As our population ages, there’s a steady increase in the number of older people developing dementia and other incapacitating mental conditions.
What can these people and their families do to make managing their finances easier? Your first thought will likely be the cheap and cheerful option of a power of attorney, but beware – it’s likely to fail just when it’s needed most.
We’ll have a look at what a power of attorney is, at why it is (unfortunately) not a “forever” solution, and at the alternatives available to you.
“The number of cases of dementia is estimated to almost triple by 2050.” (World Health Organisation)
Although the actual prevalence per capita of dementia is reportedly on the decline, aging populations ensure that it is becoming more and more of a problem in society – for older people, their families and caregivers.
If you or someone close to you (normally an aging parent or relative) needs, or may end up needing, assistance with their financial affairs, your first thought will probably be a power of attorney by which the “principal” appoints an “agent” to act for him/her, either for a particular purpose (a ‘special power of attorney’) or generally (a ‘general power of attorney’).
A power of attorney is certainly a quick, cheap and easy solution but be careful – it’s only a temporary one. It is not “forever”!
The major downside
Of course, a principal can cancel his/her own power of attorney at any time, but what is not so well known is that it terminates automatically if and when the principal:
1. Dies (an executor is then appointed)
2. Becomes insolvent and his/her estate is sequestrated (a trustee is then appointed)
3. Becomes mentally incapacitated in the sense of being no longer able to make his/her own decisions for whatever reason. Reasons could include a stroke, a coma following an accident, mental illness, dementia, Alzheimer’s, general age-related diminishing capacity etc.
It’s this last scenario that catches most people unawares, because it seems so illogical for the power of attorney to lapse just when it’s needed most.
But that, unfortunately, is the law. An agent can only do what the principal can do, so if a principal loses legal capacity, the power of attorney immediately fails. Or as a Department of Justice document neatly puts it: “In South Africa the power of attorney remains valid only for as long as the principal is still capable of appreciating the concept and consequences of granting another person his or her power of attorney”.
In practice there are probably many cases of powers of attorney continuing to be used to everyone’s benefit long after the principal has lost formal capacity, but an agent in that situation acts without authority and risks personal liability for doing so if the validity of anything done under the failed power of attorney is challenged.
So what are the alternatives?
The High Court can appoint a curator when a person becomes unable to manage his/her own affairs. A curator bonis handles all the person’s financial affairs, and a curator ad personam their personal affairs (such as giving consent for medical treatment, where to live etc). Unfortunately, curatorships are costly, prone to bureaucratic red tape and delay, paternalistic and, being public, demeaning to the principal.
Similar to curatorship but less complex, less expensive, and quicker, is an application to the Master of the High Court for the appointment of an administrator. This option is only available when your family member is a “mentally ill person or person with severe or profound intellectual disability”, so it excludes cases of purely physical frailty or disability, and suggests that in cases of mild dementia or mild cognitive impairment only curatorship is an option – but take legal advice on your specific circumstances. An extra element of cost and delay applies in larger estates, in that the Master must first commission an investigation into any application where the assets involved exceed R200,000 and the annual income is over R24,000 p.a.
A discretionary trust to address the purely financial aspects might also be worth considering whilst the person in question still has legal capacity. Take advice however on the costs, tax and other implications.
What about an “enduring” or “conditional” power of attorney?
In 2004 the South African Law Reform Commission recommended changes to our law to allow for alternatives like:
1. An “enduring power of attorney” (or “EPA”) which would remain valid despite the subsequent incapacity of the principal; and
2. A “conditional power of attorney” which would come into operation only on the incapacity of the principal.
Unfortunately, nothing concrete has as yet come of that, and although some legal commentators suggest that our courts might perhaps uphold a properly-worded EPA, the general consensus appears to be that they will not be recognised.
It boils down to this: get legal advice on your particular circumstances. We will gladly assist wherever we can.
Disclaimer – *The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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