It is good to explore the strict set of rules applied to Lasting Powers of Attorneys and gifting as the majority of individuals acting as attorneys are assuming incorrectly what they can or cannot gift if a loved one lacks capacity.
Lasting powers of attorney (LPAs) allow someone, a ‘donor’, to choose someone they trust, their ‘attorney’, to make important decisions on their behalf if they cannot do so for themselves. These are potentially very useful powers which negate the necessity for a lengthy and costly application to the Court of Protection after mental capacity has been lost. A Financial LPA gives attorneys significant authority, such as to pay bills and manage finances on the donor’s behalf.
The Financial LPA also allows the attorney to make gifts on the donor’s behalf. Gifts can be an effective form of inheritance tax planning as they reduce the value of an estate by the value of the gift – provided the donor survives seven years and the donor does not retain any form of benefit from the gift.
However – Attorneys may seek to use the powers offered to them by the LPA to make gifts on the donor’s behalf in the hope to reduce the amount of inheritance tax payable by the estate on the donor’s death. Given the likelihood that an attorney is also a beneficiary of the donor’s Will, the attorney could personally benefit from such an arrangement.
Strict rules
The rules surrounding making gifts as an attorney are very strict. An attorney who falls foul of these rules could find themselves being investigated by the Court of Protection.
The rules state that the donor should be involved in the decision-making process and, if possible, the donor themselves should make the gift. If the donor cannot make the gift, an attorney may make a gift if: it is to a family member, or someone connected to the donor; is made on a “customary occasion”; and is of a reasonable value taking account of the donor’s estate. An attorney proposing to make a gift beyond the scope of these rules must make an application to the Court of Protection for authority to proceed.
Guidance provided by the Office of the Public Guardian suggests that a “customary occasion” amounts to a birthday, wedding anniversary or a religious holiday. This means that a gift with no precedent is likely to require the court’s permission, irrespective of its value.
Whether the gift is of a reasonable value depends on the nature and value of the donor’s assets and their likely future costs. For example, if the donor is “asset rich but cash poor” the attorney should not sell assets to make funds available to make cash gifts. Rather, an application to the court should be made to obtain permission for the sale as this amounts to a capital asset that could increase in value over time. A sale would deprive the donor, and the donor’s estate, of this increase in value.
Best interests
When considering whether to make a gift an attorney must always have regard to the donor’s best interest and wishes. This means that the attorney should consider the gift from the point of view of the donor and not that of the recipient. This also means that the attorney must consider whether wishes expressed by the donor would in fact be in their own best interest.
If the donor had made it clear in the LPA that they would like the attorney to make gifts to others, the attorney should not do so if they believe that doing so would deprive the donor of funds that are required for the donor’s care.
Gifts made for tax-saving purposes are unlikely to be considered in the donor’s best interest and consequently should not be made without the permission of the court.
An exception to this was set out in MJ and JM and the Public Guardian in which the court allowed an attorney to make gifts up to the value of the annual inheritance tax exemption of £3,000 and the annual small gifts exemption of £250 per person. The conditions attached to this exemption included: the donor’s life expectancy is no more than five years; their estate is worth more than £325,000; the gifts are affordable and would not adversely affect the donor’s quality of life; and there is no evidence that the donor would have been opposed to the gifts.
The limited scope of this exception demonstrates that any gift proposed by an attorney with the objective of saving inheritance tax should ONLY be done with the permission of the court. The Court of Protection can investigate instances of gifts being made that go beyond the rules. If the court finds that an attorney has acted improperly it has the powers to remove an attorney from their role. It could also ask that the attorney return the gifts made. In extreme cases, the court could refer the matter to the police or other organisations with legal powers.
We have an example case:
A woman called Joan who is a widow suffers from dementia and no longer has capacity, her son Brian & her daughter June had a registered LPA for financial decisions and for her health & welfare. Mum was placed in a care home, after which the family home was sold for £500k and a care annuity was purchased for mum to cover her care costs until the day she died, the care annuity cost £250k leaving £250k in Joan’s bank account. With mum’s care costs now covered Brian & June decided to gift themselves £125k each from the leftover monies even though Joan had no Inheritance Tax issues. Brian dies two years later with these monies passing to his wife Alison from his second marriage, however Brian had a daughter (Helen) from his first marriage who does not get on with Alison and is not a beneficiary of Alison’s Will.
The consequences are that because Joan’s Will cannot be changed as she no longer has capacity, Brian’s daughter Helen now misses out on £125k she would have rightfully inherited under Joan’s Will as it stated that if Brian predeceased her, his share would pass to his respective children. Through Brian & his sister June’s assumption on the powers they had as attorneys there is now a possible claim against June the remaining attorney for incorrectly and unlawfully gifting monies, they had no right to give that should have passed in accordance with Joan’s Will.
Attorneys should consequently take great care and seek the correct advice when considering whether to make a gift on behalf of a donor and always remember to place the donor’s interests & wishes ahead of anybody else’s as the consequences can be devastating, especially for the beneficiaries of the donor’s Will.