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When Mom moved to independent living with her car I was so scared that night about her piling her new friends into the car and getting in an accident. So on Day 2 we made up a story of needing to borrow her car for a while when our dog was sick and he couldn’t jump up into our truck. She felt she was being helpful and after a week she said she really didn’t need it. But Mom was always pretty cooperative, not sure if your Dad is so, but if you can show that all his needs will be met without driving, maybe a little fib will help, instead of a strong arm tactic. Good luck.
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My mother drove FAR past her "capability" to do so. She was so shrunken, she saw the road between the "spokes" of the steering wheel. It was horrifying to drive with her.

She had a knee replacement. After that, she had no strength in the knee and we were able to get and keep the keys. She mourned that loss of independence, but as a family-wow, we were constantly horrified she'd cause some huge accident. AND she'd be liable.

She's never had a dr tell her not to drive, it was all family pressure and the loss of strength in the knees. BTW, every single side of her car was dented and beaten. She was hitting stationary objects all the time and wasn't even aware of it.
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Depends.

Does your father in law have mental capacity? Is there a formal medical or legal statement as to his soundness of mind?

If he is deemed formally "incompetent" then yes you have the authority - nay, the responsibility - to remove his car and, apart from anything, protect him from the risk of utter financial ruin were he to have an uninsured catastrophic accident. I hate to be cold, but it's not his hurting himself that's your main worry - what if he injures somebody else?

If not, tread a little more carefully. You can put the car in safekeeping, out of harm's way, and get creative about the reasons why this has been done (LMax's idea is nice!). You could disable it - remove the distributor cap or the battery, put it on axle stands. But you can't just pinch it.
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My brother & I made up a story about my car in shop - in order to borrow my Dads car- Just to get keys away from him. In the meantime I set-up Neuro-psych appt for Cognitive testing. His scores were so low the Dr said he was “Impaired” & Dr told him he was not to drive.
My advise is - Do or say whatever you need to in order to get the keys away, Because they put everyone on the road at risk.
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You don't say if he has Dementia or Alzheimer's? POA does not come into effect until the person can no longer do or think for themselves. If he has been diagnosed then speak to his doctor. Ask if he can report FIL to DMV. Or call DMV and see if they can test FIL. If it is found he Can't drive then take his keys away. Take the car out of sight and sell it.
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