Making decisions is an important part of our lives. We make decisions relating to matters such as where we live, health care, employment, and financial affairs (to mention but a few). As improvements in medical science and technology allow us to live longer, incapacity – both physical and mental – is becoming a growing local and global problem that may cause many people’s decision-making ability to be hampered.

A Population Census in South Africa (2017) showed an increase from 2.8-million older people in 1996 to 4.6-million in 2017. Professor Felix Potocnik, of the South African Society of Psychiatrists (SASOP), says South Africa is one of the most rapidly aging countries in Africa.

It is common practice that when a person becomes older and frailer, a power of attorney is given to another trusted person, to handle such person’s business affairs on their behalf. Although the power of attorney is a handy instrument to be used to reduce the administrative burden on elderly and/frail individuals, in South Africa, it can only validly be used to the extent that the principal (person authorising another person to act on their behalf) is still mentally competent of making his or her own decisions. The moment a person is no longer capable of managing his or her own affairs, the power of attorney lapses.[1]

Many South African’s are unaware of the fact that this instrument can lapse, and thus continue to use this instrument when the principal is no longer fit to manage their own affairs due to mental incapacity caused by illnesses which is heightened by age, such as dementia. South Africa’s 2011 census indicated that there were 2.2 million people living with dementia, and this number would have increased with global trends.

There are a few options that one can consider applying to aid the administration of the affairs of an elderly person who is mentally incapacitated: –

Curator bonis or Administrator (in the Mental Health Care Act, 17 of 2002): This is a High Court/Master of the High Court application where a person (usually an attorney/advocate) is selected to manage all affairs on behalf of the person who has been declared incapable of managing his own affairs.

• Advantage: This option has been practised for many years. There are people that are truly specialised in this offering.
• Disadvantage: This option may often be particularly expensive and admin intensive.

The High Court or Master of the High Court will select the curator bonis and such person may not personally know the individual whose affairs they are managing.

Special trusts: The Income Tax Act, makes provision for the creation of special trusts, which has certain tax advantages, where the trust is created for the benefit of a person who has been declared incapable of managing his own affairs.

• Advantage: The Founder can select the Trustees (The people that manage the affairs). This can consist of Trusted family members as well as professional independent Trustees.
• Disadvantage: The trust would need to be set up before the person becomes mentally incapacitated – making it a process which requires some forward-planning.

This forward-planning has been aided by a recent SARS released Binding Private Ruling (BPR 306 On 28 June 2018), which deals with the donation of funds to a special trust. This is specifically beneficial with the scenario where most of an elderly person’s estate is sitting in their personal capacity. When they have the capacity to deal with their own affairs, they cannot move their assets into a Trust without triggering certain tax consequences, however when they become an ideal candidate for a special trust beneficiary, they no longer have the mental capability to deal and move their assets into a Trust.

Key points from the Binding Ruling:

• (Applicant) suffered from an early onset of dementia but was still lucid and had the capacity to contract at the time that the Trust was created and funds were transferred to the Trust.
• The Applicant transferred an amount to the trust in order to provide for her future upkeep and wellbeing, which amount transferred did not represent the applicant’s entire estate.
• It was ruled the amount to be contributed by the Applicant would not constitute a donation as contemplated in s54 and s55 of the Act, and, as a result, no donations tax will be levied.
• The Primary beneficiary of the Trust however had to be the Applicant, and the purpose of the Trust was to take care of the Applicant when she became debilitated by her medical condition, by providing for her care and maintenance; The trustees may only exercise their discretion in respect of the secondary beneficiaries on the passing of the primary beneficiary.

This Binding Ruling hopefully paved the way for reform in providing a solution to people that are faced with early onset dementia but wish to utilise their discretion in selecting a capable board of Trustees to handle their affairs in the wake of the stark reality that they soon may longer be capable of making sound business decisions.

[1] Pheasant v Warne 1922 AD 481; Tucker’s Fresh Meat Supply (Pty) Ltd v Echakowitz 1957 (4) SA 354 (W) confirmed on appeal in 1958 (1) SA 505 (A).