If you’ve been left reeling following your spouse’s dementia or Alzheimer’s diagnosis, your primary focus will no doubt be on securing the best medical treatment for them. However, it is also important to give consideration to the management of their financial and personal affairs into the future.
If your spouse is in the early stages of dementia and still has mental capacity, there is a lot that can be done to ensure that their affairs can be well-managed as the disease progresses and mental capacity deteriorates. This article aims to provide advice and guidance on what can be done from an estate planning perspective in the face of a dementia diagnosis.
In the first instance, it is important to deal with the issue of a general power of attorney which many people incorrectly assume is a catch-all mandate that will allow them to manage the affairs of someone who is either mentally or physically disabled, which is not the case. In terms of our law, an agent only has the power to act on behalf of a principal while the principal can appreciate the consequences of granting another person their power of attorney. This means that, in order for a power of attorney to be valid, the principal must have full mental capacity.
If the principal has diminished mental capacity and cannot fully appreciate the consequences of giving someone a mandate over their affairs, the power of attorney falls away. As such, a power of attorney over the affairs of a spouse who has diminished mental capacity as a result of dementia is null and void.
A very effective option for the administration of your spouse’s financial affairs is to set up a Special Trust Type A which is a trust created solely for the benefit of a person with a mental or physical disability and which prevents them from managing their financial affairs. It is important to keep in mind that such a trust must be set up while your spouse still has mental capacity, so it is best to do this as soon after their diagnosis as possible. Naturally, if their diagnosis shows that they no longer have full mental capacity, this route will not be an option.
While your spouse still has mental capacity, they can set up a Special Trust Type A as an inter vivos (living) trust into which their assets can then be transferred either by donation or interest-free loan. Your spouse will also be able to nominate trustees who will then be responsible for administering the trust assets in their best interests, with three trustees being an optimal number. In the trust deed, your spouse can set out the duties and responsibilities of the trustees, and how they wish for their assets to be managed.
From an administrative perspective, this type of trust must be set up in terms of Section 6B(1) of the Income Tax Act to qualify for the special tax dispensation afforded to such a trust. To qualify as a Special Trust Type A, it must be demonstrated that the trust exists solely for the maintenance and care of your spouse whose diagnosis meets the criteria as set out in the Mental Health Care Act. Further, your spouse must have been diagnosed by a registered medical practitioner and the condition must be irreversible in nature.
From a tax perspective, the trust will be taxed as a natural person on a sliding scale between 18% and 45%, unlike ordinary trusts which are taxed at 45%. The annual CGT exclusion of R40 000 is available to this type of trust, as well as the primary residence exclusion of R2 million of the capital gain on disposal for CGT purposes.
From a timing perspective, keep in mind that once the trust has been set up and the assets transferred to the trust, the trustees will be responsible for managing the trust assets even if your spouse still has full mental capacity. This is because the nature of a trust is such that the trust founder must relinquish control of the assets. As such, it is important to give careful consideration to the timing of setting up such an entity. If you leave it too late, you may find yourself in a position where your spouse lacks sufficient mental capacity in which case they will not be able to set up a trust. On the other hand, if your spouse sets up a trust immediately after an early diagnosis, they may find that they still have many years of mental capacity ahead of them while their assets are housed in a trust and managed by trustees. Having a clear understanding of your spouse’s diagnosis and the prognosis is therefore important when it comes to the timing of a trust.
In a situation where your spouse already has diminished mental capacity, there are two options available to you when it comes to managing their affairs, namely (i) the appointment of a curator bonis and (ii) the appointment of an administrator.
(i) Appointing a curator bonis
In terms of our common law, you have the option of bringing an application to the High Court for the appointment of a curator bonis to look after your spouse’s affairs, although this is a costly and somewhat impersonal procedure given that the court appoints the curator. Bringing such an application will cost between R50 000 and R100 000, depending on the circumstances, and these costs will be paid by your spouse’s estate. Decision-making in such circumstances is slow as all steps taken by the curator bonis must be signed off by the Master. In addition, the curator bonis has limited power of investment and this can have adverse financial consequences for your spouse’s estate.
(ii) Appointing an administrator
A workable alternative is provided by the Mental Health Care Act which allows you to apply to the Master of the High Court for an administrator to manage the affairs of your spouse. The process is fairly simple and cost-effective and allows you to lodge an application directly with the Master in whose area of jurisdiction you and your spouse reside.
In terms of the Mental Health Care Act, the administrator’s powers are to take care of and administer the property of your spouse, and to carry on any business or undertaking belonging to them. Because of the inherent risks of malicious intent, the Master must take all steps to ensure that the person is in fact mentally ill and that the medical evidence substantiates the claim by the applicant. The Master can request medical evidence in support of the application which clearly indicates or confirms the person’s mental incapacity. Importantly, especially in the case of patients with dementia where mental deterioration can be slow, the act provides that the powers of an administrator must be proportionate to the mental health status of the person concerned.
In the wake of a dementia diagnosis, it is always advisable to meet with an experienced financial advisor who can take you through all steps involved in setting up your spouse’s affairs optimally. While your spouse still has full mental acuity, it is essential to ensure that they update their will as they will not be able to do so when they reach a point where their mental capacity can be questioned.
Further, they may consider signing an Advance Health Care Directive in which they can set out their end-of-life wishes in respect of medical treatment and care. As dementia is a disease which will slowly erode your spouse’s mental capacity, time is of the essence when it comes to setting their affairs in order, so do not delay having the difficult conversations.