Plan for the day when you may no longer be able to make financial decisions
Most elderly people recognise that there will come a day when they may not be able to make rational decisions concerning their financial wellbeing and investments.
According to David Knott of Private Client Trust, the fiduciary services division of Private Client Holdings, and a member of the Fiduciary Institute of South Africa, people mistakenly believe that the solution is to grant a power of attorney to a trusted child or financial advisor who will be able to make financial decisions on their behalf when the time comes that they are no longer able to.
“However, a power of attorney ceases to be valid the moment the grantor fails to comprehend those decisions and any actions taken by the child or financial advisor by virtue of the power are voidable,” says Knott. “The child or financial advisor, even if they act in good faith, are also at risk of having to make good on any loss suffered as a result of any actions taken after the grantor of the power of attorney is recognised to have diminished mental capacity.”
Knott advises that Government has for many years debated an easier route to allow persons to act for those with diminished capacity and have published various Bills seeking to address the problem. Unfortunately these Bills have not passed into law and seem unlikely to.
“For now the only solution is to have the mentally diminished person placed under curatorship,” explains Knott. “Curatorship is the formal appointment of a qualified person by the Master of the High Court to manage the affairs of another. The curator must take charge of all financial matters, settle monthly liabilities and generally step into the shoes of the patient. He must also lodge an account in the prescribed form with the Master annually and for this service is entitled to charge fees. Unfortunately, the curator’s investment powers are limited to more secure type investments which may not be suitable for all, however a curator may approach the Court to broaden their investment capacity should they provide sound reasoning.”
Apart from the formalisation and fee aspect, for many families there is also a social stigma attached to having a dear family member placed under curatorship. So what is the ideal solution?
According to Knott the solution is to establish a family trust early, whilst the settlor is still in full command of their mental faculties.
“Many have only ever regarded a family trust as a structure for the very wealthy to reduce Estate Duty. However, a trust should be much more than merely seeking to reduce a tax. The trust should have been created with several capable trustees taking joint decisions as to the management of the settlor’s affairs and so over time getting to understand the requirements of the settlor and his family as well as the family dynamics. That way, if and when the settlor becomes frail and is no longer able or willing to be involved with financial matters, the remaining trustees are able to continue to manage and disburse funds from the trust without any hindrance or interference. The trust would have a structured, established record,” says Knott.
“There is no need to wait until one is elderly before creating a family trust. A trust derives most benefit by being established early on in life when one is still building an estate and is a very desirable structure to hold long term growth assets. It is important though to seek quality advice and to ensure that the trust deed is well drafted so as to cover any eventuality which may arise in the future,” concludes Knott.