Dementia planning is an important part of estate planning

Dementia planning is an important part of estate planning

Loss of mental capacity is a reality of ageing and should not be avoided when constructing your estate plan.

A robust estate plan should include a rigorous set of assumptions and scenarios to ensure that you plan for various eventualities which could befall you. Unfortunately, loss of mental capacity is a reality of ageing and should not be avoided when constructing your estate plan.

While the available mechanisms for mitigating the risk of mental incapacity are not fool proof, careful, and proactive planning can help lessen the impact of a diagnosis such as dementia or Alzheimer’s disease.

In terms of our law, mental capacity is required in order for a person to enter into legal transactions, litigate, sign contracts, and generally manage their financial affairs. Without mental capacity, a legal transaction may be considered invalid on the basis that the person transacting did not fully understand or appreciate the consequences of his actions.

However, understanding diminished mental capacity and its effect on a person’s legal capacity to transact is not clear-cut. This is because, while some people are born with severely diminished mental capacity, such as in the case of a child born with an intellectual disability, others experience a sudden onset of mental incapacity such as that brought about by a stroke or car accident. For others, however, the onset of mental incapacity is measured and progressive, as in the case of dementia – and it is this type of mental incapacity that can create legal grey areas and uncertainty if not carefully planned for.

The general rule is that a person over the age of 18 has full contractual capacity and is legally capable of managing their own affairs until the contrary is proven. The onus of proving that a transaction or contract is invalid because the person lacked mental capacity is borne by the person making the allegation – a legal process which can be costly and protracted. Ideally, it is better to avoid a situation where your mental capacity and the validity of your contractual undertakings are questioned – something which can be achieved somewhat through the effective use of these estate planning mechanisms.

An effective way to ensure that your affairs can be protected and safely managed in the event of mental incapacity is through the use of an inter vivos trust, which is a type of trust set up during your lifetime, although it is important to understand the implications of doing so.

Firstly, as the trust founder, you will need to have mental capacity at the time of setting up your trust which in itself can be a grey area, specifically in the case of dementia where a person can have periods of greater lucidity and mental acuity. By setting up a trust structure, you can transfer your assets by way of either donation or interest-free loan, both of which have various tax implications, into the trust where they will be managed by your appointed trustees for your benefit. Remember, as you will need to relinquish control of your assets to the trust, you need to have implicit faith that your trustees will have your best interests at heart and will administer the trust assets responsibly into the future.

It is advisable to also give careful consideration to the wording of your trust deed to ensure that the trustees’ mandates, duties and responsibilities are clearly set out and not open to interpretation. Once you have set up the trust and transferred the assets across, the administration and management of those assets become the responsibility of your appointed trustees, and the assets will no longer form part of your personal estate.

If you are formally diagnosed as suffering from incurable mental incapacity your trust may qualify as a special trust Type A in terms of Section 6B (1) of the Income Tax Act following which the trust may qualify for a special tax dispensation. However, keep in mind that there are strict criteria that must be met in order to qualify as a special trust. Firstly, it must be demonstrated that the trust exists solely for your maintenance and care and that your diagnosis meets the criteria as set out in the Mental Health Care Act. Your condition, from which you must have been suffering for a period of at least 12 months, must have been diagnosed by a registered medical practitioner and the condition must be irreversible.

If your trust qualifies as a special trust, it 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 capital gains tax (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. Before setting up such a trust, keep in mind that there are costs involved in drafting the trust deed, registering the trust with the Master’s Office, running the trust, and remunerating the trustees, so be sure to seek expert advice in this regard.

A fear shared by many dementia patients is how they will be cared for during the late stages of the disease. Diminished mental capacity means that they will not be able to make informed decisions relating to their medical treatment and care which could lead to prolonged pain, discomfort and suffering. In such circumstances, an advance health directive can be drafted wherein one’s wishes for future medical treatment can be expressed and a medical proxy can be appointed. Your medical proxy should ideally be someone who you trust implicitly to honour your wishes when it comes to end-of-life care and treatment, and who can speak on your behalf when you are no longer able to communicate your wishes.

It is advisable to appoint an alternative medical proxy in case your primary nominee is not available when the time arises. An advance health directive can be a valuable document for your loved ones when you reach the more advanced stages of dementia especially when it comes to making decisions regarding potential medical interventions, pain management, and palliative care. While the legal enforceability of an advance health directive cannot be guaranteed, the intention of the document is to provide clear guidelines for your family and doctors regarding end-of-life care and treatment.

Naturally, your will is an effective estate planning tool, but only to the extent that you have full mental capacity when drafting it. With the likelihood of dementia increasing as you age, reviewing your will and keeping it updated is imperative. Remember, once you lose mental capacity, the validity of any will drafted thereafter can be challenged on the basis that your mental competency at the time of drafting your will was lacking. Our advice is to consciously review your will on at least an annual basis to ensure that it correctly expresses your wishes and that it meets all the criteria for a valid will.

Delay or failure to put effective estate planning mechanisms in place before losing mental capacity may leave your loved ones with no option but to apply for a curator or administrator to manage your affairs, although neither of these solutions is ideal. To apply for the appointment of a curator, your loved ones will need to make a High Court application which can cost around R60 000 depending on the circumstances – the costs of which are borne by your estate. If successful, an independent third party will be appointed as curator bonis to manage your affairs and, naturally, the impersonal nature of such an appointment is not ideal. In managing your affairs, the curator bonis has limited powers to make investments and is required to have each step signed off by the Master which is both inefficient and time-consuming.

The process of having an administrator appointed is somewhat less cumbersome in that your loved ones can make an application directly to the Master of the High Court without having to incur legal fees. In terms of the Mental Health Care Act, the administrator’s powers include taking care of and administering your property proportionately in relation to the state of your mental capacity.

Contrary to common belief, a general power of attorney granted by a person suffering from diminished mental capacity is not a solution. For a general power of attorney to be valid, the principal must have full mental capacity. Where 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 general power of attorney is more suited to those suffering from a physical disability or those who are absent from the country for long periods of time.

A potential solution which has been on the cards for some time is to introduce an enduring power of attorney into our law. An enduring power of attorney, which must be granted while you have full mental capacity, allows you to appoint someone to manage your affairs during your lifetime if you no longer have the legal capacity to do so. An enduring power of attorney only takes effect when you lose mental capacity and endures for the remainder of your life.

While we don’t know whether we’ll be afflicted by dementia, we do know that our chances of suffering from the disease increase with age. As such, planning for the potential loss of mental capacity should realistically form part of our estate planning.

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