Financial planning for dementia
One of the most debilitating is dementia - a term used to describe a suite of diseases associated with a decline in cognitive ability. It’s a global problem, which is becoming increasingly significant as each generation lives longer than its predecessor. A recent meta-study reported that the global prevalence of dementia is between 5% and 7% in people aged 60 to 85. From 85 and older, up to 50% of people display symptoms.
Despite the high probability that many of us will lose our mental capacity in old age, few of us plan for it.
Power of attorney falls away
Many people mistakenly believe that they do not have to worry about how their finances will be managed should their cognitive ability decline, since they’ve signed a power of attorney to grant a colleague, friend or family member the authority to manage their financial affairs.
Nothing could be further from the truth. A general power of attorney is valid only if you’re of sound mind and have contractual capacity. If you’re in a hospital with kidney disease, for example, and you want to sell your house, that’s fine - you’re still mentally able to make such a decision, so your authorised person may do so on your instruction.
If you’re diagnosed with a degenerative brain disease, however, the power of attorney will immediately lapse.
What are your options?
If you plan to live a long life, you can’t not plan for the possibility of dementia. Anyone over the age of 80 is likely to lose at least some cognitive ability. Most medical schemes don’t regard treatment for dementia as a prescribed benefit, so the cost of care will fall to you. Full-time care, which is often needed in the later stages of dementia, can amount to more than R30 000 a month. Although it’s essential to include equity in your retirement portfolio to ensure growth beyond inflation, it’s also essential that your portfolio includes a sizable medical emergency fund comprised of low-risk liquid investments, such as a money market fund.
Also, discuss the use up a special trust with your Certified Financial Planner for the management of your estate if you lose brain function. A special trust is the same as a normal trust in that it’s created by a founder (you) for your benefit under certain circumstances (if you are diagnosed with dementia, in this case). Where it differs from a normal trust in its tax advantages. In essence, a special trust is taxed as a “natural person”, not as a trust, and the tax rates are therefore lower.
You will need to appoint a trustee, or trustees, to administer the special trust. For a person with dementia, the ideal combination would be a family member, and a qualified financial planner who is close to the family.
If you plan to provide for a person with dementia, like your spouse, your will can include instructions for the formation of a special trust when you pass away. The funds will pass directly from your estate into the trust, and the trust deed will be preserved within the will.
Curator or administrator?
If you haven’t discussed the use of a special trust and you’re diagnosed with a degenerative brain disease, a family member will need to apply to the High Court for the appointment of a curator to manage your affairs. This can cost up to R60 000, and it’s a lengthy process.
Alternatively, a family member can apply for an administrator to be appointed to manage your estate. This process costs much less - only about R5 000 - but the problem here is that there’s no control over who will be selected as the administrator
Future legal changes
One would hope that because of the increased prevalence of dementia and the exorbitant cost of care, the Medical Health Act will be amended to offer prescribed medical benefits for the illness, and medical schemes will have to pay for care. This is probably wishful thinking, however, since it would put further pressure on medical scheme rates.
In some countries, including the UK, Canada and Australia, you have the option of signing an enduring power of attorney, which remains valid if you become mentally incapacitated. Our Law Reform Commission tackled this issue in 2001, but since then no concrete steps have been taken to amend our law.
At the end of the day, it’s best to plan for the law as it currently stands. Good planning starts by eliminating risk, including the risk of future cognitive decline.
Stay mentally fit
Don’t ignore the statistics and think it won’t happen to you. Of course, it’s equally important to prevent the possible onset of dementia by looking after yourself. Mental fitness is equally as important as physical fitness. Neural pathways can become damaged as you age, but new pathways can also be established. Keep learning!
You’re never too old to challenge your brain.
Hardi Swart is director of Autus Private Clients and the 2019/20 Financial Planner of the Year.