Moneyweb ~ Eric Jordaan
As improvements in medical science and technology allow us to live longer, incapacity – both physical and mental – is becoming a growing local and global problem. Contrary to popular misconception, dementia is not a normal part of ageing, but rather a degenerative brain disease – with age being the single biggest risk factor for developing the illness. Simply put, the longer you live the more likely you are to get the disease. Unfortunately, legislation and policy have not kept pace with the growing need for the affairs of those with diminished mental capacity to be looked after.
Although the World Health Organisation recognises dementia as a public health priority that is on the increase with no foreseeable cure, South Africa has massive strides to take in providing adequately for the health, legal and financial needs of those who suffer from the disease. Whereas countries such as Canada, Australia and France have dementia policies in place, no such policy exists in this country. In fact, dementia is not listed as a prescribed minimum benefit and the Department of Health does not recognise it as a chronic disease. Most open medical schemes do not recognise the illness as a chronic condition and very little cover is provided for the illness, if any.
From a global perspective, it is believed that around 50 million people have dementia and that there are 10 million new cases diagnosed each year. According to South Africa’s 2011 census, there were 2.2 million people living with dementia at that stage, and this number would have increased with global trends. While the majority of dementia cases are caused by Alzheimer’s disease, other causes can include vascular disease, brain injury, cancer and HIV. Recent reports by Alzheimer’s Research UK reveal that 2 out of every 100 people between the ages 65 and 69 have dementia, whereas this number rises to 1 out of 5 people between the age of 85 and 89 – to the extent that 7.1% of people over the age of 65 have dementia.
Because the pre-clinical period for dementia may start up to fifteen years before actual diagnosis, it is believed that three-quarters of people living with dementia have not yet been diagnosed – making the extent of the problem far larger than statistics attest to. It also means that important financial decisions are in all likelihood being made by people who are already unknowingly impaired by dementia – making them even more vulnerable to scams and fraudsters.
Alzheimer’s Research UK has also found that 39% of people under 60 years of age have said that Alzheimer’s is the disease they worry about the most – even more so than cancer – and it is by far the most feared disease for people over the age of 60. Despite the alarming statistics, very few South Africans are building the risk of dementia or diminished mental capacity into their retirement plans, with often heart-breaking consequences.
Inadequate legislation and policy
Although our law makes provision for a general power of attorney which grants an agent the power to act on behalf of a principal, this form of power of attorney falls away when the principal becomes mentally incapacitated. This is because a general power of attorney is only valid as long as the principal is competent to act for himself and has contractual capacity. If the principal becomes incapable of acting on his own behalf, such as in the case of dementia, the power of attorney automatically lapses, and the agent loses all authority. In the case of an elderly parent who is diagnosed with dementia, this leaves them in a legally and financially precarious position.
What are the options?
There are a number of options available to assist loved ones who suffer from diminished mental capacity, although none of them are ideal. Three courses of action that can be considered to help manage the affairs of a loved one include curatorship, administration and the setting up of a special trust, although they are all onerous, time-consuming and potentially expensive solutions.
Previously the only option available in cases of incapacity, the appointment by the high court of a curator bonis (or legal representative) to manage the estate is a particularly expensive and clumsy process. As it requires an application to the high court, costs include those of an attorney, advocate and two medical professionals, one of whom must be a psychiatrist. Once the curator bonis has been appointed, he is responsible for submitting annual statements to the Master and ensuring that all transactions are transparent. The reality, however, that the appointment of a curator bonis can cost anywhere between R40 000 and R60 000 and is really only accessible to those with a high net worth.
A more affordable and slightly less cumbersome option is to apply to the Master of the High Court for an administrator to be appointed to the estate – a process which costs around R5 000. Such an appointment can only be made in terms of the Mental Health Care Act (2002) in instances where a person is suffering from a mental illness or profound intellectual disability and is therefore not available to those with physical disability or ailments.
A special trust with an elderly relative as the primary beneficiary is another option, although the trust would need to be set up before the person becomes mentally incapacitated – making it a process which requires some forward-planning. A special trust is created in the usual manner between a founder and a trustee where the assets are transferred into the trust. The trustee is then mandated to administer the trust solely for the benefit of the person who is mentally incapacitated.
By far a more suitable mechanism for looking after the affairs of a loved one who is mentally incapacitated is what is referred to as an enduring power of attorney. This form of agency is used in the United Kingdom, Australia and Canada as well as in some US states. In essence, an enduring power of attorney remains valid when the principal becomes mentally incapacitated or comes into effect when a person’s mental capacity becomes diminished. Although our Law Reform Commission tackled this issue in 2001 no concrete steps have been taken to amend our law. As our law currently stands, it remains very difficult for our financial institutions to manage the retirement savings and financial affairs of those who are mentally incapacitated, leaving the elderly exposed to potential financial abuse and exploitation.
