Dementia and Special Trusts

A Solution for Managing the Financial Affairs of Individuals Diagnosed with Dementia

Dementia is the umbrella term for medical conditions causing mental decline, such as Alzheimer’s Disease, that affect people of all ages worldwide and specifically older people. Although experienced differently by everyone, a main feature of the illness is the loss of mental ability and capacity to make important decisions, including financial and care decisions. This is problematic, especially where the family is unprepared or uninformed of the practical implications or where the diagnosed individual is in charge of household finances.

Can One Use a Special Power of Attorney?

No – many family members mistakenly believe that they can rely on a signed Power of Attorney (PoA) authorising them to take over the management of the individual’s financial affairs. A PoA is only valid for as long as the individual granting the PoA maintains appreciation of what was signed (legal capacity). In South Africa, Enduring Powers of Attorneys, which continue once someone loses this capacity, are not recognised.  Furthermore, most major banks will not accept a PoA, even when it is valid. They require an account holder to sign a bank-approved PoA for access to their accounts to be shared. Once diagnosed with dementia, this route is not possible.

This essentially leaves two options available to the family, depending on how advanced the dementia is:

  1. Curatorship – moderate to advanced stage of illness; and
  2. Special Trust – early diagnosis of dementia by a duly registered medical practitioner.

Curatorship

A curatorship results in a court-appointed curator bonis to manage the day-to-day needs of the individual. The application is made in the High Court and is onerous and expensive requiring, amongst other things, medical assessments, and legal representation. Depending on the individual and their circumstances, this may be the only option available to the family.

Special Trust

There now appears to be a possible alternative for those who act relatively early in the diagnosis of Alzheimer’s i.e before there is a significant diminishing of capacity.  This is in the form of a ‘Special Trust’, which the individual would set up on early diagnosis, whilst still lucid with the capacity to contract. A recent Binding Private Ruling by SARS on the 28 June 2018, saw SARS recognising Dementia as a disability as defined in terms of section 6B of the Income Tax Act and thus permitting the creation of a Special Trust. Although a Binding Private Ruling may not be cited in any proceeding before court or SARS, it does serve the purpose of providing clarity on how SARS is likely to interpret any particular provision of an Act.

Provided the purpose of the Special Trust is to provide for the beneficiary’s care and maintenance when she/he is no longer able to do so, there are benefits to this structure:

  • The donation of assets to the trust will not attract donations tax.
  • The creation of the Trust will allow for family members or trusted professionals to be appointed as Trustees and continue to manage the finances of the family member diagnosed with Dementia.
  • The Special Trust has a lower tax rate than ‘normal’ Trusts, which are taxed at 45%. A Special Trust is taxed on a sliding scale in the same way as Natural Persons.
  • This can potentially be a good estate planning tool. Other beneficiaries may be added to the Trust as a separate class of beneficiary. This will not affect the Special Trust status provided their discretionary rights only kick in after the death of the family member with Dementia. When the individual dies, the trust will lose its Special Trust status but the structure of the trust for preservation of assets is maintained.

Conclusion

This is a complex area of law, and as such, correct implementation will have a significant impact on the success or failure of the structure. It is therefore important that you choose to work with an Estate Planner who has the necessary skill set to provide accurate advice.

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