When your parents can no longer make financial decisions

A power of attorney is not valid if the person becomes mentally incapacitated.

Power of attorneySomething that we often don’t think about when we consider our financial health, is the prospect of deteriorating mental health, specifically the onset of dementia. Dementia is caused by a variety of brain illnesses that affect memory, thinking, behaviour and the ability to perform everyday activities ‒ including managing one’s financial affairs.

A financial planner once shared with me a story about a client who was concerned about the mental state of her husband who was spending his retirement days at the local pub. He refused to discuss his finances with his wife and on investigation, it turned out that he had made the local pub owner the beneficiary of his living annuity to cover his drinks bill! As living annuities are not protected by the Pension Funds Act, this was entirely legal and would have left his wife financially destitute.

Elderly people with diminished mental capacity are also vulnerable to scams. I received an email from a reader who was desperately worried about his 75-year-old father who kept falling for 419 scams. Despite constantly losing money, he still believed they were real. His son wanted to know what he could do to stop him.

The challenge is that the law is not that user-friendly when it comes to assisting someone with diminished capacity.

Jenny Gordon, head of retail legal support at Alexander Forbes says that as we grow older, developing some form of dementia is a probability and not merely a possibility.

In order to legally transact on behalf of another person, such as your parent, you need to have a power of attorney (POA). This gives you the right to act on their behalf. However, South African law (unlike in the UK) stipulates that the person for whom you are acting must have the necessary soundness of mind and legal capacity to perform the same deeds that you are authorised to do in the POA.

“In terms of law, an agent cannot perform any act which the person has no legal capacity or mental soundness to perform. Therefore, if the person who gives the POA when he or she is of sound mind, later suffers from a mental illness or severe or profound intellectual disability, the authority granted in the power of attorney ends. An agent cannot perform a legal act which the person cannot do himself/herself,” explains Gordon.

For example, my mother has given me the general power of attorney to deal with her affairs if she is physically incapacitated. However, as soon as she lacks mental capacity, then the power of attorney is null and void, and to continue to act on it amounts to fraud.

Gordon says the Law Commission has been investigating enacting legislation to introduce an ‘enduring power of attorney’, which continues to be valid when a person becomes incapacitated, or only comes into operation when the person becomes incapacitated, but this does not currently exist in South Africa.

From a financial institution’s point of view this becomes very challenging, as they often manage the retirement savings of people who become mentally incapacitated. “If the client is unable to give instructions on any investments held, or even a change to the annual drawdown rate of a living annuity, then the agent under the POA no longer has authority to do so either,” says Gordon.

What are your options?

So what can you do if a parent becomes mentally incapacitated?

Gordon says that in the past, the only option was to apply to court to have a “curator bonis” appointed to manage the financial matters of the person. “This is an expensive procedure as it requires applications to the High Court, including the costs of attorneys and advocates, and medical reports. This might be well above many older clients’ financial ability especially when the lion’s share of many elderly clients’ income consists of a monthly pension. However, this avenue is available for appropriate persons.”

A more cost-effective alternative under the Mental Health Care Act of 2002 (MHCA) allows an administrator to be appointed for the care and administration of the property of a mentally ill person or a person with severe or profound intellectual disability, without a court procedure.

“Application is made to the Master of the High Court in the district where the patient resides. The Master is granted the power to appoint an administrator in terms of the procedures set out in the MHCA. An Administrator and a Curator are treated similarly by the Master,” says Gordon. The applicant initiates the procedure using a form MHCA 39/CB11, available on the Master’s website or from the Master’s offices.

Information required includes the grounds on which the applicant believes the person is incapable of managing his or her affairs, and a medical report showing that the patient is not of sound mind and able to manage his or her own affairs. The Master will require an investigation to be conducted by an advocate or attorney.

“However, the Master ensures that the cost of the investigator is contained. The Master might authorise an interim administrator pending the final appointment. The administrator will receive conditions from the Master on how to manage the estate. The cost of appointing an administrator is lower than the appointment of a curator bonis,” says Gordon. She adds that while it is hoped that the Law Commission can urgently investigate legislating an enduring POA, in the interim, the relatively inexpensive administration order procedure which exists is a very useful process to consider.

This article first appeared in City Press.

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