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Wills and powers of attorney – Covid-19 and beyond

Thank you for joining me this morning for our webinar on wills and powers of attorney – Covid-19 and beyond.

My name is Kirsten Morgan and I'm one of the technical consultancy managers at Standard Life.

We're going to spend the next half hour talking about some questions that you can consider that should help you identify challenges that could arise if your client's health changes or on their death. Before we dive into today's topics, let's just cover a couple of formalities. This is a CII accredited event and you will be sent your CPD certificate of attendance after the session. These are emailed out on a weekly basis so there may be a short delay between attendance and receipt of your certificate.

The learning outcomes following today's session are: you should be able to

• Outline the new Covid-19 processes for drafting a will or power of attorney (POA)
• Identify common planning issues that could be resolved by an updated will/POA
• Differentiate between actions that can be done by a POA and those that can only be taken by your client
• There's no doubt that Covid-19 has focused the minds of some clients on their future. That's fuelled demand for support in this area, and that support has had to respond to demands that none of us had considered this time last year.

Your client's wealth underpins any discussion of later life planning. The key question is what assets will and won't be covered by any will that they put in place? For most clients, their pension won't be covered by their will. As this could be a major component of their wealth, firstly we'll talk about pensions issues first both on death and ill health.

Then we'll move on to client ill-health – particularly loss of capacity. That's a very real issue because most of us are living longer, and with that, unfortunately, comes increased risk of dementia. So there's two key issues:

• how can your clients put planning in place now so that there is continuity of financial care for them?
• how can you help your clients who have already lost that capacity get the best financial outcomes in their situation?

Finally, we'll talk about death – as your client's will covers the majority of their wealth, it's crucial for your clients to consider whether their wills still meet their needs. As their financial adviser, you are in a great place to prompt those discussions by considering whether their will planning will get the outcome they want.

Please do submit your questions throughout the webinar. We'll use the most popular themes to shape our next Techzone insight article which we'll publish later today. You should receive an email when it's available.

Your client's pension may be one of the largest assets they have. But its destination on death is not controlled by a will. So what steps can you and your client take to make sure that their pension goes to the people they intend on their death?

Firstly let's consider flexible pension death benefits.

Is your client in the right pension?

Does the contract offer full flexibility on death? We still come across pensions that don't allow full flexibility. Some only offer a lump sum and some will only offer drawdown to a surviving spouse and not to children or other nominees. It's so important to check that the existing contract offers all the options required by the client.

Secondly, are nominations on point?

For non-dependants, nominations can be crucial - if they haven't been nominated, a lump sum may be the only option. This is because if the deceased had nominated another individual or if there's a dependant, then the trustees or provider can't allow anyone else to use the funds for pension purposes.

To ensure the beneficiaries get all options - make sure they are named.

Also some clients may have nominated a trust to receive the death benefit. This can be a good idea where the client wants to control what a beneficiary can take from the death benefits, but this option may not remain suitable as the client gets older, especially if they are over 75. To avoid payments into a trust where they are no longer required – the client must update the nomination form.

A death benefit nomination can only be made by the scheme member, if the scheme member loses mental capacity or is unable to act due to illness, the ability to update the nomination is lost. So, as you can see, it's vital to regularly check that the death benefits nomination reflect the clients' wishes especially as your clients gets older.

Finally let's consider timing.

Dying in the wrong pension or with the wrong nomination may mean your clients' wishes cannot be met.

If a transfer is needed to access full flexibility, do this while the client is in good health to avoid the possibility of IHT. Some of you may be thinking we don't need to worry about pensions transfers and IHT due to the recent 'Staveley' court case, but that was just one case with a particular set of circumstances. Until HMRC update their guidance in this area, it is prudent to assume that IHT could be payable on transfers if the client is in poor health and dies within two years of transfer.

Now let's move on to income benefits. A few questions to consider here.

