Looking after the financial affairs of someone who has lost capacity is an onerous responsibility. There’s often uncertainty about how a donor’s (the donor is the person who creates the power of attorney) funds may be used to benefit others, including the attorney themselves. Court judgements against attorneys acting outside of their permitted powers have increased significantly in recent years.
The overriding message for those wishing to undertake significant inheritance tax planning is to do it before the donor loses mental capacity.
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 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.
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 though apply to the Court of Protection. A number of RG clients have, by taking advice from a specialist solicitor, successfully applied to the Court of Protection to make large gifts that have reduced the value of the donor’s estate.
Providing for others
There are occasions where an attorney can use the donor’s money to benefit others. These are principally to meet the ‘needs’ of a person the donor was obliged to provide for, such as a spouse or dependant.
A recent court judgement has potentially increased the scope of what is possible by suggesting 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, the attorney may be able to do what the donor might reasonably have done themselves but there must be some evidence for this.
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.
However, any attorney giving consideration to using the donor’s money in this way should seek advice in the first instance from a solicitor who specialises in Court of Protection work.
When an attorney is making a decision, 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 inheritance tax, 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.