This article was first published in the first-quarter 2015 edition of Personal Finance magazine.

Handling the affairs of a person who is no longer capable of doing so because of old age, a stroke, head injury, mental illness or dementia presents problems, and a major one is that there are big gaps in the mechanisms for managing that person’s finances.

These shortcomings affect not only the sick or elderly and their families. “Every competent individual is to some degree vulnerable to the possibility of becoming incapable,” the South African Law Reform Commission (SALRC) points out in a discussion paper published in 2014 into what it calls “the outdated and inappropriate ways” in which the law deals with declining decision-making ability.

“There is definitely scope for improvement. The system has not kept pace with commercial and demographic realities,” says Nicholas Yeowart, the managing partner at RFJ Yeowart Attorneys in Cape Town and an attorney who works at the coalface of administering estates.

If a person needs someone to act on their behalf while they are temporarily unable to – they are out of the country or in hospital for an operation, for example – that person (the principal) can give power of attorney to an agent to act on their behalf (see “What is power of attorney?”, below). This is certainly convenient if you have an elderly parent who is able to handle his or her financial affairs but simply wishes to slow down and hand over responsibility to you. If you are properly authorised to execute power of attorney, you can transact on behalf of that person and you will be protected from liability.

But for power of attorney to be valid, the principal has to be competent to act for themself. As soon as the principal becomes incapable of acting on their own behalf, the power of attorney automatically lapses, which, the SALRC says, is “a major concern”.

“Frequently, care-givers are under the impression that the power granted by a person in their care will be effective until that person dies, even in cases where the person has severely diminished … capacity and is therefore incompetent in the eyes of the law. This is an unsatisfactory position, as care-givers acting in good faith are putting themselves at risk of performing unauthorised acts for which they could be held personally liable,” the SALRC says.

It is fraud to exercise a power of attorney that has lapsed, Yeowart says. “If you commit fraud, you could be held liable for any of the consequences.”

These consequences may include being sued by the family or a third party.

Margaret Meyer, a law lecturer at the Justice College, the training institution of the Department of Justice and Constitutional Development, says: “In the legal sense, and especially when referring to the decision-making capability of a person, capacity refers to someone’s mental ability to make rational decisions and to understand the consequences of their actions. If someone cannot fully understand or interpret the nature and all the consequences of his or her actions, they are considered to be without capacity.”

Meyer says that, in terms of our law, the onus for proving that a transaction is invalid because of incapacity normally rests on the party alleging it. Nonetheless, “it is imperative that someone be legally appointed to assist the person who has become incapable”. There are two legal procedures to do this. You can apply for the appointment of a curator or an administrator.

Appointing a curator

The system of curatorship was developed a century ago, Yeowart says, and, in his opinion, the system is foolproof if done properly.

The curator steps into the shoes of the patient and takes control of their assets (to provide income) and expenditure. Every item of expenditure must be supported by a voucher, and regulations spell out how to prepare the accounts.

The curator submits an annual statement to the Master of the High Court, and the accounts and vouchers are part of public record. This means curatorship is completely transparent, Yeowart says.

“Curatorship is a good system if properly applied, policed and maintained. But if it is not applied and policed properly, it can be abused,” he says.

However, he believes it is no longer appropriate for the modern world. Today’s realities are that legal ser-vices are expensive, and there is a need to cater for the poor and those with modest assets, as well as the wealthy. In addition, hundreds of people are put under curatorship every year, which is difficult for a system that needs to be carefully monitored by the Master’s office.

To have a curator appointed, common law allows you to approach the High Court in whose jurisdiction the person concerned lives or in which they own property. The procedure is prescribed in rule 57 of the Uniform Rules of Court. The application for the appointment of a curator bonis (typically referred to as the curator) will need to include recent reports from two doctors, one of them a psychiatrist (if it is practical), Meyer says.

The court will appoint a curator ad litem, who is usually an advocate, to investigate and report to the court and the Master. If the court is satisfied after input from the curator ad litem and the Master, the court will issue an order appointing a curator bonis. The appointee can begin to act as curator only when formally authorised to do so by the Master, in terms of the Administration of Estates Act.