The FCA has issued draft guidelines on the treatment of vulnerable customers with a view to finalising them in late 2020 or early 2021. One of the key themes it picks out is not just for firms to react to vulnerable customers but to proactively identify potential issues and take measures to mitigate them.

This can be particularly acute when it comes to managing pensions income under pensions freedom. The increased flexibility of drawdown means that more decisions need to be made throughout retirement. Income levels may need to be monitored to keep them sustainable, or simply varied to meet changing needs or circumstances such as increased health care costs.

The onset of ill-health can drastically change retirement income needs. For some, as they become less active they may need less income to live on. At the other end of the scale, it could require additional expenditure to make adaptations to the family home or even the need to pay for residential care.

And to ensure that needs are met in a tax efficient way, being able to turn on and off pension withdrawals is a huge advantage, particularly where it forms part of a wider holistic approach to retirement income planning which also involves withdrawing capital from other investments such as bonds, ISAs or collective investments.

When the flexibility of pension freedoms is needed most, it may not immediately be available unless a power of attorney has been put in place.

So we've touched on a major part of your client's wealth that won't be catered for in their will.

But moving on, it's essential to consider the impact of ill health on your client's retirement strategy.

If you want your client's retirement strategy to remain functional if your client loses capacity, it's important to get a power of attorney in place.

The good news is making a lasting power of attorney in England and Wales has become significantly easier in the last five years, with processes moving online. And using it could become easier too with the rollout of an online register which removes the need for LPAs registered from 17 July 2020 to post the attorney to each provider in turn.

A little forward planning can make sure everything is in place to ensure your client's changing needs to be met by having a power of attorney in place.

A lasting power of attorney (LPA) is available in England and Wales and allows a client to nominate someone to look after their financial affairs if they're no longer able to. This allows them to make decisions in the best interests of your client (often referred to as the 'donor' – that is, the person who has created the power). This includes starting, stopping or varying pension withdrawals, as well as being able to make withdrawals from other savings such as investment bonds, personal portfolios or ISAs.

The LPA has to be completed and registered while the client still has capacity. But that little bit of forward planning can make a huge difference to loved ones by ensuring that income can be varied and that care costs can be met.

The equivalent document in Scotland is a 'continuing power of attorney' (CPA), and in Northern Ireland it is an 'enduring power of attorney' (EPA). Both are similar to an LPA in aims, but slightly different in how the powers are actually given.

The consequences of not having a power of attorney can be quite severe.

Lack of a power of attorney can make it difficult for those in retirement relying on a flexible income. It may not be possible to start, stop or vary pension withdrawals from a flexible pension. It may also mean that other lifetime savings are not accessible before a deputy is put in place.

Without a valid power of attorney, a deputy or guardian may have to be appointed before funds can be accessed - a time consuming and potentially costly process. This individual may not be the person the client would have favoured if they were still in a position to make a choice.

Finally it's important to remember that capacity is not all or nothing. For example, a client may have capacity for face to face financial transactions but not for online ones. If the client has been advised to self-isolate, this may lead to difficulty in managing bank accounts, and other everyday transactions. A lasting power of attorney can help here, to enable the client to make the decisions they want to, without exposing themselves to a higher level of risk.

It's important for your clients to know that help is on hand to get a power of attorney in place. Only Scotland allows video witnessing as I speak, as the solicitor drafting it with the client can also witness it. England, Wales and Northern Ireland are using socially distanced signing processes, which can be as simple as the witness observing the signature through a window.

Even when a power of attorney is in place, planning can be limited in unexpected ways. We'll talk about IHT planning a little more in a minute, but there are other considerations to resolve before a client loses capacity. Otherwise, a costly trip to the Court of Protection (or equivalent) may be needed with no guarantee of success.

Later in this webinar, we'll cover how vital a will is in greater depth. It's important to note that one can't be drafted by a power of attorney. They have no power to alter a will either. A simple will can be put together but this will require application to the courts.

