I recently attended a conference on Superannuation in Melbourne and I noted that one of the topics getting more and more attention is how to manage for loss of capacity.
We often throw terms such as “capacity” about without really thinking them through. Capacity is actually a legal term; you may not have capacity for a number of reasons, for example you are a child, in a coma or, the one we discuss most often, the loss of cognitive ability with age.
Generally speaking we have more complex financial lives than we did one or two generations ago. Close to a million people in Australia are members of a Self-Managed Super Fund, a large proportion of the population has investment properties, family trusts and companies, and the number of blended families continues to increase. The inability to make prudent decisions about your financial affairs due to loss of capacity can create all sorts of problems for your family.
It is critical to consider putting an Enduring Power of Attorney (also called a Prescribed Power of Attorney in NSW) in place to empower someone else to look after your financial affairs if you can’t.
What is loss of Capacity?
From what the lawyers have told me, only a court can determine loss of capacity, and if we need a court to make this determination then we are in trouble. The way I read it is that nobody can speak or act for another, whether it is husband and wife, parent or sibling, unless that person is acting under a Power of Attorney. If something happens to you and you cannot act for yourself and there is no Power of Attorney in place, your options are limited. In this circumstance an application needs to be made to the Supreme Court or the Guardianship Tribunal for management of Financial Affairs. From my experience this is a long and slow process, that does not always obtain the outcome you applied for. An example would be a parent loses capacity and you apply for management of their financial matters. The court or tribunal may decide that you are not the appropriate person and appoint another relative or the NSW Trustee (read the government) may be appointed. Not what you or your family may want.
Choosing the right person
Some of the reasons that people avoid appointing an Attorney include: there may be nobody suitable or you don’t feel comfortable in choosing the person. Choosing the right person or persons is critical and below I have prepared a quick guide to the options and issues of practicality.
A common issue is that as we age our spouse ages as well, so there may be manifold issues of capacity. However your spouse is generally the first person chosen and is usually the most trusted person in your life.
If you have children sometimes only one child is chosen for the Attorney. This may be practical such as they live nearby, or have the ability to take on the task.
Often all children are given Attorney and this can be done in a number of ways, the two most common are all the children are given appoint jointly, meaning they all need to agree to everything, and the other common is jointly and severally which means each can act in their own right. I have seen both work and both fail. Having Attorneys jointly seems to work when all the children have the same needs and values and are close at hand. They seem to fail when the children differ and this can stymie any action. Having the children as Attorneys jointly and severally can work and fail in a similar manner.
This may include optioning a trustee company, a friend or key advisors such as lawyer and financial advisor to act jointly.
So what happens on a day to day basis if I lose capacity?
On a practical level if you lose capacity and nobody is acting with a Power of Attorney for you, nothing can occur. Your electricity bills can’t be paid, your bank accounts can’t be operated, you can’t cancel direct debits on your credit cards and you can’t sell or rent out your house if funds are needed for treatment. Any shares or superannuation can’t be sold or liquidated and you can’t sign off your tax return. Under this scenario the situation rapidly moves from a medical crisis to a financial crisis. Often other family members have to pay bills and hope they can recoup the funds in the future. In all the cases I have seen, it always becomes a crisis.
My rule of thumb is to be proactive and appoint a person or persons who can and will act in the best interests of you.
A few years ago I had a client who was very ill. I was contacted by his son who had a signed Power of Attorney. The son wanted to liquidate the assets of my client as he wanted to gain access to his father’s money to prop up a struggling business. Fortunately the client had previously given me a copy of the Power of Attorney and a briefing on his family dynamics. Following the approach by the son, I contacted my client’s daughter, met with the client, and did not liquidate the assets. If I had been uninformed of the client’s family circumstances and preferences, I would have been obliged to seek legal advice as to what to do, as I was concerned that the son was acting for his own benefit, not my client’s.
Important note if you are the director of the family trustee company
It is important to note that the Power of Attorney (PoA) can only be used for financial matters when you act for yourself only. This means that if you are the director of the family trustee company, someone with a PoA cannot act for you in this capacity, however, they may be able to act as a shareholder. In these circumstances we need to review the structure and deeds to determine an appropriate plan.
Here are some useful ideas if you are considering putting an Enduring Power of Attorney in place:
- Understand your financial position and what assets you own. If you are unsure or you are concerned about your spouse’s capability, then seek advice on options for managing your affairs going forward. Remember it is better to take control in advance than have a mess that is difficult to manage.
- Get to know your financial advisor, your spouses or your parent’s advisor, because if you have to step into the decision making role you will be better prepared.
- Make sure you have a financial inventory of what you own and owe, the names of the key contacts, and if required, have a mechanism to manage the myriad of passwords and usernames for online financial systems.
- Ensure you know where your legal documents are and that they meet your needs, including your Wills and Powers of Attorney, and review the current financial structure (that is, who owns what).
- Ensure your Financial Advisor knows what you want, has details of your family, and copies of all legal documents.
One common way to issue the Power of Attorney is to put it “out of harm’s way”, by holding the documents at a lawyer’s office. This means that in a crisis the Attorneys will need to visit the solicitor and will hopefully seek counsel before acting.
As with all documents you can restrict what the document can be used for, but always remember that the tighter you make it the harder it is for the Attorney to do their job if circumstances change.
If you would like to know more about putting an Enduring Power of Attorney in place, please feel free to call Rob MacLean on 02 9492 0444.