Financial planning for dementia or diminished mental capacity
Mental incapacity is not limited to dementia and Alzheimer’s disease. Strokes, cancers, Parkinson’s disease, tumours and other chronic illnesses can result in mental incapacity, and this is something that must be planned for. Although medical science and technology are keeping us alive for longer, many of us are living with illnesses that affect our minds and subsequently our ability make sound financial decisions. With the likelihood of mental incapacity at some point during our retirement years, it makes sense to put plans in place to manage this eventuality, preferably sooner rather than later.
There are a number of areas that should be considered when planning for future mental incapacity:
As part of your financial planning journey, our advice is not to underestimate your longevity. When it comes to financial planning, start as early as you possibly can and plan for a life expectancy of age 100. Take into consideration that healthcare costs increase annually at a rate of inflation plus 4%, and that this growth assumption should be built into your plan financial. It is also important to bear in mind that women tend to spend around 7% more on healthcare expenses in retirement as a result of the fact that they live longer than men. These assumptions are the very least that should be built into your financial plan, bearing in mind the exorbitant costs of frail care, assisted living and private nursing. 24-hour home care costs around R30 000 per month whereas a frail care facility in a retirement home will cost around R25 000 per month, with these costs being over-and-above medical aid benefits. Living comfortably in the present while also investing enough for a comfortable, future retirement is a fine balancing act, but it can be done. Review your financial plan at least annually, taking into account any changes in your health status.
There are a number of tools in the estate planning arsenal which can be used to help craft your desired legacy. The first of these is to ensure that your beneficiary nominations, particularly in the case of your retirement funds, are correct and express your wishes accurately. In South Africa, retirement funds – including living annuities – do not form part of your deceased estate which means that on your death the capital is transferred directly to your beneficiaries without attracting estate duty or executor’s fees. However, if you have not nominated beneficiaries, the proceeds will form part of your estate and, in such a case, executor’s fees may be charged. Another advantage of nominating your beneficiaries is that they do not have to wait for your estate to be wound up to receive the capital.
Your will is an important legal document and is something that should be drafted by an expert. It is important to bear in mind that a will which is drafted by a person not of sound mind or with diminished mental capacity is not valid, and it is therefore advisable to be proactive about drafting your will and keeping it updated while you are still of sound mind.
Prior to the onset of dementia or any form of mental incapacity, you may wish to consult with your financial advisor about the advantages and disadvantages of setting up a special trust, bearing in mind that each person’s situation is unique and a trust may not be appropriate to your circumstances. There are tax implications when setting up trusts and these need to be fully understood beforehand.
With escalating medical aid premiums and healthcare inflation constantly outstripping CPI, remaining on a comprehensive medical aid option as you get older might not be financially possible, albeit highly advisable. In addition to a comprehensive medical aid, we strongly recommend that you take out gap cover insurance which funds the shortfall between what is paid by the medical aid and what is charged by service providers for in-hospital care. While medical aid and gap cover remaining the fundamentals of post-retirement healthcare planning, the big cost-drivers are actually frail care, private nursing and assisted living facilities. If these costs haven’t been budgeted for in the pre-retirement financial planning process, funding the cost of 24-hour care in retirement can be insurmountable. We therefore cannot stress enough the importance of starting your financial journey early on in life and ensuring that the underlying assumptions used when modelling your retirement plan are realistic.
Should you become diagnosed with an illness that will have impact on your future mental capacity, our advice is to involve your partner and/or family in the decision-making process while you are still of sound mind – with honest communication and transparency being integral to the process. A living will is a declaration of your non-consent to artificial life support in the event that you are unable to communicate, and is applicable in circumstances where there is no chance of your recovery. Although not legally enforceable, it is a helpful guide for your doctors and family members as to your last wishes. A letter of wishes is another useful document which can be used to notate more personal end-of-life wishes such as the dispersal of personal belongings, funeral arrangements and decisions regarding your pets. Organ and bone marrow donations, too, should be communicated with your loved ones so that they are fully aware of your wishes.
Advances in science and medicine can result in our bodies outperforming our minds, especially as we age. Although not foolproof, there are mechanisms we can employ while we are mentally sound to relieve the future financial, legal and emotional burdens associated with diseases like dementia.