Don't assume you can take control

Regardless of the severity of the problem, your involvement in another person's affairs should be as little as required. Stepping in and taking over everything isn't a good idea unless it's absolutely essential.

In any case, there are strict limits on your ability to step in. Even if you've been married for 50 years, you can't deal with any bank accounts or policies that are exclusively in your partner's name. Under the Privacy Act, banks can't even disclose another person's account balances to you.

Nor can you get involved just because someone has poor judgment. The law makes it clear that, except in very limited circumstances, people are free to squander their own money.

Kerri-Jane Wallis discovered this when she tried to stop her mother sending away money to scamsters. "There was no way I could stop her ... Even though I was her daughter, I had absolutely no power to stop her cheques ... Some days she would post away at least $200. I felt quite helpless knowing that I had no control over these scams at all."

Even people with conditions such as Alzheimer's disease are free to make major financial decisions provided they get independent legal advice. In the 1990s, a woman with Alzheimer's provided security for a business loan her son and husband had taken out. When they didn't repay the loan, she took court action to try to undo the guarantee she'd given. The court ruled against her.

If you have to step in

If you are convinced you need to step in, the best approach is a voluntary one, in which the person with a problem agrees to give up some control of his or her finances. One approach is for the wages or benefit to be paid to a bank account that only you can access, and for you to pass on a living allowance to the person who has a problem.

While that might work for some, Cynthia Orme points out that it might leave the person with the problem feeling resentful and feeling like a child. She suggests finding a third party such as a budget service to handle the money.

Powers of attorney

Another approach is to set up an enduring power of attorney. This is a document giving you power to act in someone else's name. There are two types of power of attorney, one covering personal care and welfare, and the other covering property.

Power of attorney over personal care and welfare takes effect only when a person becomes mentally incapable of understanding and arranging their own personal care. If you have power of attorney, your job will be to help deal with rest homes or hospitals, medical issues (with some exceptions), personal needs and so on.

If you have power of attorney over someone's property, you can write cheques, manage bank accounts and even sell their house, depending on the power you're given in the power of attorney document.

You can't use powers of attorney to benefit yourself (unless the document appointing you says you can). However, we've heard of cases where people have abused their powers. Dealing with situations like this can be very difficult and involve court action.

If you're granting powers of attorney over your property, it's worth considering limits on the attorneys' powers, or appointing two attorneys who can only act if they both agree.

Taking control through a court order

It is possible to get court approval to take over a family member's finances using the Protection of Personal and Property Rights Act 1988, but only if the court finds that the person lacks the capacity to understand, and to foresee the consequences of, decisions relating to their property.

Using a family trust

Many people use family trusts to provide for someone who can't handle their own affairs, or to protect family assets - a farm or home or business interests - from being lost. Instead of just handing over ownership of an asset, you put the asset into the ownership and control of trustees. These are often family members together with an outsider such as a lawyer.

What the trustees can and can't do is set out in the trust deed. They administer the assets or investments and on behalf of the beneficiaries, making payouts to beneficiaries as appropriate.

While trusts are often used to provide for children's education or protect their inheritances, they can also be used to protect assets from a family member who has alcohol, drug or gambling problems or is a compulsive spender.

However, you should only set up a trust if you have a clear understanding of its purpose and how it will work, and you should do it after taking advice from a lawyer.