Powers of Attorney in Trust and Estate Planning

The older client market is an ever-expanding area of rapid growth. General lifestyle changes and advances in science and medicine over the last 50 years mean that people are now living far longer. Indeed, recent figures from the National Office for Statistics predict that by 2035, 110,000 of us will be living to the age of 100 – that’s a seven-fold increase in the number of us living to the same age in 2013. However, the fact that people are living for longer does not necessarily mean that people will stay fit and healthy for longer. It’s well known, for example, that the incidence of dementia increases with age - and mental incapacity brings with it a whole host of issues.

Lasting Powers of Attorney (LPAs) therefore have an important role in the elderly client advice process as they provide a means of delegating property and financial matters to a third party when it’s becoming difficult – either physically, mentally or both – for the donor of the power to manage their own affairs independently. In addition, lasting powers of attorney, are not revoked by the mental incapacity of the person creating the power (the donor). LPAs were introduced in 2007 by the Mental Capacity Act 2005 and replaced the old system of Enduring Powers of Attorney (EPA) from that point. Enduring powers of attorney still exist (and pre-2007 EPAs can still be registered) but any new power will be a lasting power.

Why make a Lasting Power of Attorney?

The benefits of creating an LPA are probably fairly obvious – as this type of power (like its predecessor the EPA) lasts (or endures) notwithstanding the subsequent incapacity of the donor, the donor of an LPA can be assured that if he or she becomes either physically or mentally incapable of dealing with his or her own business affairs, precautions are in place. Provided the power has been registered, the attorney –who will have been hand-picked by the donor – will be able to step straight into the donor’s shoes for the purposes of:

• Paying bills and operating bank accounts
• Managing investments
• Buying or selling or property
• Making business decisions
• Entering into contracts – for example, to pay residential care home fees
• Claiming, receiving and using benefits, pensions and allowances

Where a health and welfare LPA is also in place, the donor can be further assured that a trusted person will be responsible for making decisions about where the donor should live, health care, medical treatment and other day-to-day issues once the donor has lost the mental capacity to make such decisions him or herself.

What happens where no LPA/EPA is in place?

Where an individual loses capacity to act for himself and no power of attorney is in place, an application will need to be made to the Court of Protection before any action can be taken or any decisions made. Under the Mental Capacity Act 2005 (MCA 2005) the Court of Protection has the power to make a one-off decision on behalf of any person who lacks mental capacity; however, where several decisions may need to be made over future years, the Court will usually need to appoint a Deputy to make these decisions on the vulnerable person’s behalf.

Applying to be a deputy can be onerous and elderly clients should always therefore be advised to create a power of attorney if none is already in place. The costs and administrative burden involved in creating and registering an LPA will be negligible compared to those involved with applying for a deputyship order. For example:

• The standard deputyship application fee is £408 however an additional £494 may be payable if the court decides that the case needs a hearing. There is also a one-off ‘deputy assessment’ fee of £100 payable to the Office of Public Guardian (OPG) on registration and an annual supervision fee of £320;
• The deputy is closely supervised by the OPG - annual returns will need to be submitted and the deputy may be asked to explain any large expense claims or items of expenditure. The deputy must also take out an annual ‘security bond’ to protect against any financial loss that may occur due to their handling of the vulnerable person’ finances.

Joint bank accounts

Many people are unaware that when one party to a joint bank account loses mental capacity, the other party may be restricted in operating the account and using the funds within it.  If the bank or building Society become aware that one account holder has lost mental capacity, the account may be frozen or restricted to essential transactions only. This is in accordance with guidance issued by the British Bankers Association in March 2013.

The reason for this (typically, unexpected) outcome is that a joint bank account operates on the premise that both parties give their consent to either account holder operating the account.  If one joint account holder loses mental capacity, then they lose their ability to give consent.  Legally this is a minefield and can put the bank or building society in a difficult position whereby they feel that they have little choice but to limit the transactions or to freeze the use of the account.  This applies even if the other account holder is the spouse or civil partner of the vulnerable person.

Of course, where an LPA is in place and has been registered soon after creation (or at least before mental capacity has been lost), this situation will be avoided.

What can’t an attorney do?

The primary duty of an attorney is to make decisions in the best interests of the donor. The attorney must keep their own money separate from the donor’s and must not take advantage of their position as attorney.  To this end, the ability of an attorney to use the donor’s money to directly or indirectly benefit themselves or others is closely regulated. In particular, the attorney will not be able to do any of the following without approval from the Court of Protection:

• exercise trustee functions of a donor other than where the trustee function relates to land (or the capital proceeds or income from land), in which the donor has a beneficial interest;
• make a Will on behalf of the donor;
• make gifts other than on “customary occasions” (such as birthday, Christmas, marriage etc) to persons (including himself) who are related to or connected with the donor; or to any charity to whom the donor made or might have been expected to make gifts. Even where gifts are allowed, the value of gift must not be “unreasonable” either in terms of itself or in terms of the size of the donor's estate”.
• carry out IHT planning on behalf of the donor (although it was suggested in the 2013 case of MJ and JM and the Public Guardian that gifts within the annual or small gifts exemption could be within the scope of the attorney’s authority in certain circumstances – see below);
• make interest-free loans to, for example, a loan plan arrangement or loans to the attorney or to members of the attorney’s family;
• make investments that could be considered not to be wholly in the donor’s best interests.

