustee could be a trusted adult child (or children), or a bank or trust company.

Even after the settlor resigns as trustee, the revocable trust will often give him or her the ability to remove and replace the trustee, or to revoke the trust entirely. (This provides a useful check and balance a very elderly person who is no longer trustee can use to respond to overreaching or indifference by a trustee.)

If a revocable trust is funded when a settlor reaches old age and stops serving as trustee, the wealth conservation strategy works well. What happens, however, if the revocable trust isn't yet funded? That's where a power of attorney can help.

In a power of attorney, the person names an agent to serve as his or her attorney-in-fact in legal or financial matters. With the authority provided by a power of attorney, the agent can often fund the revocable trust. If supported by the revocable trust's provisions for incapacity of the settlor, the successor trustee can then manage and protect the revocable trust assets, using them for the settlor's benefit (and, sometimes, also for the benefit of the settlor's family, if the trust permits that).

A revocable trust is not designed to keep assets out of the settlor's taxable estate. Nor does it provide "asset protection" in the classic sense of protection from creditors. But asset protection in a broader sense also includes protecting a family's assets for the benefit of the settlor and his or her spouse, descendants, and other beneficiaries. In other words, protecting settlors (who may be cognitively impaired in late old age) from themselves. And that's the way a funded revocable trust can provide important asset protection benefits for a family's assets.

As Gold notes in his article, the best time to start planning for this is before it's necessary - possibly as early as one's late 60s or early 70s.

Bad investing decisions -- whether over-concentration, excessive trading, asset-liability imbalances, excessive risk aversion, or something else -- come in many varieties. In volatile markets, even one year of cognitive impairment exposes family assets to uncomfortable risk, let alone the ten or more years that's quite possible, given increases in life expectancy.

Gold's article does a real service in calling broader attention to this issue. Please read it and consider taking appropriate steps yourself, or for a parent, to keep the broader trends and risks it describes away from your family.

Image above courtesy of State Library and Archives of Florida.