Three ways to manage the finances of incapacitated parents

In most cases, a power of attorney falls away and is not legal if your parents start showing signs of mental incapacity.  Without an alternative plan, things could become problematic.

As difficult as it might be to have these discussions now, it is important that everyone discusses the three options available if parents’ are suddenly unable to manage their own finances.

1. Appointing a Curator Bonis

As the name suggests, this is quite a complicated legal process, which involves submitting medical reports, affidavits, proof of income and expenses to the High Court. It can be costly too as you will need an attorney.

Despite being complex, this is the only legal way to manage the financial affairs of someone who is already mentally incapacitated.

The process can take several months, so be prepared to foot any care costs for your parents with your own money before you are legally able to access their funds.

2. A special trust

Similar to a family trust, a special trust is there for the sole benefit of one or more persons with a disability – including mental impairment.

You should create this trust as early as possible, and your parents will need to donate assets into it over the next few years. It is good to get advice from a professional tax consultant or trustee specialist before you start this process. The benefit is that the trustees have a legal obligation to manage the trust for the benefit of the incapacitated individual(s). You do not have to be a trustee, if you do not want to.

The trust ceases being a trust when the last beneficiary dies, which means that even if your parents do not end up suffering with mental impairment, the assets in the trust will ultimately form part of their estate.

3. A family solution

Here, the families request a lump sum donation from their ageing parents (preferably no more than R100, 000 per tax year to avoid tax implications) and then manage this via a family agreement.

As this is not a legal option, there is no recourse available if the money is used for another purpose, and so it is open to abuse and should only be considered as a very last resort.

Try to enter open and honest discussions with those involved, and ensure that you absolutely trust those left with the responsibility of managing the funds. You should also think carefully about the possible consequences if the trust is abused. Also, remember to account for the funds via a specific clause in your will, to ensure the continued care of your parents.

Whatever you decide, make sure you have your parents’ consent (if they’re not yet incapacitated) and have discussed and agreed this at length with all the family. Most financial and inheritance disputes drag on and can end up in the courts as matters aren’t discussed openly.