Tread carefully when investing for incapacitated ward

Peter Smith took over his dad's financial affairs at the beginning of 2010. He slowly worked through all of the things he needs to know to do the job for his father correctly.

His dad had a portfolio of investments. First, there was a RRIF valued at $260,000. Then there was a pool of non-registered investments, chiefly stocks in publicly traded companies such as Apple. The portfolio had an aggregate value of $400,000.

Peter's first thought was to hunker down and continue doing whatever dad had done. If dad had been investing in companies involved in emerging technologies, Peter would continue that. That is what dad would have done. It seemed to Peter that continuing the same investment pattern had to be right path to take.

He was wrong. The law in Manitoba, in common with laws across Canada, imposes special rules on people such as Peter while they handle the financial affairs for incapacitated friends and family. Peter was expected to abide by those rules.

In Manitoba, those special rules are imposed by the Trustee Act. In general, Peter was expected to invest his dad's money in a way that would obtain a reasonable rate of return, but avoid undue risk. Technology stocks are generally thought to be risky. An investment policy that focused on that type of stock would be offside the rules for that reason. More specifically, Peter was expected to invest his dad's money using "the judgment and care that a person of prudence, discretion and intelligence would exercise in administering the property of others." That normally means an investment policy balancing risk, rate of return, capital appreciation, inflation, liquidity, and regularity of income. He was also expected to consider the need for diversification, costs of commissions and fees, and the tax consequences of various investment decisions.

Peter quickly sold the risky tech stocks and reordered his father's portfolio.

Once Peter reordered the portfolio, he was expected to review it regularly, making sure it was onside with rules outlined above. He is a school teacher, not a stockbroker or financial adviser. The law placed demands on him far higher than he expected.

Peter had a choice. He could attempt to handle the investments himself, or could delegate it. The Trustee Act contains a provision allowing him to hire a financial adviser to assist him in developing an investment policy for his dad's money. So long as Peter chose the adviser carefully, he could meet the adviser from time to time to make sure the job was being done. Peter was off the hook for any losses. More importantly, he could stop worrying.

Generally, the RRIF falls under the same rules as other investments. At the same time, it is slightly different. It allows for the designation of a beneficiary. The beneficiary is the person who gets the RRIF at the death of the person who owns it, assuming it has not dwindled to "nil" before the owner dies. That difference creates a special rule of its own. Peter was expected to determine the identity of the designated beneficiary and then jealously guard that person's status as beneficiary. If dad designated Peter's sister, then she had to remain as beneficiary.

A beneficiary designation is like a will. It cannot be changed by an attorney acting under a general power of attorney, or by anyone else. Even if Peter had been appointed under a court order to handle his father's financial affairs, the rule would have been the same. No changes are permitted to wills or to beneficiary designations after the incapacitated person loses the capacity to make changes on their own.

While Peter and his dad are real, names and details have been changed.

If you are handling financial affairs for a friend or family member in Manitoba, then the rules above apply to you. Ultimately, you are accountable to the heirs of your incapacitated ward. The courts will hold you to account if you have done the job poorly.

John E. S. Poyser is a Winnipeg lawyer with the Wealth and Estate Law Group. Contact him at 947-6801 or jpoyser@inksterchristie.ca

Republished from the Winnipeg Free Press print edition December 21, 2011 B6