Diminished mental capacity: What happens to an individual’s investments?

What happens to my investments should I be declared to have diminished mental capacity?

It’s a daunting thought, isn’t it? One of the go-to solutions is likely that a power of attorney is granted to a friend/family member or independent financial adviser. Many people tend to think that this action should enable those chosen to manage his/her finance affairs which may include their investment portfolio. However, this can be viewed as an error in judgement because a power of attorney cannot be granted if the grantor is suffering from a mental impairment.

Under South African law of agency, it states that a power of attorney ceases to be valid when the grantor is mentally incapacitated.

So, what options does an does investor have if they suffer from diminished mental capacity?

There are two processes that the person’s family or independent financial adviser can follow. An application can be submitted

• to the High Court for the appointment of a curator;
• or to the Master of the High Court for an administrator to be selected to oversee the incapacitated person’s financial affairs.

Curatorship

According to common law and the Administration of Estates Act of 1965, an application of curator (usually a family member) can be made to the High Court. It should be noted that this may not be a simple process; instead, it is generally burdensome and expensive for the applicant. There are specific documents that need to accompany the application:

• A complete affidavit, setting out the details of the incapacitated person’s mental impairment and financial circumstances.
• In addition, the affidavit should be supported by two medical reports (one from a general practitioner and the other usually by a neurologist or psychiatrist.

Firstly, the court typically appoints a temporary curator, which is usually an advocate, (known as curator ad litem). It’s his/her job to evaluate whether the individual may indeed be incapacitated and can’t manage his/her own financial affairs. Should this be the case, a permanent curator (known as a curator bonis) can be appointed. A curator’s duties are generally time-consuming and cumbersome; there can be many legal documents required. It’s in this light that the curator is usually an admitted attorney.

Administratorship

The Mental Health Care Act of 2002 addressed certain challenges presented by curatorship. The Act outlines that a person (usually a loved one) can apply to the Master of the High Court to be appointed as an administrator, allowing them to manage the financial affairs of the individual suffering from diminished capacity. It’s a quicker and less expensive process.

A Trust

It may be worth considering creating a trust in which investments can be placed before diminished mental capacity. This way, the individual can nominate trustees and decide how investments (such as property; unit trusts and other savings vehicles) may be distributed to nominated beneficiaries.

However, trusts are generally known to be complex structures and can lead to complex tax issues. Should you need clarification about the tax implications associated with a trust, it’s suggested that you speak to an IFA to establish how the trust can be structured optimally.