One topic which has come up with increasing frequency in the last few years is using a power of attorney in conjunction with a DFM. The OPG has confirmed there must be a specific clause in the power of attorney to continue a DFM relationship. It's worth checking with your preferred DFM partners if they need a bespoke wording, and with your client that their PoA is updated to cope with this.

Another tricky topic is death benefit nominations – again these must be done by the individual before they lose capacity. We've already covered the benefit this can have for your clients' beneficiaries, and online updating is available from many providers now.

Finally, insurers take the view that only the individual has full insight into their state of health, so an attorney will not be able to put life cover in place or answer the health questions for a DGT. If these are planning possibilities for your client, the key is to act now.

IHT planning with a power of attorney can be particularly challenging. This is because once the client has lost capacity a change of mindset from the family is required.

When a client is capable of making their own decisions, it's entirely up to them to choose to arrange their affairs so that their loved ones receive the maximum benefit.

The responsibility of a power of attorney is slightly different.

They have to ensure that every decision has the donor's best interest at its heart. The donor is your client, not the attorney. And they are potentially vulnerable, increasing your duty of care.

This can mean that choices such as AIM share investment or larger lifetime gifts, may be ruled out by a power of attorney as they would benefit the client's family more than the client.

Conflicts of interest also need to be recognised, if the attorney themselves would benefit. This is a complex area and professional legal advice should always be sought.

You can see from the above that all three jurisdictions are limited in what IHT planning can be done. You might well be thinking that small gifts for your clients would mean small in proportion to their other assets. In fact, small will usually mean very small, and on special occasions (which will differ according to your client's power of attorney type) or to a charity that your client supported when they were in good health.

In particular, in England and Wales, the client must have an estate over the nil rate band and a life expectancy of less than five years before IHT exemptions such as the £3,000 annual exemption can be used.

Anything outside the scope of the power of attorney will need an application to the courts. This will involve fees, will generally take time and there is no guarantee the attorney's wishes will be approved. All the more reason to act before a power of attorney is necessary.

But a power of attorney being in place doesn't mean that any hope of tax efficiency has to be abandoned.

We can see this in this case study. Margaret has a portfolio of just over a million and needs £35,000 income a year. Left to their own devices, an attorney might well go with taking an income from the SIPP. That's where the value of financial advice comes in.

So let's look at how your advice could change that. As things stand, Margaret will have an IHT liability of £20,000. Traditional methods of IHT planning such as reducing the estate through gifting, or taking out life cover are unavailable as the power of attorney is in place.

Margaret needs income of £35,000; she currently receives State Pension of £8,000 so an additional £27,000 must be generated.

You advise Gillian that she can meet this by generating £12,500 of taxable income from the State Pension, the personal portfolio, and deposit account income. Her ISA portfolio also generates a further £6,000 of tax free income. She realises £12,000 of capital, from her personal portfolio, using half her annual CGT exemption on the gains. This leaves the remainder of the allowance to be used to rebalance the portfolio over the tax year. In our example for simplicity's sake, she takes the 5% tax deferred withdrawal on the bond. An alternative would be to realise bond gains tax free using the balance of Margaret's savings rate band and personal savings allowance.

There are three big benefits to the approach.

No income tax on income (versus the £5,625 paid in income tax if Gillian had taken all the income from the SIPP – as she was planning to before your advice).

40% IHT reduction on every use of capital (saving £6,800).

Maximises money left to the SIPP – now Margaret listened to your advice and got her nominations in, allowing the SIPP administrators to pay pension income to the grandkids. Potentially income tax free, even though Margaret is now over 75 as she could use the grandchildren's taxable allowance.

Having looked at what could help your client in the event of ill-health, let's move on to the inevitable: death.

It may seem like the ABC of financial planning to get a will in place but the fact that 6 out of 10 UK adults don't have one means that the penny may not have dropped with all your clients.

