It has become increasingly common for people to execute lasting powers of attorney. Under a property and financial affairs lasting power of attorney, the donor passes power to make financial decisions to their named attorneys either immediately or when they become incapable to act for themselves.
The two relatively common situations in which a lasting power of attorney can be encountered when contemplating trusts are as follows:
When an existing trustee loses mental capacity. In this circumstance, who, if anyone, will replace them.
In situations where an attorney or attorneys under a lasting power of attorney, wish to make gifts.
Trustee Loses Mental Capacity
When an existing trustee loses mental capacity, the first consideration should be the trust deed since it may include a provision whereby a trustee who has lost mental capacity is treated as if they have died. In these circumstances, a trustee and any attorney, who they may have appointed, will have no power to act under the trust.
If there are no relevant provisions in the trust deed, the general rule is that any delegation of trust powers to an attorney must be compliant with section 25 Trustee Act 1925 (as amended by the Trustee Delegation Act 1999).
Section 25 permits an individual trustee (subject to various conditions) to delegate the exercise of their trustee functions, under a power of attorney, for up to twelve months. This power would be useful if, for example, the trustee is abroad for a lengthy period. If, however, the trustee loses capacity, this type of power will be automatically revoked and would therefore be of no future use.
A lasting power of attorney, which continues after the donor has lost mental capacity, will not usually cover any trustee functions. The loss of mental capacity of a trustee can, therefore, result in problems for their co-trustee(s), notwithstanding the existence of a power of attorney, since in England and Wales, at least, trustees must make decisions unanimously unless there is a contrary provision in the trust deed. Trust administration would, as a result, cease until the incapacitated trustee can be replaced or removed in accordance with the trust deed, trust law or, failing that, by the court.
The person nominated in the trust deed to appoint new trustees, usually referred to as the appointer, or, if there isn’t an appointer, the continuing trustees can replace an incapacitated trustee under Section 36 Trustee Act 1925. However, if the incapacitated trustee has a beneficial interest in the trust, permission to make such an appointment may first be needed from the Court of Protection. If the incapacitated trustee has survived their co-trustees, the personal representatives of the co-trustee, who was the last to die, can appoint a replacement trustee, potentially subject to the Court of Protection’s approval.
Accordingly, a trustee’s potential loss of mental capacity should be addressed in the trust deed to remove the risk of these issues arising.
Gifts
An attorney, under a lasting power of attorney, can only make gifts on behalf of a donor in limited circumstances:
- Gifts can be made to people who are either related or connected to the donor on birthdays, weddings, anniversaries or other similar occasions provided the amount is reasonable taking into account the size of the donor’s estate.
- Gifts can be made to any charity that the donor made or might be expected to make gifts to as long as the amount is reasonable.
It’s therefore problematic to undertake inheritance tax planning, involving gifts, for someone who has lost mental capacity; an attorney is generally only able to implement substantial gifts or establish a trust with the prior approval of the Court of Protection (COP). The COP will only grant its approval if they conclude that an application thereof is in the donor’s best interests. The applicant would be required to provide the COP with various information:
- a report on how the proposed changes would affect the donor’s circumstances
- information on the donor’s life expectancy
- the probability of increased expenditure
- a draft of any proposed trust deed.
Fees would be payable to the COP to process such an application.
Consequently, the ability of an attorney to undertake inheritance tax planning on behalf of a donor is very limited.
It may be thought that the restrictions on gifting assets could be overcome by an attorney choosing to invest in assets that will qualify for a relief from inheritance tax such as that applicable to unquoted shares in trading companies, owned for at least two years. However, even in these circumstances, the attorney’s actions may come under close scrutiny especially if those shares have declined in value on death.
Hence, individuals who wish to explore strategies for mitigating inheritance tax should consider taking action sooner rather than later.
If you are affected by any of the points raised in this article and would like to discuss this further, please do not hesitate to contact me or your usual Menzies Wealth Management contact.
Disclaimer:
The information provided is for general information only and is not intended to address the particular requirements of an individual or business. It does not constitute any form of advice or recommendation by Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any financial decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided.
Menzies Wealth Management is authorised and regulated by the Financial Conduct Authority (486548). Registered address: 1st Floor, Midas House, 62 Goldsworth Road, Woking, GU21 6LQ Registered in England and Wales 06597008.
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