Attorneys bearing gifts

Since the Mental Capacity Act 2005 (MCA) came into force on 1 October 2007, enduring powers of attorney (EPAs) can no longer be created and have been replaced by lasting powers of attorney (LPAs). However, EPAs that were made before 1 October 2007 can still be used and private client practitioners will therefore often deal with their registration and advise attorneys acting under them. At the same time, practitioners are drafting LPAs on a regular basis and are increasingly advising attorneys acting under LPAs as donors begin to lose mental capacity.

With LPAs and EPAs both in regular use, it can be confusing to those who do not deal with them on a daily basis to understand the difference between them. Indeed, there is also confusion about what happens to those who lose capacity without either document in place; in such cases the best option may be for a family member or other interested party to ask the Court of Protection to appoint them as a deputy.

There are two types of LPAs: one for property and financial affairs and another for health and personal welfare. When donors create the latter they appoint one or more attorneys to make decisions on their behalf about their healthcare and medical treatment; for example, whether they should be moved to a nursing home. If a client has a close and united family, nursing homes and doctors would usually consult the family about such decisions in the absence of such an LPA.

LPAs for property and financial affairs can be vital for clients, no matter their age. In these documents donors appoint one or more attorneys to act on their behalf to deal with, for example: (i) operating their bank accounts; (ii) filing their tax returns; (iii) paying their household expenses; and (iv) paying nursing home fees.

This type of LPA significantly eases the administrative burden on family members dealing with an incapacitated loved one, whether their incapacity is the result of old age or a tragic accident/illness at any age. In addition, to allow flexibility when a donor is out of the country or in hospital, these LPAs can be used both before and after the donor loses capacity. However, they can only be used once they have been registered with Office of the Public Guardian (OPG). Registration currently takes around three months and costs £130.

EPAs were much shorter documents than LPAs but are less flexible. The regime established by MCA 2005 (including LPAs) was designed to provide greater protection against abuse of vulnerable donors. EPAs broadly granted attorneys the same powers as LPAs for property and financial affairs; there is no equivalent to an LPA for health and welfare and EPAs could not grant an attorney authority to make such decisions.

EPAs are effective as soon as they are signed (as long as this was before 1 October 2007), although they must be registered when the donor loses capacity (or it appears that they are losing capacity).

Appointing a deputy

When someone who loses capacity has neither an EPA nor an LPA in place, the Court of Protection may become more actively involved in making decisions on that individual's behalf. The guiding legislation is again MCA 2005, which replaced the previous system of receivers with the current system of deputies. The court can decide either to take a specific decision about the person's property and affairs by means of a single order or, more often, to delegate authority by appointing a deputy. The latter is usually appropriate when day-to-day decisions need to be made on an ongoing basis.

The process of appointing a deputy is formal and costly, involving an application to the court and ongoing supervision requirements; for example, a report must be submitted to the OPG each year setting out key decisions taken by the deputy and people with whom the deputy has consulted when taking those decisions. The applicant must provide clear evidence demonstrating that a deputy needs to be appointed, that the person lacks capacity, that there is no other practical alternative to appointing a deputy and that the appointment of that particular deputy is in the individual's best interests.

Ideally, the court will grant the deputy a widely drawn power so that they do not need to make lots of applications to the court to exercise specific powers and incur a £400 fee per application. If such a wide power is granted, the deputies will have largely the same powers as attorneys under LPAs for property and affairs and EPAs '“ albeit they will be subject to greater scrutiny by the court and the OPG.

Small gifts

LPAs for property and financial affairs grant attorneys authority to make small gifts to people (including the attorney) who are related or connected with the donor on special occasions, such as birthdays or weddings, or on occasions that, within that particular family, are considered customary. Gifts can also be made to charities that the donor has made donations to in the past or to those that the donor might be expected to donate. The value of the gifts must be reasonable in the context of the value of the donor's overall estate.

The power to make gifts under EPAs is similar to the power under LPAs, although there is no provision for 'customary occasions' to be considered in the context of a particular family. Again, gifts on the occasion of weddings or birthdays are acceptable, the individual must be connected or related to the donor and gifts to charity must be to charities to which the donor might be expected to donate.

The power to make gifts under a deputyship depends on the terms of the court's specific order and a widely drafted order may enable the deputy to make gifts on the same terms as an attorney acting under an LPA.

Large gifts

When it comes to making more significant gifts than those outlined above, for example for inheritance tax (IHT) planning purposes, an application to the Court of Protection is required no matter what type of power of attorney (if any) is in place. The court will always consider the donor's best interests as paramount, although it will also take into account the donor's likely wishes (if known), the remaining resources available to him or her and the terms of any will or (where relevant) the effect of intestacy. MCA 2005 favours a cautious approach and applications must be carefully considered in light of the donor's best interests and specific circumstances.

Re JDS, Smyth v JDS [2012] COP 10334473 offers an interesting opportunity to consider the court's approach to large gifts for tax planning purposes.

Unusually, this case involved an application by a deputy to make a gift up (rather than down) a generation for tax planning purposes. The gift was to be from a man referred to as James to his parents (as is customary in Court of Protection proceedings, James' full name was not reported to protect his privacy).

James was in his twenties, had cerebral palsy as a result of complications at the time of his birth and had lost capacity as a child. He received damages of more than £2m from East Sussex, Brighton & Hove Health Authority (ESBHA) for medical negligence at his birth, which was managed on his behalf by his deputy. His deputy applied to make a gift of £325,000 out of these funds and into trust, the primary beneficiaries of which would be James' parents. This would reduce the value of James' estate and would subsequently reduce its liability to IHT upon his death (the saving would be £130,000 if James survived for seven years from the date of the gift).

The Official Solicitor was appointed to act as James' litigation friend and opposed the application on various grounds, including: (i) that he would receive no direct benefit from the gift; and (ii) that he had never been able to indicate whether or not he would want such a gift to be made. The Official Solicitor appreciated that the court can authorise gifts when IHT mitigation is the sole motivation. However, this case differed substantially from cases involving applications made on behalf of elderly clients who lack capacity and who have more capital than they could ever possibly need. In this scenario, the source of James' wealth had been the damages received from ESBHA and these had been calculated on the basis of James' life expectancy and the need to ensure his financial stability for the rest of his life. Therefore, a potential IHT saving was not an adequate reason to allow the gift.

The court agreed with the Official Solicitor and dismissed the application. Senior Judge Denzil Lush applied the 'balance sheet approach' to the case and considered that the disadvantages of allowing the gift outweighed the benefits. This was in itself not conclusive but there was a 'factor of magnetic importance' that tipped the balance, namely the purpose of the damages awarded to James.

In general, it is extremely important for clients, no matter their age, to put LPAs in place as they will ease the administrative burden placed upon the family in the future if they should lose capacity. Clients will understandably hope that they will never suffer a loss of mental capacity but it is nevertheless important to plan for such an eventuality.