Your estate: planning
for incapacity
Most of us spend much time planning what will happen to our assets after we die. Far fewer consider what would happen if we were still alive, but no longer able to manage our own financial affairs. As people live longer, the possibility of experiencing an illness or condition that affects mental capacity becomes increasingly important to consider. Failing to plan appropriately may put your assets at risk and create difficulties for those who will need to make decisions on your behalf.
It’s uncomfortable to think that you may at some stage no longer be able to manage your own finances and estate. However, none of us can predict what our health, wellbeing and financial position will look like in the future – certain conditions, such as dementia, may result in a loss of mental capacity, affecting important financial and care decisions. This could be problematic for those responsible for your welfare, especially if they are unprepared for the practical implications of your situation.
The best time to prepare for this possibility is while you are still able to determine how you would like your affairs to be managed.
A common misconception is that granting a general or special power of attorney to a spouse, child or other trusted person will allow them to continue managing your affairs if you lose mental capacity.
Under South African law, this is not the case. A power of attorney is valid only for as long as the person granting it has the capacity to act on their own behalf. Once this is lost, the power of attorney becomes invalid and can no longer legally be used.
This can leave families in a difficult position. Someone may need to access bank accounts, pay expenses or make other financial arrangements for a loved one, but have no legal authority to do so.
Where someone is no longer capable of managing their own affairs, it may be necessary for the family to apply to the High Court for the appointment of a curator bonis to manage the person’s financial affairs.
Depending on the circumstances, curatorship may be the only available option. However, the process can be onerous and costly and may involve medical assessments and legal representation. It also means that important decisions about who will manage your financial affairs will be made after you have lost the ability to participate in them.
Taking appropriate steps in advance can therefore provide greater certainty for both you and your family.
If you have a disability as defined in section 6B(1) of the Income Tax Act, it may be possible to establish a special trust to provide for your care and maintenance if you are no longer able to do so yourself.
Assets can be donated to the trust without attracting donations tax, while family members or trusted professionals can be appointed as trustees to manage the trust assets on your behalf. A qualifying special trust is also taxed at the rates applicable to a natural person.
Other beneficiaries may be included as a separate class of beneficiary, but will generally only be able to benefit after your death. At that point, the trust will lose its special trust status, although the trust structure can remain in place for the ongoing preservation and management of its assets.
Financial affairs are only one aspect of planning for incapacity. Loss of mental capacity may also mean that you are unable to make informed decisions about your medical treatment and care.
A living will allows you to record your wishes regarding future medical treatment, particularly in circumstances where you are no longer able to communicate those wishes yourself.
While the legal enforceability of a living will cannot be guaranteed, it can provide valuable guidance to your family and medical practitioners regarding your preferences for end-of-life care and treatment.
Your last will and testament is another important part of planning ahead. A valid will must be made while you have the necessary mental capacity – a will drawn up after capacity has been lost may be challenged.
Regularly reviewing your will becomes particularly important as you get older or if your health circumstances change. An annual review can help ensure that your will continues to reflect your wishes and meets the requirements for validity.
An inter vivos trust may also provide a way to protect and manage assets should you lose mental capacity in future. Unlike a testamentary trust, it is established during your lifetime, while you are still able to determine how it should operate and who should be responsible for managing it.
Once assets have been transferred to the trust, they are administered by the appointed trustees and no longer form part of your personal estate. Careful consideration should be given to the trust deed so that the trustees’ powers, duties and responsibilities are clearly defined.
Planning for incapacity is ultimately about retaining as much control as possible over what happens if you are no longer able to make decisions for yourself. The appropriate solution will depend on your circumstances, and may involve a combination of measures rather than a single document or structure.
Addressing these issues as part of your broader estate plan can make it easier for those responsible for your welfare to manage your affairs and, importantly, ensure that the arrangements you put in place reflect your own wishes.
If you’d like to discuss or implement any of these proposed solutions, or if you need a trust deed drawn up or reviewed, please don’t hesitate to contact one of the Sanlam Private Wealth fiduciary and tax specialists at fiduciary@privatewealth.sanlam.co.za.
The formation and registration of trusts, and the provision of independent trusteeships – both local and offshore.
The creation of BEE, charitable, special and Shariah trusts compliant with regulatory and legislative requirements.
The administration of deceased estates in South Africa and abroad.
Advice on complex structures, asset restructuring and bequests in foreign jurisdictions.
Advice on emigration and immigration, foreign earnings and the application of any double taxation agreements.
Updating trust deeds to ensure they’re in line with the latest changes in the trust environment.
Updating and/or drafting of wills dealing with South African and/or foreign assets.
Advice on the establishment and management of charitable organisations, their tax status and tax deductible donations.
Advice on the potential tax consequences and reporting obligations if you hold a US passport or green card, or if you have children living in the US.
Guidance on the financial implications of life-changing events, such as getting married, divorce or the birth of a child.
