Elder Financial Abuse: Capacity Law and Economics

58 Pages Posted: 5 Dec 2020

See all articles by Ben Chen

Ben Chen

The University of Sydney - Faculty of Law

Date Written: September 19, 2020


Elder financial abuse is an alarming problem in this era of aging population. Baby boomers are entering retirement with a higher life expectancy and more wealth than any generation before them. The combination of mental decline and substantial wealth renders many seniors vulnerable to overreach. In private suits alleging elder financial abuse, courts often apply the mental capacity doctrine to avoid seemingly exploitative contracts, gifts and many other lifetime transactions. The formal rationales for avoidance are that the elderly party to the impugned transaction lacked mental capacity, and that the transaction was inequitable.

This Article argues that the mental capacity doctrine in prevailing American law is ill-suited for the era of aging population. In theory, the doctrine grants mentally-incapable individuals a power to choose whether to avoid their transactions. In reality, that power is usually exercised by claimants who expect to inherit from incapable individuals. Prevailing doctrinal theories overlook the possibility that the claimant may seek to avoid a transaction to increase her expected inheritance, rather than to advance the interests of the incapable individual. As a result, the mental capacity doctrine may operate to avoid transactions that actually had benefited potentially incapable seniors and reflected their testamentary intent. This harms many seniors by unduly limiting their ability to gift their close relatives and friends, reward informal caregiving, and recruit their preferred caregivers.

The mental capacity doctrine can nonetheless be reformulated to offer appropriate protection against elder financial abuse without undue intrusion into close families and personal relationships. In particular, when applied to transactions between close relatives and friends, the doctrine should be narrow, determinate, and respectful of individual will and preferences.

Keywords: mental capacity, contracts, property, restitution, elder abuse, elder financial abuse, nursing homes, annuities, family

JEL Classification: K11, K12, K36

Suggested Citation

Chen, Ben, Elder Financial Abuse: Capacity Law and Economics (September 19, 2020). Cornell Law Review, Vol. 106, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3710237 or http://dx.doi.org/10.2139/ssrn.3710237

Ben Chen (Contact Author)

The University of Sydney - Faculty of Law ( email )

New Law Building, F10
The University of Sydney
Sydney, NSW 2006

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