Clients often ask what they should do if one of their parents starts suffering from dementia. How does one even begin to manage the situation when it comes to estate planning? There are countless examples of elderly people who, due to their age and lack of ability, whether physical or mental, have given a supposed power of attorney to a child or other person to manage their affairs, which usually include banking, medical insurance and the management of their day-to-day affairs. The intention is to enforce such power of attorney until the end.
It should be noted that no one can give someone else the power of attorney if he or she is unable to perform such a task or make decisions on his or her own. As far as South African law is concerned, power of attorney is only valid when the grantor of a power of attorney can still handle the tasks and decisions him or herself. Therefore, if your father or mother presents signs of cognitive decline, any power of attorney granted to you will automatically lapse.
As a result, any contracts you have entered into on behalf of a parent will be invalid because you no longer have the power to act. The proxy holder (agent) will face civil claims if any party questions the validity of such action. In practice, we know that there are thousands of proxies held with banks and care units that are, in fact, invalid.
In America and Britain, the concept of “lasting power of attorney” exists. It is valid until the moment of death. Back in 2004, The South African Law Reform Commission, in a report titled, “Supported decision-making: Adults with limited decision-making ability” (free translation), suggested that legislation should be amended. So far, nothing has been changed.
The following solutions to this problem may be considered:
The related parties can bring an application to the High Court to appoint a curator bonus. This trustee will then be authorized to conduct all financial interests until the person’s death, after which the executor will take over. This process is expensive and can cost around R30 000 to R40 000.
For those with smaller estates, an alternative is to apply to be appointed as an administrator in terms of the Mental Health Care Act.
As a last resort, and possibly the best solution, a trust can be used. While the person is still accountable, he or she can register an inter vivos trust with himself or herself as the sole and lifelong beneficiary. The trustees can typically be a child or two and another professional. As soon as the beneficiary is declared “unfit” in terms of the definition in the Act (Tax Laws Amendment Act, Act 22 of 2000, section 6B (1)), the trust becomes registered as a so-called special trust with the South African Revenue Service (SARS). The most important element besides compliance with the definition of disability is that the trustees cannot grant benefits to any other person. However, this may happen as soon as the original beneficiary passes away.
How do you get assets in such a trust? In two ways, namely donations or loans. Donations to special trusts are covered in SARS’ Binding Private Ruling (BPR 306). It provides that such donations for the above purpose are not subject to donations tax. SARS, however, will assess each case on its merits and evaluate accordingly. The dreaded section 7C of the Income Tax Act excludes loans to special trusts, and no interest will be paid to the lender. The financing of a primary residence of an associated person is excluded. Therefore, the estate owner can obtain for himself or herself a convenient unit in a care facility and at the same time significantly reduce his or her estate.
Policies that ensure a person against dreaded illness and disability can also be used meaningfully to get money into the trust.
There is hope for potential sufferers of dementia. However, it is a highly specialized area of estate planning. Expert and professional advice are essential.
In recognition of Mr Johan Brandt (a member of FISA and a legal consultant associated with Allegiance Consulting (Pty) Ltd.)