Trustee, be mindful of your mental capacity

When transferring assets to a trust, tax savings is not the only consideration. It is also about a strategy to protect your assets, to create continuity and liquidity upon your death, as well as other considerations—such as a contingency plan should you develop a mental illness such as Alzheimer’s Disease or senile dementia. Registering a trust, in which you build wealth, acts as “insurance” should something go wrong with your mental health. 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. Therefore the appointment of trustees should be carefully considered in anticipation of these circumstances.
 
Another risk that an estate planner should mitigate against during his/her lifetime, is the risk that he/she may be removed as trustee of the trust he/she has created – either by the Master, if he/she has been declared by a competent court to be mentally ill or incapable of managing his/her own affairs, or if he/she is by virtue of the Mental Health Act 18 of 1973, detained as a patient in an institution or as a State patient (in terms of section 20(2)(d) of the Trust Property Control Act), or in terms of an express provision in terms of the trust deed. The automatic removal of a trustee in terms of the trust deed was confirmed in the Land and Agricultural Bank of South Africa v Parker case of 2005, when the person kept acting as trustee, even though the trust deed determined that the position of trustee would be automatically regarded as being vacated if a trustee’s personal estate was sequestrated. The Court held that his actions were invalid and that he had no authority to act on behalf of the trust. Therefore, with dreaded deceases such as Alzheimer’s Disease, people need to be mindful of stipulations in the trust deed which determine that someone would be automatically removed as trustee in the event that one becomes of unsound mind or incapable of managing one’s own affairs.
 
Some people cannot make legally binding decisions because of their diminished mental capacity. Diminished mental capacity may result from mental illness, intellectual disability, brain injury or disease, a stroke, dementia or incapacity related to ageing in general. Decision-making impairment affects mostly the mentally disabled and the elderly (such as Alzheimer’s Disease). In terms of our Common Law the general principle is that if a person is not able to fully understand or interpret all the consequences of his/her actions due to a mental illness, it is said that such person lacks capacity to perform a specific act and the act is therefore null and void. It makes no difference whether the person has not yet been declared mentally ill and a curator appointed to him/her, or that the other party to the transaction was unaware of the person’s mental condition (Molyneux v Natal Land & Colonization Co Ltd case of 1905). The ability to enter into legal transactions and to litigate independently is very closely related to a person’s mental condition. The parties must be able to understand the nature, purpose and consequences of their actions for a legal transaction to be valid.
 
It is however important to note that the mere fact that a person has been declared mentally ill and that a curator has been appointed to administer his/her estate does not mean that such person loses all capacity to act (Pienaar v Pienaar’s Curator case of 1930). Therefore, someone who has been placed under curatorship because of a mental illness and a subsequent inability to manage his/her own affairs, can enter into a valid legal transaction with its normal consequences if, at that particular moment, he/she was physically and mentally capable of doing so. Therefore, such person may make a will, enter into a contract, and litigate. However, the person who alleges that the person under curatorship had full capacity to enter into the legal transaction must prove that fact. If it is found that the person lacked the capacity to understand the nature or consequences of the transaction when he/she entered into it, he/she is not bound by it and it is not legally binding.
 
The United Nations Convention on the Rights of Persons with disabilities (CRPD) is a ground-breaking treaty, which promotes and protects the rights and dignity of persons with disability. South Africa signed and ratified the CRPD in 2007, and is obligated under this convention to fulfil its commitments in terms of its implementation and reporting. This treaty guarantees the right to enjoy legal capacity, including both the capacity to have rights and the capacity to act (to exercise rights and responsibilities and make decisions in everyday life). Although the law protects the right of people to make decisions, it may be questionable if a person, who cannot manage his/her own affairs due to a mental disease such as Alzheimer’s Disease, can manage the affairs of another in terms of Section 9(1) of the Trust Property Control Act, which requires a trustee to act with the necessary care, diligence and skill which can reasonably be expected of a person who manages the affairs of another. Therefore, even though people have this protection, they will still be at risk of removal as trustees in terms of the Trust Property Control Act.
 
What should you do?
1.     Include an automatic trustee removal clause in the trust deed to prevent a challenge of trustee decisions taken, should a trustee develop a mental illness. In stead of requiring a court to declare a person mentally ill or incapable of managing his/her own affairs,             rather stipulate in the trust deed that such a person has to be certified as such by a neurologist or psychiatrist to be removed as trustee.
2.     Choose your trustees well, who have to act in your interest, if you are a beneficiary of the trust and may no longer participate in trust decisions due to your removal as trustee.
3.     If you are also a beneficiary, it is recommended that proactive provision is made for your replacement, such as a trustee resolution appointing a person who you know will act in your best interest.