Techzone

Looking after the financial affairs of someone who has lost capacity is an onerous responsibility. There's often uncertainty about how a donor’s funds may be used to benefit others, including the attorney themselves. It's perhaps no coincidence that court judgements against attorneys acting outside of their permitted powers more than doubled in 2018/19*.

However, new guidance is now available following a recent ruling** by the Court of Protection. This will give attorneys a little more scope to benefit others in some situations than previously thought. However, the overriding message for those wishing to undertake significant IHT planning, including gifts into trust, remains the same - do it before the donor (the person creating the power of attorney) loses mental capacity.

The role of the Court and OPG

The cases under scrutiny were referred to the Court of Protection (COP) by the Office of the Public Guardian (OPG). The OPG receive applications to register Lasting Powers of Attorney (LPA) from the public and have access to the Court, should they need help in determining the meaning and effectiveness of any words and statements included in the application, before they agree to register it or not.

Most of the cases under review on this occasion contained mandatory instructions to the attorney on how they should act. The Court ruled that these conflicted with the key principle of ‘acting in the best interests’ of the donor and an attorney should not be bound by such instructions, ruling that any mandatory instructions should be removed by the OPG. 

However, the Judge also commented on situations where an attorney could use the donor’s money to benefit others, without the need to obtain approval from the Court of Protection. These are considered below.

Power to make gifts

Attorneys have an overriding duty to always act in the best interest of the donor. The Mental Capacity act 2005 sets out the rules on what gifts attorneys are permitted to make. These are designed to protect the donor’s assets from being given away frivolously.

The attorney can only make gifts on customary occasions, such as birthdays and Christmas, or to charities the donor may have previously supported. The value of those gifts must be reasonable based upon the individual circumstances. So it may not be reasonable to make gifts even on these customary occasions if, as a result, the future financial needs of the donor may be compromised. It's also possible that the power may restrict these gifts further. But authority cannot be given to expand the scope of gifting.

This potentially scuppers any meaningful estate planning by making large gifts with the intention of reducing the value of the estate.

If the attorney wishes to make gifts outside of these powers, they can apply to the Court of Protection. But this adds both cost and delay, with no guarantee that the gifts will be approved.

Of course, if the donor still has capacity they can still make the gifts themselves and, wherever possible, should be supported to make their own decisions. If the donor has both a strong desire to make lifetime gifts and sufficient assets to do so, it makes sense to do this long before incapacity becomes an issue. And the use of trusts can help ease any concerns of giving family members too much at an early age.

Providing for others

There are occasions where an attorney can use the donor’s money to benefit others that are not regarded as ‘gifts’.  Prior to this recent ruling by the COP, these were principally to meet the ‘needs’ of a person the donor was obliged to provide for, such as a spouse or dependant.

But the ruling extends this a little further. Commenting on how this sits with the concept of acting in the ‘best interests’ of the donor, the Judge felt that attorneys should not be limited to ‘needs’, but may also consider the donor’s ‘past and present wishes and feelings, beliefs and values’. Broadly, they can do what the donor might reasonably have done themselves - but there must be some evidence for this.

Evidencing what the donor may have intended

Evidence may come in the form of past behaviour, or an expression of wishes that the donor has included in their power of attorney. For example, a parent may have provided financial help to the eldest of their two children to get on the housing ladder while in good health. An attorney acting for the parent after they've lost capacity may consider doing the same for the youngest child, provided they're confident it's what the parent would have wanted. They must be able to support their decision with evidence or an expression of wishes in the LPA to that effect.

Without this evidence, the attorney cannot assume that the parent (donor) would have done the same for the youngest child. For example, the relationship between the parent and youngest child may not have been as amicable. If they're unsure, they should apply to the Court of Protection for authority.        

When making any decisions, the attorney only has to take the evidence into account. They're not bound by it. Foremost in their thinking should be what's in the best interests of the donor, and not the interests of the recipient. If they try to justify a transaction solely on the basis that it may save the donor IHT, it's unlikely to be seen as being in the donor’s best interest. There should be another motive. Obviously, the size of the donor’s estate and any future costs of lifestyle and care will also influence decisions.

For the avoidance of doubt, if money is transferred to another individual and is not a ‘gift’ in terms of the Mental Capacity Act 2005, it will still be regarded as a transfer of value for IHT, unless covered by an exemption.      

Court of Protection ruling

The Court of Protection (England and Wales) was asked by the Office of the Public Guardian (OPG) to rule on 11 separate cases which all had similar circumstances. In each of these cases a lasting power of attorney had been submitted to the OPG for registration.

The donor in each case had included either specific instructions or preferences for the attorney to follow. These include wording such as:

• "If I am currently making payments towards either of my daughters' living expenses then my Attorneys must carry on with those payments which are currently made out of my excess income. If there is insufficient excess income these payments should come from capital."
• My attorney must ensure that any children (when over 18) are financially supported with my finances in any educational aspirations they may have. This must be equally distributed."

These wordings expressed a desire to look after someone’s needs and the Court concluded that they should not be considered as gifts. However, they were written in a way which removed the attorney’s ability to exercise their discretion to determine whether the payments are in the donor’s best interest. Consequently, the court ruled that they must be omitted from the lasting power of attorney when it was registered, rendering the instructions ineffective. 

Scottish Continuing Powers of Attorney

The position in Scotland is a little different. It is possible for a Continuing Powers of Attorney to make gifts, including those for estate planning. But this is only possible where the donor had specially included this within their power of attorney document.

Summary

The  Court of Protection’s ruling does mean there's greater scope for attorneys to provide for the needs of family members without being constrained to making gifts only on birthdays and at a Christmas. However, this may only be possible if there's a clear expression of wishes included and the attorney believes it to be in the donor’s best interests.

If they're uncertain of their authority to use the donor’s money for the benefit of others (including themselves), they should apply to the Court of Protection.

Clearly it's far better to commence gifting earlier rather than leave it to chance. And by doing so, the donor can see the benefit their generosity has on their loved one.   

* Money Observer article
** Court of Protection Judgement