The Effects of Diminishing Capacity.
What is diminished capacity, and how can it impact a family trust?
Here's a scenario to help explain...
Jenny, Dan and Tania’s father had died five years ago. Their mother, Iris, was now in her late 70’s and while she was physically well, they had really started to notice her mental capacity starting to decrease. Iris and her late husband had owned their home and investment portfolio in a trust they had set up in the 1990s.
They also had an investment property they had purchased in their own names which had been passed to Iris by way of survivorship when her husband died. Iris’ daughters could see their mother slipping and thought now was the time for her to move into a retirement village. Iris was fine with that decision, although her son, Dan, was reluctant. After many weeks of looking around various villages with her daughters, Iris paid a deposit on a unit in a village that was in the community that Iris had been living in for many years. They booked an appointment to see Iris’ lawyer.
Iris’ lawyer explained how the occupation license worked and that it was something that the trust couldn’t purchase. It had to be purchased in Iris’ name. The lawyer explained that the trust could lend the money to Iris for the purchase but that she would need the consent of the trustees of the trust to do that. The trustees of the trust were Iris and Dan, who had been appointed as a trustee after the death of his father. At that point, the girls were concerned. Dan hadn’t been keen for Iris to go into a retirement village because of the costs over time. He thought she was well enough to continue in her own home. He was very keen to preserve all trust assets for the next generation.
The lawyer also mentioned Iris’ diminishing capacity. She explained that under the new trust laws, people could not be trustees once they no longer had mental capacity.
As Iris’ trust deed was an old one, if she lost capacity, then Dan would be the remaining trustee with the power to appoint new trustees. Because of the way the trusts had been set up and decisions made as to who would be trustees of the trust after their father died, Jenny and Tania now had absolutely no say in how they could help their mother move into care that was more appropriate for her current needs.
The lawyer then talked about enduring powers of attorney and how important they were at all stages of life. Iris had fortunately put those in place years ago. Jenny and Dan were jointly attorney for property and Tania was attorney for personal care and welfare. Jenny then became concerned that she may not be able to work with Dan given his position in relation to the trust and his mother’s care going forward.
Iris and her husband had appointed Dan to come on as a trustee when Iris’ husband had died, but perhaps had not appreciated the different view Dan might hold to his sisters. They had done everything right with having powers of attorney in place as well, but there may have been no thought given as to how that might impact the trust.
This scenario highlights the need to understand all the aspects of your asset planning. Sometimes the decisions you make around your powers of attorney will have an impact on who has the power to say who the trustees of your trust are if you lose capacity. In some trusts, that has no impact at all. In other cases, if you die, then the make up of the trustees may be different again. It is so important to take specialist advice to ensure that all facets work well together.
Diminishing capacity is becoming more of a talking point with an aging population. It is so important to continually review your affairs to ensure that you have a plan which works cohesively with all family members in all events – whether you are alive and functioning, alive with diminished capacity or deceased.
If you feel you could use some specialist advice, don’t hesitate to contact the Trusts & Wealth Protection Team.