De minimis gifting

The Court of Protection accepts that there can be occasions where the attorney may wish to make a gift which is, strictly, outside their authority but in such a minor way that it doesn’t justify a Court application. These exceptions are often called ‘de minimis exceptions.

In the case of MJ and JM and the Public Guardian [2013] EWCOP 2966, Senior Judge Lush said the de minimis exceptions can be taken as covering the annual inheritance tax (IHT) exemption of £3,000 and the annual small gifts exemption of £250 per person, to up to a maximum of, say, ten people when:

1. the person has a life expectancy of less than five years;
2. their estate is worth more than the nil rate band for IHT purposes (currently £325,000);
3. the gifts are affordable, taking into account the person’s care costs, and won’t adversely affect their standard of care and quality of life; and
4. there is no evidence that the person would be opposed to gifts of this value being made on their behalf.

It is important to note that being able to gift small amounts up to the IHT exemption without the permission of the Court doesn’t mean that the attorney can carry out any form of IHT planning without the Court’s permission – in most cases, a Court of Protection application will still be necessary.

Investing in IHT-efficient investments

It may be thought that the restrictions on making lifetime gifts for IHT planning could be overcome by the attorney investing in investments that qualify for 100% business relief from IHT once they have been owned for two years. However, even here, the attorney’s actions may come under close scrutiny.

In Re PP:  BB v PP (by the Official Solicitor as litigation friend) [2015] EWCOP 93, a Court of Protection case which involved an investment in business relief investments made by the attorney or behalf of his elderly mother-in-law (who had an estate valued at approximately £1.3 million), the judge recognised that if the primary purpose of an investment is to save IHT after the donor’s death, then the benefit to the donor is unclear.

It was held that the attorney had not acted in the donor’s best interests in investing in the business relief investments and, further, that the attorney had a conflict of interest in determining what was in the donor’s best interests in terms of investment given that he and his family were likely to ultimately benefit from the estate.

Can IHT planning ever be in the best interests of the incapacitated person?

Given the restrictions on an attorney’s authority to make gifts or carry out IHT planning on behalf of the donor, where an individual lacks capacity and there is likely to be a substantial IHT liability on their death, the attorney will usually need to make an application to the Court of Protection for specific approval to implement any sort of IHT mitigation strategy.

 

Historically a key difficulty with such applications has been how to argue that a substantial gift, on behalf of a mentally incapacitated donor, can in any way be in their best interests if the primary motivation is to mitigate IHT on their death.  

However, the recent Court of Protection case of In the matter of JMA ([2018] EWCOP 19) demonstrates that these types of applications can succeed.  The application was for various gifts totalling £7m from an estate worth £18.6m – including one of £6m to himself!  The reason given for bringing the case was to reduce the burden of IHT on her estate for the benefit of JMA’s heirs as a whole – of which the applicant was the main one. 

The judge took into account a variety of factors including the terms of JMAs Will (which left her estate predominantly to the recipients of the proposed lifetime gift), the fact that following authorisation of the gifts, JMA would retain a substantial estate, sufficient for her to live comfortably for the rest of her life and the fact that both her financial adviser and the Official Solicitor agreed that authorisation of the gifts was in JMA’s best interests and would reduce her IHT liability by up to £3m. In dealing with the concept of best interests, the Judge adopted a ‘balancing exercise’ approach of weighing the factors in favour of and against making the gifts, concluding that taking all aspects into consideration she was satisfied the factors in favour of the gifts outweighed the factors against and the gifts were in the best interests of JMA.

Whilst this was an unusual case, it does demonstrate that bringing such applications before the CoP should not be dismissed simply because the tax savings will be enjoyed by others.

 

Continuing Powers of Attorney (CPAs) – the position in Scotland

In contrast with the English Law position, where the powers that can be granted to an attorney are subject to statutory limitation, a granter who makes a Continuing Power of Attorney (CPA) can specify exactly what powers the attorney is to have, without restriction. Often, there will be a general power that authorises the attorney to deal with all financial affairs, or there may be a list detailing the specific powers conferred.

Unless specifically authorised to do so, a Continuing attorney cannot make a Will for the granter and cannot make gifts to himself or herself or to anyone else. However, there is no outright prohibition on gift-making by the attorney, so if the granter wishes to give the attorney the power to make gifts (including to trusts) or to enter into tax planning arrangements on their behalf, they may include such authority in the power.

If an attorney in Scotland wishes to make a gift or do anything else that he or she is not expressly authorised to do so, they must make an application to the Public Guardian (the equivalent of the English Court of Protection).

 

Conclusions

Recommending an LPA is a vital part of the elderly client advice process; and making sure that there is an LPA in place may provide invaluable cost and administrative savings for the client’s family later on.

However, as we have seen the attorney’s powers are not without restriction and the LPA cannot be relied upon as a catch-all mechanism that can be used to implement any and every arrangement that the donor may have wanted to attend to before mental incapacity thwarted his plans.  The Court of Protection has the power to approve applications made by the attorney but there is no guarantee of approval if the proposed gift or arrangement is not considered by the Court to be in the donor’s ‘best interests’.

The LPA should therefore not be thought of as a substitute for timely planning but of an additional tool that can make life easier for the client and their family in the event that mental incapacity strikes.