The procedure itself is relatively expensive, and Meyer says the cost typically ranges between R40 000 and R60 000.

In addition, the curator is paid fees, which, Yeowart says, are:

* An annual fee of six percent on gross revenue accrued from, for example, dividends, pension, interest and rental; and

* A one-off fee of two percent of capital on the date the curatorship ends. (This happens on the death of the person or on an order releasing the person from curatorship.)

The system is outdated, because the curator is limited in the ways in which the assets can be invested, Yeowart says. Generally, the Master wants capital invested where it will be guaranteed, which means returns will be lower than if assets are invested in equities. If equity investments were in place before the curatorship, the curator can give a new mandate to a stockbroker, Yeowart says. But if the patient has no such investments, the Master will not allow the curator bonis to invest in equities unless the curator applies to court for permission.

People are living longer, but seldom does the mind keep up with the body to the very end of life, Yeowart says, and curators need to stretch income for many more years than they did in the past. “We are confronted with that problem regularly and frequently.”

Administrator

Having an administrator appointed is a low-cost or no-cost alternative to curatorship that was introduced in 2004, Yeowart says. “It is by no means perfect, but it is a huge step towards making curatorship accessible.”

You can apply to the Master of the High Court to appoint an administrator in terms of the Mental Health Care Act. The Act requires that the Master “causes an investigation to be conducted” if the person’s assets and/or annual income exceed prescribed amounts – currently, R200 000 in assets and/or annual income of R24 000. The cost of the investigation is borne by the estate of the person for whom an administrator is appointed.

Meyer says the cost of the investigation varies. The person appointed to investigate – it does not have to be an attorney or advocate, because the law refers only to “a suitable person” – will submit a quote for the cost, and the Master will negotiate the amount and then approve or reject it. She says the cost can start from about R2 500.

Although applying for administratorship is a far cheaper and more accessible process than applying for curatorship, Yeowart says administratorship is still too narrow.

“It has gone a long way to plugging a hole, but there are a lot more holes that need plugging.”

A major shortfall is that administration can be sought, in the words of the Mental Health Care Act, only for “a mentally ill person or a person with severe or profound intellectual disability”.

Meyer points out that those persons who cannot manage their own affairs because of a physical handicap, serious illness or old age without any form of dementia, which impairs their decision-making skills but falls outside the narrow definition of mental illness or intellectual disability of the Mental Health Care Act, will not be able to benefit from the administration procedure.

“The only route is a curatorship,” she says. “That is definitely a gap, especially for the poor.”

In addition, Meyer points out that both administration and curatorship are all-or-nothing procedures and neither “makes provision for fluctuating and temporary incapacity”.

Yeowart points out that administration, because of the terms of the Act, does not cater for people who are born with mental incapacity. It also does not have the scope to cater for a person who has a serious, debilitating problem with overspending and whose finances should be in the control of someone else, unless the overspending behaviour is part of a broader mental health issue, he says.

Not only do some people fall outside the ambit of the Mental Health Care Act, but there is no middle ground for both curatorship and administration, Yeowart says. In this middle ground fall what the SALRC calls the “grey areas” of temporary incapacity and fluctuating incapacity.

Another shortcoming of the current system is the problem posed by people with reduced capacity who do not have any family or friends to act for them. In that case, the problem is twofold: an individual needs someone to put him or her under curatorship or administration, and then he or she needs someone to care for his or her personal needs – for example, that his or her accommodation is clean, that he or she has food, that disputes are mediated.

“There are more and more people who are in that exact position,” Yeowart says.

The function of a curator is to take control of the assets, not control of the person, he says. This typically falls to a social worker if there is no family member or friend who can do it.

A court may appoint a curator-ad-personae to look after the personal needs of a person with incapacity, but Yeowart believes that this should be automatic when a curator is appointed. “If a person is incapable of managing their money they are probably incapable of managing other aspects of their life,” he says.

Some solutions

The SALRC makes some preliminary recommendations in its discussion paper. One of these is that “a multi-level system of substitute decision-making should be developed as an alternative to the current curatorship system”. Administration goes some way towards this.