From our recent survey, you've told us that during Covid-19 you've seen an increase in client enquiries on retirement planning and estate planning. Having a valid will in place is at the heart of this and an opportunity for you to assess if anything needs to be updated, or put in place. And listening to the adviser community, it's clear to see the complications that:

• having no will, or
• a will that's been made invalid by life events, such as marriage, or
• a will that's made less effective than intended, through changes in legislation

can bring.

Action now can give peace of mind and save loved ones time and money in the future. It can be a process that clients start and then pause for a while so Covid-19 has offered that much needed prompt for some to get on and complete them.

Thankfully, the system has responded in terms of making this as easy as possible to execute wills in the current circumstances.

As you can see, wherever you are based in the UK, help is in place to get the process done. In England, Wales and Scotland, witnessing your client's signature can be done on a video call. Northern Ireland is, currently, relying on social distancing , but as previously mentioned that can be as simple as observing a signature through a window. So there's no reason for your clients not to act now to get some certainty in place for the future.

It's not just those who have no will at all who need to act.

Your clients are likely to see you for some of the major life events that could cause a will to be invalid or out of date – marriage, divorce, birth of children, to name some of the obvious ones. Your annual review questions will help remind them that there are other considerations than immediate financial needs and a will is a crucial part of the process.

Another issue we see advisers dealing with regularly is where wills haven't been updated to keep up with changes in legislation.

One issue that can be thorny are wills that involve planning with the family home that haven't been updated for nil rate band changes.

Historically, a popular planning solution, usually involving a solicitor, has been to change the tenancy of the family home from joint tenants, to tenants in common.

Then half of the home could be left to a discretionary trust on first death. This had the benefit of allowing the surviving spouse to remain in the home, while decreasing the value of their estate.

However, in April 2017 when RNRB came in, one of the stipulations was that property should go to direct descendants. And even if a discretionary trust's possible beneficiaries are all direct descendants, that's just not exact enough to meet RNRB's criteria.

So this arrangement could lose your clients an IHT relief worth up to £70,000.

Thankfully there are a couple of ways that this could be addressed. A deed of variation is a commonly suggested solution to will issues but this can't be used with a discretionary trust due to the impossibility of the beneficiaries all being identified.

An possible alternative is that if it's within two years of the trust's creation on death and the trustees are agreed, the trustees could wind the trust up and pass the property to the spouse. This would be treated as if the trust had never existed, and the transfer of half the house would be an exempt transfer.

There may well be other concerns that mean keeping a discretionary trust is merited. Potentially the trust could accept an IOU from the spouse or take a charge against the property to be repaid on the second death. This allows the surviving spouse to retain outright ownership of the property. It also means that the RNRB can be transferred to the surviving spouse if the property is to pass to direct descendants on the second death. Solicitor involvement is crucial. That's why this kind of case can offer a great opportunity to work with existing professional legal contacts or build new ones.

Let's have a look at a case study – Hugh and Camilla.

The family home has been split into a tenants in common basis which means that Hugh can leave his half of the home (worth £250,000) to a discretionary trust.

This leaves Camila with her half of the family home, worth £250,000, and £1m of other assets, which she plans to leave to her children on death.

So the issue with this kind of set up, is where the client has an interest in the house that is worth potentially less than the available RNRB, the RNRB is capped at that interest. So your client will be potentially be paying more IHT than they need to, which is never a popular outcome.

As this is quite a common scenario that advisers face, let's move on to discuss some actions that the trustees could take.

What will happen if no action is taken and half the share of the house remains owned by the trustees?

Let's run through the numbers here.

Camilla's other assets are worth £1m and she has a half share of a £500,000 home, worth £250,000. That gives her an estate worth £1.25m.

Against that she can set her own NRB of £325,000 and, as Hugh used £250,000 of his nil rate band in setting up the nil rate band trust, she inherits £75,000 of his. Giving her £400,000 of NRB to deduct from the estate.

Camilla inherited Hugh's RNRB as it couldn't be used with the discretionary trust. But she won't be able to use the full inherited RNRB of £350,000 against her half of the property on death as it's capped at the value of the property, only £250,000.

