Answer: This is an issue that is becoming increasingly common. We are living longer, so it is natural that there will be a greater likelihood that members of our family will develop issues with their mental capacity.
I had a situation where a retired family member of one of my clients went on a spending spree and used up a significant portion of his savings. He was later diagnosed with dementia, but the damage had been done and they suffered financially.
This is a difficult and sensitive issue. No one wants someone looking over their shoulder and judging their actions. On the other hand, you have a finite amount of money when you retire, and an irresponsible spending spree or risky investment can have long-lasting consequences.
It is important to put structures in place to protect your finances should you be in a situation where you are no longer as strong, mentally, as you used to be. One of the best ways is to get your financial affairs in order and then to have your plans documented.
Draw up a detailed financial plan
I like to draw up a full financial plan for my clients that details all their investments and what they would be used for. It is important that both you and your spouse understand what is going on with your finances.
Call a family meeting
If you’re comfortable, call a family meeting with your children and have your financial planner present. At the meeting, you can discuss your financial plan as well as your life file, which documents where everything is. You can also discuss the rules of engagement that would apply should you or your spouse develop a fall-off in mental capacity.
If you have a living annuity, you have to make a decision every year regarding what drawdown you’re going to take. This can be anything between 2.5% and 17.5%. If your drawdown is too high, there is a real chance of you running out of money. It may be an idea to document the future drawdowns that you intend making when you take out the living annuity. This can at least serve as a warning sign should there be a major variance from what you originally planned.
Another option is to convert your living annuity into a life annuity. Here the income is guaranteed and this type of decision will not be an issue.
I like to have individual wills for my clients. One of the challenges that I come across with joint wills is that when the first person dies and there are any mental issues with the surviving spouse, it can cause unnecessary complications, such as the one mentioned in your question.
So, to deal with your question. A power of attorney is only valid as long as the person providing the power is competent to act for himself or herself and has contractual capacity. When this person becomes incapable of acting on their own behalf, the power of attorney automatically lapses and the person to whom power of attorney was given loses all authority. You therefore cannot use a power of attorney to draw up a will.
There is a possible solution, though. Wills have a requirement in the Wills Act that the testator must be competent, and that person should understand the implications of the action. It is therefore going to depend on the degree of the dementia. If the level of dementia is not high, then a will can be signed.
I do not have any personal experience here but have spoken to colleagues who have dealt with these situations. They recommend that, if there is any element of doubt, you should have a medical practitioner present to confirm that the testator understands what he or she is signing. This can go some way towards avoiding future disputes.
Dementia is, sadly, a reality that most of us will face in our families. It is important that we take active steps to put the right structures in place to ensure the future financial wellbeing of ourselves and our loved ones.