Personal finance and mental incapacity in your family

By Warren Ingram, CFP®
What happens when a loved one loses mental capacity? The law offers a few options, but the situation is very complex, especially when adult children try to assist a parent who loses mental capacity. This article provides some ideas of the options available to family members facing this challenging situation.
1. Power of Attorney: Empowering Decision-Making
- General or Special Power of Attorney (GPA): There is some legal jargon to understand about GPA. If a parent gives an adult child a General Power of Attorney, the law considers the parent the Principal and the child the agent. Under South African law, the agent’s powers cannot exceed those of the principal. If the principal faces mental incapacity, the Power of Attorney becomes void. Registering this document at the Deeds Office ensures enforceability and public record. The cost, including drafting and registration, is typically R5,000 (excluding VAT).
- Medical Power of Attorney: While some jurisdictions acknowledge a Medical Power of Attorney, South African law does not. This document grants someone the authority to make health decisions in case of your incapacity.
2. Curator Application: Managing Finances with Care
- Appointment Process: When a Power of Attorney lapses due to incapacity, appointing a curator is a prudent step in managing financial affairs.
- Costs and Considerations: An unopposed curator application may cost between R50,000.00 and R100,000.00 (excluding VAT), covering attorney fees, advocate fees, medical reports, family affidavits, and more.
- Curator Responsibilities and Fees: A curator, often a professional like an attorney or accountant, manages finances under the scrutiny of the Master of the High Court. Fees are typically a percentage of income (up to 6%), with additional fees upon termination.
3. Administration Application: A Less Costly Alternative
- Appointment by the Master: For diagnosed mental illness, the Master of the High Court can appoint an administrator. This process is less costly than curatorship and doesn’t require a High Court application.
4. Trusts: Tailoring Solutions for Your Needs
- Inter Vivos Trust: Established during a person’s lifetime, this trust manages assets for beneficiaries, providing income for various needs. Donations tax and Capital Gains Tax implications should be considered.
- Testamentary Trusts: Created posthumously, these trusts, established through a will, ensure a controlled distribution of assets.
- Special Trusts: A type-A special trust caters to individuals with mental or physical disabilities, offering tax advantages and flexibility.
5. Recommendations: A Personalised Approach
- Power of Attorney: Prepare one if concerns about mental capacity arise. Be mindful of the gradual nature of mental incapacity and consider registration at the Deeds Office for added security.
- Curator and Administration Applications: Only contemplate these when mental incapacity is evident, considering the associated costs and complexities.
- Inter Vivos Trusts: Assess the donation tax implications and weigh the benefits of potential growth within the trust against upfront costs.
- Loan Option: Loan assets to the trust cautiously, considering tax implications under section 7C of the Income Tax Act.
- Testamentary Trusts: Explore this option for those opposed to immediate donation tax or annual income tax on loans.
These decisions are very complex and we recommend seeking professional advice. We can refer you to our colleagues at Galileo Advice if you would like a detailed discussion tailored to your unique circumstances.