But the commission envisages more nuance, recommending a “first tier” of day-to-day decision-making by family, carers and others on matters of personal welfare. It also puts forward the possibility of applying to the Master of the High Court for a “specific intervention order” when one-off decisions have to be made for incapacitated adults.

A solution to some of the problems outlined above is seen by many as the extension of the power of attorney beyond the point at which the principal becomes incompetent. This is called enduring power of attorney and has been adopted in a number of countries, including Australia and the US.

In its discussion paper, the SALRC proposes the introduction of enduring power of attorney, as well as conditional power of attorney (power that comes into effect only on the incapacity of the individual).

On enduring and conditional powers of attorney, the commission says: “It should be possible to grant a power in respect of property (that is, financial affairs) and personal welfare.”

It recommends that proper safeguards be built into the process to protect the interests of the principal and that restrictions should be placed on an agent’s authority.

The SALRC is developing a final report on incapacity in adults. Its discussion paper number 105, “Assisted decision-making: adults with impaired decision-making capacity”, can be found on its website at www.justice.gov.za/salrc/.

Faltering capacity “is a sensitive issue and a social issue, because it impacts on privacy and dignity”, Yeowart says. “It seems as if the focus of social welfare in general is on children. The elderly need more attention than they are getting.”

WHAT IS POWER OF ATTORNEY?

A competent adult (the principal) who grants power of attorney authorises another person (the agent) to act on their behalf.

General power of attorney allows the agent to transact – to open a bank account and manage immovable property, for example. But it is limited: it does not allow the agent to make a will or initiate divorce proceedings, among other things, on behalf of the principal.

Special power of attorney relates to a specific transaction, such as the purchase of a car, and falls away when the action is completed.

Both types of power of attorney can be withdrawn whenever the principal wants.

There is no prescribed document, form or procedure to formalise power of attorney, but it would be wise to have a document drawn up professionally, because the wording has to be quite specific, particularly for general power of attorney, Nicholas Yeowart, the managing partner at RFJ Yeowart Attorneys in Cape Town, says. (Although there is no prescribed document, Yeowart says that, in his experience, banks will not accept a power of attorney unless it is on their own stationery.)

There is nothing in South African law that says power of attorney has to be witnessed, he adds. But common practice is to have the document witnessed by two competent witnesses who are 14 years of age or older, or to have it witnessed by a commissioner of oaths.

Anyone can be appointed as an agent, as long as he or she is competent and is not a minor.

APPOINTING AN ADMINISTRATOR

Administrators, like curators, are governed by parts of the Administration of Estates Act. This means they are entitled to a fee of six percent on income from assets and of two percent of the value of the capital when administration is terminated.

In return, administrators have to meet high standards of transparency and accountability in handling financial matters. Among these, they must lodge annual accounts and supporting vouchers with the Master of the High Court.

The steps for applying for the appointment of an administrator are clearly set out in section 60 of the Mental Health Care Act.

The first step is to apply to the Master of the High Court, using form MHCA 39, which is a simple three-page document available from any Master’s office.

You, as the applicant, do not have to be the spouse or next of kin of the affected person.

Among the documents that must be included with the application are proof that you have informed the affected person of the application, and all certificates and reports related to the person’s mental health and ability to manage their finances.

The Act says the Master has 30 days from the date of submission to arrange for a suitably qualified person to investigate the application if the estate is worth more than R200 000 and/or the affected person’s income is more than R24 000 a year. The Master may appoint an interim administrator pending the outcome of the investigation. If the income or assets are less than these amounts and if the Master is satisfied that there are good grounds, the Master can appoint an administrator without conducting an investigation.

The investigation must be finalised within 60 days, although the Master has the discretion to extend this. The Master then has 14 days to either appoint an administrator or refuse to do so, or refer the matter to a High Court judge in chambers.

The total time, from submission to the Master’s decision, is three-and-a-half months if there are no deadline extensions.

If you are not happy with the Master’s decision, it can be appealed to a High Court judge in chambers. This process could take another three-and-a-half months.