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Provided by the South African National Department of Health
Power of attorney:
it’s not what you think
Head of Fiduciary and Tax
Nov 28, 2018
The time might come when – due to old age, an illness, stroke or dementia – a loved one is no longer able to manage their own finances and estate. Many people believe either a general or special power of attorney will entitle an agent, such as a close family member, to act on an incapacitated individual’s behalf. What they don’t realise, however, is that under South African law, if someone is no longer capable of making their own decisions, the power of attorney will fall away.
Unlike in some other countries, South African law doesn’t provide for what’s known as an ‘enduring power of attorney’ that continues after the individual who granted it (the principal) has become incapable of acting legally. Under our law, the agent can never have more powers than the principal, so if the latter is no longer of sound mind, the agent’s power of attorney will become void.
This clearly leaves those looking after a loved one who has lost mental capacity, in a predicament, for example, if funds need to be accessed to provide for the individual’s personal care.
The South African Law Commission recognised the need for reform and in 2004 drafted legislation to allow for enduring powers of attorney. However, in 2009, the Human Rights Commission intervened, as the United Nations Convention on the Rights of Persons with Disability, adopted by South Africa, needed to be taken into account. A report was eventually submitted to the Minister in 2016. There has been no further progress, however, and an enduring power of attorney is not yet available as a solution to these issues.
What alternatives are there to an enduring power of attorney under South African law? One potential solution is to apply for the incapacitated individual to be placed under curatorship or administration.
The process of applying for curatorship in terms of Rule 57 of the High Court Rules is usually cumbersome, and can be costly. Applying to the Master of the High Court to appoint an administrator in terms of Sections 59 to 69 of the Mental Health Care Act may be a quicker, simpler and cheaper option. However, it’s generally only available to persons with assets worth under R200 000 or an annual income of less than R24 000.
A more appropriate solution may be to set up a special trust while the beneficiary is still of sound mind. The trustees can then later provide for the general maintenance and welfare of the incapacitated individual out of the trust fund – including medical costs.
A special trust will enjoy individual tax rates and not necessarily the high 45% tax rates that may apply to other trusts. As a funding mechanism, an interest-free loan to a special trust is exempt from the application of Section 7C of the Income Tax Act, in terms of which donations tax may be levied on deemed interest on such a loan. The person making the loan to the trust can be the secondary trust beneficiary after the death of the primary beneficiary.
Bequests can be made in the wills of family members or the parents of the incapacitated person to the special trust. A special trust can also be set up in the will of a person on their death to receive benefits from their deceased estate as funding for the maintenance and general needs of an individual unable to act on their own.
Everyone should keep their wills updated, especially when circumstances change. Individuals who become compromised in terms of handling their own affairs, may thereafter be unable to sign a new, valid will. Spouses can balance their estates from time to time, or set up an independent, separate fund or bank account for the other spouse – ensuring that one spouse will have access to funds if the other becomes mentally incapacitated and a power of attorney lapses.
Trust deeds should be updated to make provision for succeeding trustees should an existing trustee no longer be able to act on their own. Provision should also be made in the trust deed that the number of trustees won’t fall below the minimum requirement should one trustee have to vacate their position. The trust deed should in addition stipulate that the founder won’t have to agree to amendments should they become unable to act legally.
If you’d like to discuss or implement any of these proposed solutions, or if you need a trust deed reviewed, please don’t hesitate to contact one of the Sanlam Private Wealth fiduciary and tax specialists at email@example.com.
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