As individuals grow older, they often face Mental or physical challenges that hinder their ability to handle finances. Elderly individuals, especially those with diminished mental capacity due to illnesses like dementia or Alzheimer’s, can become susceptible to financial exploitation and investment scams. Conditions such as stroke, certain cancers, or general aging can also lead to diminished capacity. This vulnerability underscores the importance of safeguarding the financial well-being of older adults, who are at a heightened risk of exploitation.
Where an elderly person struggles with physical disabilities that prohibit them from attending to their affairs in person, a general power of attorney is a useful tool in that it gives authority to another person (usually a spouse, adult child or family member) to transact on behalf of the incapacitated person. While a power of attorney has its uses, it is important to bear in mind that such a mandate only remains valid while the principal (i.e. the physically incapacitated person) is mentally competent. In terms of our law, an agent only has the power to act on behalf of the principal while the principal can appreciate the consequences of granting another person his power of attorney. This creates a conundrum, especially for the adult children and loved ones of an aged parent who they fear is losing mental capacity. In terms of our law, no one is permitted to manage the affairs of another person without being legally permitted to do so, and it is therefore important to understand the available options if you fear an ageing parent is losing the ability to look after their own affairs.
Generally speaking, there are three options available in such circumstances, all of which serve different purposes and are governed by different pieces of legislation. It is important to fully understand each of the options before proceeding as they all have different financial and administrative implications.
Appointing a Curator Bonis
In terms of our common law, an application can be brought to the High Court to have an individual declared incapable of managing his own affairs. If found incapable, due to either mental illness or physical infirmity, the Court may appoint a curator bonis to take over the management of his affairs. Besides the high costs of bringing such an application – which could be in the region of between R50 000 and R100 000 (borne by the estate) – there are also high medical costs involved as the application normally requires medical reports from a neurologist or psychiatrist. The entire process is a cumbersome one which is further stifled by the fact that all steps taken by the curator bonis must first be approved by the Master. Further, the curator bonis has limited powers of investment which can adversely affect the growth of assets in the estate. The nature of the job together with generally poor remuneration means it is difficult to find appropriate candidates to assume the role of Curator Bonis. This means that the assets in the estate could be managed by someone less than capable or competent, which is not ideal. From a practical perspective, many curators fail to understand that their job is to assist the incapacitated person in managing their affairs, bearing in mind that they may have varying degrees of incapacity and that their job is not to manage the estate entirely on their own volition but to supplement their lack of capacity to act.
Appointing an Administrator
Where an individual suffers from mental illness or incapacity, an application can be brought in terms of Section 63(3) of the Mental Health Act 1973. Such an application is made to the Master of the High Court who has the authority to appoint an administrator to manage the property of the mentally incapacitated person. This procedure does not involve a High Court application and is therefore much more cost-effective than bringing an application for the appointment of a curator bonis. However, if the individual’s capital assets exceed R200 000 and their income is above R24 000 per year, the Master will insist on an investigation to be conducted before the administrator is appointed, and these costs (legislated at no more than R15 000) will be borne by the estate of the person placed under administration. Bear in mind that mental illness is a pre-requisite for such an application and the person’s condition needs to be confirmed by a mental health practitioner. Once satisfied, the Master will appoint an administrator to assist in the management of the person’s affairs. It is important to keep in mind that, while this solution is useful and cost-effective where a person meets the narrow definition of mental illness or intellectual disability as set out by the Mental Health Act, it does not provide a solution for those who cannot manage their affairs due to a physical handicap, terminal illness or old age (without any form of dementia).
Setting up a special trust
An alternative to appointing a curator bonis or administrator is to set up a Special Trust Type A, which is a trust created solely for the benefit of a person with a mental or physical disability which prevents him from managing his own financial affairs. In order to be effective, the Special Trust must be set up before the person becomes incapacitated which requires some forward planning. This means that a person who is diagnosed with early stages of dementia, but who still has mental capacity, can plan for the future by setting up a Special Trust into which his assets are then transferred either by donation or interest-free loan. Importantly, the trust founder can choose the trustees he would like to administer the trust assets – which is a much more favourable position to having a court-appointed curator bonis or administrator looking after one’s affairs. To qualify as a special person in terms of a Special Trust Type A, the beneficiary must have a disability which limits his or her ability to function or perform daily activities, must have suffered from the disability for 12 months or more, and the condition must be irreversible. By registering as a Special Trust Type A with Sars, the trust will enjoy the same tax rates applicable to natural persons ranging from 18% to 45%. In addition, the annual CGT exclusion of R40 000 is available to this trust, as well as the primary residence exclusion of R2 million of the capital gain on disposal for CGT purposes. Generally speaking, this type of trust will cease to exist from the beginning of the year of assessment in which the beneficiary dies.
Finding an appropriate solution to manage the affairs of someone who lacks mental or physical capacity can be complex, and it is always best to seek independent advice.
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