Planning for Dementia

Introduction

Dementia is the medical term used for conditions that affect mental capacity such as Alzheimer’s Disease. Where the individual suffering from Dementia no longer has the mental capacity to make decisions for themselves, it becomes a problem in that the person no longer has the ability to contract, make financial decisions, or medical decisions.

 

Power of Attorney

In South Africa, a Power of Attorney is only valid until your mind fails. Thus, any Power of Attorney granted to a loved one/professional advisor to manage an individual’s affairs, financially and otherwise, becomes inoperative as soon as the individual is diagnosed with mental incapacity/dementia.

To curtail the issue of no one having the effective power to control the affairs of the mentally incapacitated individual, the following options exist:

  1. Appointment of a curator bonis and/or personum;
  2. Administratorship;
  3. Establishment of a Special Trust (Type A); or
  4. Establishment of an Inter-Vivos Trust.

During the application processes for the above, actions taken on behalf of the incapacitated person may be ratified after the relevant official appointments have been made.

The four options are discussed in detail below.

 

Options

1.   Appointment of a curator bonis and/or personum

  • A curator bonis is a person appointed to manage the finances, property, or estate of a mentally incapacitated individual.
  • A curator ad personum is a person appointed by the High Court to attend to the daily living needs, care, and treatment of the mentally incapacitated individual.
  • A single application may be made to simultaneously appoint both a curator bonis and a curator personum.

Process:

  • An application for the appointment of a curator is made to the High Court by any family member or interested party, with the assistance of an attorney and an advocate who appears before the High Court.
  • A comprehensive affidavit is prepared setting out the details of the mentally incapacitated individual’s impairment and financial circumstances, and is further supported by two medical reports from a general medical practitioner and an alienist (a neurologist or psychiatrist).
  • The court will consider the application and initially appoint a curator ad litem (a legal representative – usually an advocate), who must confirm the incapacity of the individual to manage his/her own affairs and that an appointment of a curator will be in the individual’s best interests, following an investigation.
  • The curator ad litem will submit a report based on the investigation to the Master of the High Court to confirm the findings. Should the Master approve of it, the report will submitted to the High Court for hearing.
  • Once the court is satisfied, it will appoint a curator (usually an attorney). The Master of the High Court will then be approached to issue a Letter of Curatorship, authorising the curator to commence management of the individual’s affairs.

Pitfalls:

  • The appointment process is lengthy and requires legal representation, which is expensive.
  • The duties of the curator are cumbersome and is attendant with poor remuneration, which makes finding a suitable candidate to take on the appointment a complicated task.

Costs:

  • The cost of the application for the appointment of a curator bonis and/or personum is approximately R50,000.00, but may vary depending on the merits of the application.
  • The costs are inclusive of the attorney fees, fees of the curator ad litem, and medico legal reports

 

2. Administratorship

The Mental Health Care Act, No. 17 of 2002, sought to advance a simpler procedure to curatorship for smaller estates, involving the direct application by any interested party to the Master of the High Court for the appointment of an administrator to handle the affairs of the incapacitated individual.

The application consists of a written affidavit, supplemented with medical reports, and nominating an administrator, whose appointment the Master of the High Court must confirm.

Should the incapacitated individual’s property exceed R200,000.00, or his/her annual income be more than R24,000.00, the Master will appoint an interim administrator and order an investigation into the merits of the application to provide leeway.

 

3. The Special Trust Solution – A Possible Alternative

During the early stages of dementia or prior to the onset of significant mental incapacitation, there exists the possibility of an alternative solution to managing one’s affairs involving the establishment of a Special Trust (Type A). The trust must be created whilst the individual is still lucid and with the capacity to contract.

A Special Trust (Type A) is a trust established only for the benefit of one or more persons with a mental or physical disability as defined in Section 6B(1) of the Income Tax Act, where such disability affects their ability to earn income or manage their own financial affairs.

Assets in the Trust are managed and administered for the benefit of the beneficiaries by the Trustees. Significantly, Special Trusts are taxed different to normal trusts in that they are taxed on the same sliding scale as natural persons and are afforded similar Capital Gains Tax treatment as natural persons.

In a 2018 Binding Private Ruling (BPR 306 - Donations to a Special Trust) by SARS, SARS dealt with the donations tax consequences for a cash transfer made to a Special Trust. It is important to note that a BPR is issued in response to an application relating to a specific transaction only and only provides us with clarity on how SARS is likely to interpret provisions of the Tax Act. This means that a BPR cannot be cited in any Court proceedings or SARS proceedings unless the proceedings involve the Applicant of the relevant BPR referred to.

Facts of the BPR

The Applicant in this case was suffering from an early onset of dementia but was at the time still lucid and therefore had the capacity to contract.

The Applicant had set up and registered a Special Trust for the purposes of caring for the Applicant at the time of her fully becoming incapable as a result of the dementia. The Applicant was the primary beneficiary of the Trust, with her descendants as the secondary beneficiaries, and would only benefit on the passing of the Applicant as the primary beneficiary.

The trust was to be funded as a result of the Applicant transferring an amount to the trust.

Ruling By SARS

SARS ruled that the amount contributed by the applicant in this regard will not constitute a donation in terms of sections 54 and 55, which meant that there would be no Donations Tax payable on this donation.

Conclusion

This BPR by SARS, whilst not binding outside of the applicants involved, provides us with guidance that SARS may allow for a transfer of assets into a Trust set up for your own benefit as a result of debilitating capacity (but before full capacity has been lost) as a result of a recognised disability in terms of S6B(1) without attracting donations tax.

This is a fairly complex area of law and should be undertaken with the guidance of a professional.

 

4. Inter-Vivos Trust (most feasible)

An Inter-Vivos trust may be set-up during the individual’s lifetime. This Trust will require the Founder to have sufficient mental capacity at the inception of the Trust and will be regulated by a Trust Deed. The individual’s assets may be transferred into this Trust by way of either donation or an interest-free loan, which carries various tax implications. The Trust will be taxed at the standard rate of 45% and assets will be managed by the individual’s appointed trustees for his/her benefit. This method is the most feasible during the early onset of dementia.