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Personal investing

Diminished mental capacity: What happens to a person's investments?

Investors are generally unaware of the consequences of impaired mental capacity, resulting from neurocognitive disorders such as Alzheimer’s disease, when it comes to managing their investments. Jaya Leibowitz explains.

A common mistake people make is thinking that granting a power of attorney to a loved one or a professional adviser will enable that person to manage investments on their behalf, should they lose the ability to manage their own affairs due to diminished mental capacity.

A power of attorney is a useful tool for people who are outside the country, too busy to manage their own investments or too frail or injured to physically sign documents. However, a power of attorney cannot be granted if a person is suffering from a mental impairment. This is because the South African law of agency dictates that a power of attorney ceases to be valid when the grantor becomes mentally incapacitated. Acting pursuant to an invalid power of attorney can amount to fraud.

So what does this mean for investors who lose their mental capacity?

Once it has been determined that a person lacks sufficient mental capacity to manage their own affairs, that person’s family or adviser can follow one of two processes: apply to the High Court to be appointed as curator, or apply to the Master of the High Court to be appointed as administrator of the incapacitated person’s affairs.

a person cannot dictate who should manage their affairs should their mental capacity become diminished or impaired


In terms of common law and the Administration of Estates Act of 1965, an application for the appointment of a curator may be made to the High Court by any interested party (usually a loved one). The process is lengthy and cumbersome and is usually undertaken at considerable expense to the applicant, who requires legal representation.

The application needs to be accompanied by a comprehensive affidavit, setting out the details of the incapacitated person’s mental impairment and financial circumstances. In addition, the affidavit has to be supported by two medical reports, one by a general practitioner and the other by a psychiatrist, psychologist or neurologist.

First, the court will appoint a curator ad litem (usually an advocate) on a temporary basis. The curator ad litem is appointed to confirm that the incapacitated person is indeed unable to manage their own affairs and that the appointment of a curator would be in their best interest. Once the court is satisfied, it will appoint a curator bonis to permanently manage that person’s affairs. However, before the curator may begin, the Master of the High Court must issue letters of curatorship, which provide the curator with the necessary powers and authority to manage the incapacitated person’s affairs.

The duties of the curator are cumbersome and particular. For example, a complete account, in a prescribed format, of the curator’s administration, supported by vouchers and receipts, together with a statement of all the property under the curator’s control, must be submitted to the Master annually. For this reason, the person appointed as the curator will often be an admitted attorney.

In terms of the Administration of Estates Act, curators are entitled to charge fees based on a prescribed tariff. Currently, curators are entitled to an annual fee amounting to 6% of the income collected on the incapacitated person’s behalf (for example, annuity income), as well as a fee amounting to 2% of the value of any capital assets that are distributed, delivered or paid by the curator.

a power of attorney cannot be granted if a person is suffering from a mental impairment


The Mental Health Care Act of 2002 sought to address some of the difficulties presented by curatorship. It entitles any interested person (usually a family member or loved one) to apply directly to the Master of the High Court to be appointed as an administrator to manage the affairs of a person with a “severe or profound intellectual disability” (which includes persons suffering from Alzheimer’s and other forms of dementia). This process is quicker and far less expensive than appointing a curator as there is no formal court application that requires legal representation.

The written application to the Master must be signed in front of a Commissioner of Oaths, and must include all medical certificates and/or reports relevant to the incapacitated person’s mental health status. If their property is valued at more than R200 000, or their annual income is more than R24 000, the Master will appoint an interim administrator and order an investigation into the merits of the application.

Another option is to create a trust in which investments may be placed prior to a person losing their mental capacity

The applicant or the incapacitated person’s estate will have to bear the costs of the investigation, which must be completed within a 60-day period. If the investigation provides a satisfactory outcome, the Master will issue an official notice of appointment to the administrator, following which the administrator will have all the powers necessary to manage the incapacitated person’s affairs.

A trust

Both of the above processes have obvious drawbacks. For one thing, a person cannot dictate who should manage their affairs should their mental capacity become diminished or impaired.

Another option is to create a trust in which investments may be placed prior to a person losing their mental capacity. This would allow such a person to select trustees and dictate, in a formal trust deed, how they must administer the investments. Trusts, however, can be complex structures and often lead to complicated tax implications. If this solution is considered, we recommend that an experienced financial adviser and/or attorney is consulted to establish whether this is the best option under the circumstances and, if so, to ensure that the trust is structured optimally.

Enduring power of attorney

Some countries, such as Australia and the US, have developed their laws to include an enduring power of attorney, which, as the name suggests, allows a person to grant a power of attorney that continues to be valid after the grantor can no longer manage their own affairs. 

Unfortunately, South African law is still lagging behind in this regard. As far back as 2004, the South African Law Reform Commission published a report recommending the passing of legislation to introduce the concept of an enduring power of attorney, which will hopefully address issues relating to persons with diminished mental capacity and provide a simpler process. Although a bill was drafted, it has not been published for comment due to delays caused by various complications.

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