In order to manage your finances, you need to have the mental and physical capacity to do so.
An illness, accident or aging can take away a person’s ability to manage their own affairs.
Legally family members cannot manage the incapacitated family member’s financial affairs – buying or selling their assets or accessing ongoing payments – such as disability or pension payments – in a bank account, without the authority to do so.
There is no formal test for mental capacity, but mental healthcare practitioners will typically be required to make a diagnosis to prove incapacity. A person will be assumed to have capacity until they are proven to lack capacity.
Here are some of the ways you can get the authority to act for an incapacitated person or get someone to do and the problems with each of these methods:
At the onset of an illness or cognitive decline, it is possible for a family member to sign a power of attorney authorising another person – such as a spouse, family member or friend - to manage their affairs for them.
The person granting the power is known as the principal and the person authorised to act is known as the agent.
A power of attorney document does not have to be drawn up by legal adviser, financial adviser or financial institution but these professionals will be best placed to ensure the document is correctly worded.
A power of attorney must:
Both the principal and the agent must be over the age of 18 and have the mental capacity to enter into the agreement. Once they have lost the capacity, any power of attorney they enter into will not be valid and could be challenged by anyone who believes the agent is acting without authority.
And importantly, in South Africa a power of attorney is not continuing or enduring, which means that once a person loses the capacity to grant a power of attorney, any such power they have granted in the past will no longer be valid.
So, for example, the power of attorney that an aging parent grants to an adult child becomes invalid if that parent develops dementia and no longer has the mental capacity to understand that they gave their child the power of attorney.
Many other countries have continuing or enduring powers of attorney that may be granted when a person has mental capacity and will endure even after they lose that capacity. The Law Reform Commission has recommended a similar power of attorney be introduced in South Africa, but the recommendation has not been implemented.
This means that families with parents who are losing their mental capacity need to explore another way to get authority to manage their parents’ finances.
If you want to manage the affairs of a parent, family member or friend who has lost the mental capacity to grant a power of attorney, you may be able to apply to the Master of the High Court in the area where the person lives to appoint an administrator under the Mental Health Care Act.
An administrator will only be appointed if two medical practitioners, including one mental healthcare practitioner, confirm that the person who affairs need administering has been diagnosed with a mental illness or severe or profound intellectual disability.
An administrator cannot be appointed for someone who is physically incapacitated.
The administrator can be a family member or friend, but they should be able to understand the responsibility, literate and able to deal with the financial institutions. The higher the value of the incapacitated person’s assets, the more likely that the Master will demand that it be a person of higher literacy and competence.
You do not need an attorney to make the application and there is no cost.
To prevent abuse of the system, a copy of the application must be given to the incapacitated person and proof that they were provided with the application must be given to the Master. This could be by way of affidavit from someone who witnessed the application being given to the incapacitated person or their signature.
If the application is brought by someone other than a spouse or next-of-kin, they will need to explain why a spouse or next-of-kin did not make the application.
If the incapacitated person’s estate is larger than R200 000 or their income exceeds R24 000 a year, the Master’s office is obliged to order an investigation be conducted.
This will require a report to be written by a suitable independent person and the cost of this can be paid from the estate of the person placed under administration.
The Master may appoint an interim administrator pending the outcome of the investigation.
The Master may require anyone who is appointed as the administrator to furnish security for the proper administration of the estate. In this case, the administrator will have to provide a bond of security by an approved financial institution for the full value of the property they are administering.
An administrator will also be required to provide the Master with a report annually of showing the accounts managed with vouchers and receipts for all entries. At all times they should act with integrity and in the best interests of the person whose affairs they are administering.
An administrator is empowered to take care of and administer the property of the incapacitated person and to carry on any business on their behalf in consultation with them where appropriate.
An administrator is entitled in terms of the Administration of Estates Act to charge six percent of the annual income of the estate and two percent of the value of the capital assets of the estate when the administration is terminated. If there is reason to, the Master may however reduce, disallow or increase the fees.
It is also possible to get authority to manage the affairs of someone who is unable to do so themselves by applying to the High Court to have a curator bonis appointed.
The application is made under rule 57 of the High Court Rules. This application will require legal representation and is therefore more costly than getting an administrator appointed, but it may be an option when you cannot prove mental ill-health or intellectual disability.
The application must outline or include:
The court will first appoint someone – usually an advocate of the court – to investigate and then only appoint a curator bonis whose function it is to assist the incapacitated person to make perform legal acts when such assistance is required.
The court needs to satisfied that the curator is sufficiently qualified to be able to understand the powers granted and how to execute these powers.
If the incapacitated person is also incapable of making decisions as to his or her care, custody and personal welfare, the court may appoint a curator personae. This may be anyone the court considers appropriate.
Curators may also be expected to provide security for the estate of the incapacitated person.
They are also required to act in the best interests of the incapacitated person and to act with integrity.
A curator must provide the Master with an annual report showing the accounts managed on behalf of the incapacitated person with vouchers and receipts for all entries.
A curator bonis is entitled in terms of the Administration of Estates Act to charge six percent of the annual income of the estate and two percent of the value of the capital assets of the estate when the curatorship is terminated. If there is reason to, the Master may however reduce, disallow or increase the fees.
A trust may be set up to manage the affairs of a person with physical or mental disabilities.
This trust is known as a Type A Special Trust and it pays tax in the same way as an individual and enjoys the same exemptions from capital gains tax for any capital gains made each year and on the sale of a primary residence.
The trust must be set up for someone whose disability has been diagnosed by a medical practitioner, they have had the condition for more 12 months, and the condition must be one from which they will not recover.
A person with an early diagnosis of dementia could set such a trust up with a trust deed and appoint the trustees. That person can then donate their assets to the trust free of donations tax as long as certain requirements are met.
Such a trust will have ongoing administration costs and possibly costs for trustees.
Timing the transfer of the assets to the trust could also be difficult in cases where the dementia progresses rapidly.
* This article was compiled with the help of the Fiduciary Institute of Southern Africa
