Tackling investment dementia head-on

PORTFOLIO POINT: Take steps now to organise your investments and structures so they can be looked after if you are incapacitated, especially later in life.

Included amongst the many ways dementia robs a person’s and family’s quality of life is the challenge it places on making financial decisions and managing investments.

Dementia is a progressive loss of capacity that affects one in 10 Australians aged 65, and one in three aged 85. There are now an estimated 300,000 suffering from this condition (click here), and this figure is expected to grow as our population ages. If you consider also that about one in four of Australia’s about 400,000 self-managed super funds (SMSF) are run by members over the age of 65 (with some of the oldest funds having been around for more than 30 years), you can appreciate that managing them will become a problem for some families.

Dealing with complexity is not just a problem for the rich. It is a problem too for the less wealthy, forced to deal with complex rules associated with Aged Care and Centrelink-administered benefits.

An anxious mix: age, wealth, complexity, family

A study of any rich list will confirm that the older you are the more chance the miracle of investment compounding will have grown your personal wealth – indeed the average age of BRW Rich List members is 65. Had you bought Commonwealth Bank shares at the float, bought several properties prior to the long boom, or simply ran a successful business for decades, time has likely been generous to you.

Unfortunately the older you become the more likely age-based degenerative conditions could hinder your ability to manage complexity – such as that associated with holding a diverse portfolio of shares, deposits spread around multiple banks, a property portfolio, or even just compliantly maintaining a self-managed super fund. Amongst many elderly couple investors, there is often one active money manager who worries that the other “would have no idea” how to manage investments without them.

This issue is complicated where elderly investors don’t wish to involve their children in their affairs. Sometimes this is because they don’t want to bother them. However, in a few cases some worry about “vulture children” circling over a future inheritance, wanting early access to funds, and fear that in doing so the children will lose the motivation to work or spend prudently. At the extreme, financial abuse is a form of elder abuse and senior rights organisations like in Victoria (click here) can help people who have concerns. 

Planning for incapacity is an unfortunate necessity for elderly and independent investors. As adult children notice symptoms of dementia on average three years before a diagnosis is made, they too can play a role in planning. An “Investment Succession Plan” should be created to deal with the possibility that you or a loved one becomes unable to manage your/their finances. It needs to cover both (1) legal control and (2) investment administration matters.

1. Legal control

To allow financial decisions to be made on your or someone’s behalf in the event of mental incapacity, an “Enduring Power of Attorney” can be appointed. Rather than give this power now, it can be awarded conditional on a doctor’s diagnosis of loss of capacity. Unfortunately it can’t be arranged when someone has already lost full capacity – then, with greater effort, you will need to get a court to appoint a representative. Also note a simpler more common “Power of Attorney” ceases when the person who gave that authority loses capacity.

When it comes to banking, a joint account can continue to be used by both capable and incapable parties – though this may or may not be appropriate and its use may require joint or either parties’ signature(s). Banks may agree to third party access to a bank account, but that can only be set up while the account owner has capacity.

Many wealthy individuals hold assets not just in their name but in a company or in a trust. There the rules about change of control and management of entity-owned investments will be described in the company constitution or trust deed – you might remember them as the documents you never read when setting them up.

In a self-managed super fund, by law all members must be trustees or directors of a trustee company and be mentally capable. If they are not, then a number of options will need to be explored including:

• Have the ill member resign as trustee or director and have their Enduring Attorney appointed to act in their place and continue to operate the SMSF (this, assuming the trust deed allows). If you have a corporate trustee, you might be able to have an alternate director act on that person’s behalf.
• Replace all the trustee(s) of the fund with a professional trustee, converting the fund to a slightly more expensive to administer “Small APRA Fund” or SAF.
• Withdraw out of super the incapacitated member’s funds if permissible and practical, roll them over to a large “Public Offer Fund” (if, and while, they will welcome them), or simply buy them a superannuation-funded annuity – then continue the fund for the remaining members.
• If running the SMSF for the remaining members becomes too burdensome, then consider these options for all members and wind up the SMSF.

Unfortunately, if nothing is done, the fund over time may become uncompliant and suffer penalties. You shouldn’t be surprised if I suggest you seek specialist legal advice and, while at it, make sure you also turn your attention to the ultimate contingency event – death.

2. Investment management

It is not surprising that the challenge of taking legal control of assets consumes a lot of the energy that should also be directed to changing how investments are managed. If you are taking over assets for another, or planning for that contingency, there are many things to consider:

• Reduce the number of investments and consolidate them into as few vehicles as possible.
• Have records about what investments are owned and when and for how much were they purchased. Perhaps those records should also include passwords to online accounts and they should extend beyond investments to include expenditure accounts, government and medical information.
• Introduce a more easily continued “core” [Put your portfolio into orbit] of diversified investments that actively traded speculative shares can later be redeemed into.
• Put “Warning” labels on assets that have substantial capital gains or were bought pre the introduction of capital gains tax and probably shouldn’t be sold. Give consideration also to tax on superannuation benefits paid to non-dependent children and whether that can be managed.
• Increase the proportion of liquid assets needed to fund health and aged care costs and any early transfers of wealth. Review the holdings of any illiquid investments and form a view for when they might be realised.
• In the event of prolonged investment indecision, ensure a portfolio has good inbuilt inflation protection, perhaps through inflation-linked bonds and annuities.
• Put in place a periodic “rebalancing” discipline to ensure gains in one investment or asset don’t grow out of proportion, and sensitise beneficiaries to future loss – note loyalty is not always rewarded in the sharemarket.
• Move the administration of assets to a custodial administration service that captures all cash flows and provides comprehensive reporting to assist with performance monitoring, tax accounting and full transparency for someone stepping in to help supervise those assets (for instance an attorney, executor or trustee).
• Ensure trusted advisors are known to all parties, not just the lead decision maker, and are remunerated on an appropriate basis. If you will need, and don’t have a trusted advisor, then you might need to start dating a few now.
• Conduct a tax and fee “audit” to ensure wealth is not being inappropriately leaked away over the long term to others. Similarly, ensure “lazy money” is not left unrewarded in low yielding bank accounts or old style insurance savings policies.
• To reduce burden and conflict, detail now the preferred investment and income management approach to be followed in future structures like testamentary and charitable trusts. 
• Consider writing a “Dear [partner]” letter detailing how you have managed the family’s investments and how you would suggest they be managed if you can’t.
• Review what is a prudent amount of capital needed to fund retirement and if you enjoy a substantial surplus, consider enjoying more of that now!

A reminder to the bullet-proof Generation Y investor

While the natural focus here is on the elderly, a loss of capacity can occur at any age, and thus consideration should also be given to ensure young people (read: all children above age 18) have sufficient disablement and related illness insurances. Ideally insurance should fund superannuation pensions (and also testamentary trusts in case of death) to reduce the tax burden on beneficiaries. There are no insurance agents with steel toed boots left to remind young people of the need for insurance, and too many people suffer financial hardships through inadequate protection.

This is a sensitive subject and I’m sorry for raising these difficult issues. If it helps to start an even more difficult and important conversation, send this article to your parents or children with my apologies to them also.

Dr Douglas Turek is principal advisor of family wealth advisory firm Professional Wealth (www.professionalwealth.com.au) and a member of The Society of Trusts and Estates Practitioners.