Consider a trust as planning tool in case of Dementia

An ageing worldwide population carries a high risk of dementia, a condition that is so far neither preventable nor curable. An estimated 35.6 million people – differently put 0.5% of the global population – are affected. Alzheimer’s disease (a condition that affects the brain) is the most common form of dementia, a general term for memory loss and other intellectual abilities serious enough to interfere with daily life. It is named after Dr Alois Alzheimer, who first described the condition in 1906. It accounts for 50% to 80% of dementia cases. It is a progressive disease – the symptoms are mild at first and become more severe over time. In the case of very serious forms of mental illness, a person may not be able to look after their own affairs any longer.

In the event that a person becomes mentally disabled a trust can be used to avoid the need to place a person under curatorship. A board of trustees, selected by the person, can then look after the financial affairs of that person. From a tax perspective, the Income Tax Act makes provision for the creation of a special trust, where the trust is created for the benefit of a person who cannot take care of their own affairs due to a disability, such as a serious mental illness. A special trust established during the life of a person is one created for the benefit of one or more persons with a disability as defined in Section 6B of the Income Tax Act – this includes a moderate to severe limitation of any person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment that has lasted or has a prognosis of more than a year. It is required that the disability must be diagnosed by a duly registered medical practitioner. Alzheimer’s Disease and simple senile dementia fall within this definition.

On 28 June 2018 the South African Revenue Service (Sars) issued a binding private ruling (BPR 306) in which the applicant, a person in the early stages of dementia, but still lucid and with the capacity to contract, distributed part of her estate to a special trust she had established for her care and maintenance. 

With a BPR, Sars provides an advance tax ruling on a transaction that is still to be concluded in the future. The purpose of this system (and the BPR) is to promote clarity, consistency and certainty regarding the interpretation or application of one of the tax acts administered by Sars, such as the Income Tax Act. It is important to note that a BPR may not be cited in any proceeding before Sars or the Courts, other than a proceeding involving the taxpayer applicant. The BPR does, however, provide more clarity on how Sars is likely to interpret any particular provision of a tax act. The specific facts present on the BPR provided must be considered if one wishes to be guided by its application since the BPR is based on a specific set of facts that may influence the outcome of Sars’s view.

The lady created a discretionary trust with herself as the primary beneficiary with other beneficiaries listed as secondary beneficiaries – the founder was to benefit alone from the trust until her death. The purpose of the trust was to provide for the applicant’s care and maintenance when she was no longer able to do so. The fact that there were other beneficiaries did not affect the trust’s status as a special trust, because their discretionary right would come into operation only on the death of the applicant. 

In addition to the trust serving as a vehicle to look after her during her lifetime, it also serves an estate planning purpose as one may establish a special trust that continues seamlessly for the benefit of the remaining beneficiaries without the need to terminate the trust and create a new one for those beneficiaries – this is achieved by establishing two classes of beneficiaries and only the disabled person having rights until that beneficiary’s death.

Sars ruled that the move of her assets to the trust was not a donation as contemplated in Sections 54 and 55 of the Income Tax Act. If you have created a trust during your lifetime and become afflicted by one of these dreadful conditions, your financial affairs would continue as before, with persons that you entrusted as trustees of the trust. If you do not yet have a trust set up by the time you become mentally disable, you should do so at an early stage whilst you are still lucid and have the capacity to contract. A special trust is not a viable solution for persons already suffering from mental incapacity but may be useful as a remedy in anticipation of incapacity. The appointment of trustees should also be carefully considered in anticipation of these circumstances.