It can be tricky discussing finances with your ageing parents, but it’s vitally important to have some sort of plan in place in the event of their becoming incapacitated and unable to manage their own affairs.
Most people think that having power of attorney on your parents’ accounts is sufficient, but this unfortunately falls away and is not legal if the affected individual becomes incapacitated. This means that you can manage your mom’s affairs while she is mentally capable but physically frail. However, at the point where she starts showing signs of loss of mental capacity, the power of attorney lines are blurred, and things could start becoming problematic.
There are only two legally sound options for families to deal with this situation, one of which would need to be set in place prior to any signs of mental impairment. A third option exists but is open to abuse.
Appointing a curator bonis
As complicated as the name may sound, the legal process is even more so! And, unfortunately, costly too. The process has to be completed with the assistance of an attorney and will involve medical reports, affidavits, proof of income and expenses, and will end up in the High Court.
The process is complex but is unfortunately the only legal way to proceed should you need to manage the financial affairs of someone who is already mentally incapacitated.
In this scenario there may be several months during which you would need to care for your parents with your own money before being able to access their funds.
A special trust
Another option, which would need to be in place as early as possible, is a special trust. Although similar to a family trust, a special trust is created for the sole benefit of one or more persons with a disability – including mental impairment.
If you created such a trust now in anticipation for its necessity, your parents would need to donate assets to the trust over the next few years (in consultation with a professional trustee and tax consultant). One benefit is obviously that the trustees have a legal obligation to manage the trust for the benefit of the incapacitated individual(s), so there is no need for you to be a trustee.
The trust will cease to be a trust on the final demise of the beneficiaries so, even if your parents do not end up suffering with mental impairment, the assets in the trust will ultimately form part of their estate or be distributed in accordance with the trust deed.
A family solution
Another solution, which is not recommended as it is open to abuse, is for the families to manage the finances themselves by requesting a lump sum donation from their ageing parents, and then managing this via a family agreement. In order to avoid taxation of the donations, they would need to be limited to R100,000 per tax year.
It is important to note that there is no legal backing should the money be used for any purpose other than the intended one, and your parents could be left high and dry.
Open and honest discussion is key to this solution working, as well as absolute trust in the family members left with the responsibility of managing the funds. If you plan to go this route, or are already in such a situation, be sure to think carefully about the possible consequences should the trust be abused.
Also remember to account for the funds via a specific clause in your will to ensure the continued care of your parents.