That gives her a taxable estate of £600,000 and tax on that at 40% is £240,000.

And then look at the difference in tax outcomes when the trustees wind up the trust (within two years of Hugh's death) and appoint the house out to Camilla.

£40,000 less IHT is paid, because Camilla owns the house and can use the RNRB of £350,000 against it, giving her an extra £100,000 in allowances. And this has the benefit of simplicity.

But a discretionary trust does have some advantages. It keeps half the property out of Camilla's estate and that might be beneficial, if for example the children are concerned about keeping their inheritance if Camilla were to remarry. So our last option, the trust giving her ownership of the family home in return for an IOU to be repaid on Camilla's death could relieve some of these concerns. The trustees take a charge on the house, which gives the beneficiaries peace of mind that the debt will be repaid. Using an IOU gives the trustees the option to charge interest on that IOU, increasing the debt on Camilla's estate. Although you are potentially sacrificing some IHT efficiency, as the charge will reduce the value of Camilla's interest in the home, this could give Camilla the control of owning her own home, with more security for the children's inheritance than winding up the trust.

Any discussion of the options available to an individual trust always should be done in conjunction with professional legal and tax advice. This is a simple example to give you an idea of what could be achieved.

Something we're also seeing is where, especially with older individuals who have maybe been actively involved in a business, Covid-19 is making them and/or the family stop and think about what might happen in the future.

One point to think about is that although traditionally BPR assets may have been left in the will, as they had no IHT impact, their value is included in the estate to work out the impact of any tapered RNRB. So if your clients' estate is over £2m it's well worth looking to see if any assets with BPR can be gifted.

Gifting BPR assets can offer an opportunity to make further gifts with no immediate IHT charges when the nil rate band has already been gifted.

It's also worth keeping an eye on gifts of business assets for the seven year period after they are gifted. During this period, they should be retained by the recipient until the giver's death or replaced by other business assets. Another area of danger could be if the company is no longer eligible for BPR. Again, replacement of assets could help in this situation. Otherwise business property relief could be withdrawn on the donor's death.

Helping your clients with questions around will planning is an area where an adviser can add real value and also build relationships with the next generation, making retention of family wealth more likely.

Today we've covered the impact that death and ill-health can have on your clients' wealth and the ways a will and a power of attorney can help with that.

It's always good to have a plan of action and so I've summarised the main points we've spoken about here. And the actions you may like to consider. As you can see the themes running through them are:

• Prevention is better than cure – a lot easier to get a will and power of attorney in place than try to deal with an intestacy or set up a deputyship
• Act while your client is in good health
• Review wills and powers of attorneys regularly, especially on a change of personal circumstances

And finally, to finish up, I'll recap on the learning objectives for this CPD accredited session.

I hope after our webinar today you will be able to:

• Outline the new Covid-19 processes for drafting a will or power of attorney (POA)
• Identify common planning issues that could be resolved by an updated will/POA
• Differentiate between actions that can be done by POA and those that can only be taken by your client

If you've submitted a question to us, we will pick up the themes that come up most regularly in our next insight which will be out today. Before we finish, I need to read the next slide to keep us all right with our legal obligations.

Any advice you give is your responsibility.

This presentation is based upon Standard Life's understanding of UK law and HM Revenue & Customs practice in the UK as at December 2020.

Tax and legislation are likely to change.

This presentation is designed as educational support for authorised advisers and should not be relied upon by anyone else.

Tax treatment depends on individual circumstances.

No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this presentation.

This content provides a suggested approach only – other approaches may be equally suitable. Every client's circumstances will be different and require advice.

Standard Life accepts no responsibility for advice which may be formulated on the basis of this presentation. Any advice you give is your responsibility.

All that remains is for me to thank you for your time today. Keep an eye out for that insight arriving in your inbox and head over to Techzone where our team of experts provide regular thought leadership on the issues that matter to you.