Why LPAs are a vital part of intergenerational planning
While many people make arrangements for what should happen to their property and finances after they die, fewer people make arrangements for someone else to manage their finances for them during their lifetime, e.g. in the event that they lose mental capacity.
According to the Office of the Public Guardian (“OPG”), although an estimated 40% of the adult UK population have a Will, less than 1% have put in place a Lasting Power of Attorney (“LPA”). Many people assume that there is an automatic right for a family (or a spouse) to deal with an individual’s finances once they lose capacity or if they cannot manage their own finances for some other reason, but without a power of attorney having been put in place, this is not the case.
What is an LPA?
An LPA is a legal document which allows an individual (the “donor”) to choose people to make decisions for them (“attorneys”). There are two types of LPA that can be made in England and Wales: one for health and care decisions and one for property and finance decisions. The LPA for property and finance decisions is the main focus of this article. It gives the donor’s attorney(s) authority to deal with their financial affairs for them, such as opening, closing and operating bank accounts, paying bills, claiming pensions, and making or selling investments or real property, or even running a business. An attorney must be an adult of sound mind who is not bankrupt: they can be a professional (such as a solicitor), but most people choose family members (e.g. spouses or their adult children), friends or other people they trust for this role. If an attorney is not a professional, the important thing (as stated in the OPG’s guidance itself) is that the parties know each other well and the attorney(s) respect the donor’s views and will act in his or her best interests.
Financial LPAs can be put in place so that they are effective either immediately, or when an individual has lost capacity. Therefore, while more often than not it is older clients who consider putting LPAs in place, there is great value in putting a financial LPA in place as soon as possible so that it can be used in light of an emergency situation, such as an individual suffering an injury causing them to be housebound for a period of time. The authority afforded by an LPA can also be useful in more simple everyday circumstances, for example, where a spouse wants to access a bank account on their partner’s behalf, though it is important to note that if the donor has not lost capacity, their attorney is under a duty to act only with their consent.
From an intergenerational planning perspective, advisers should encourage individuals to protect the management of their finances by making LPAs. Not only will this make the practical elements of dealing with the finances of a loved one easier for family members, it also serves to protect and preserve their wealth so that it can be passed on to future generations. Advisers should therefore tie discussions on LPAs in with broader discussions with their clients around succession planning.
The practical benefits of an LPA from an intergenerational wealth planning perspective
There are a number of practical benefits that come with putting an LPA in place. LPAs allow a donor to choose who will have authority to deal with their financial affairs if they lose capacity, and they can add preferences and instructions, or a letter of wishes, to their LPA, which guide their attorneys as to how they want them to act. This sort of guidance can prevent difficult decisions and potential family conflicts arising over how an individual’s finances should be managed once they have lost capacity. Funds for private medical or residential care might be required for an older donor who has lost capacity, and LPAs allow the attorneys access to the individual’s assets so that they can pay for such treatments.
LPAs also enable the donor to choose who they want to be their attorneys, giving them an element of control over a time when they will not be able to have control over the financial decisions themselves. If no LPA is in place and an individual loses capacity, an application has to be made to the Court of Protection for a deputyship. This can be an expensive process, and considerably more costly than putting in place an LPA, and so financially it is not the best course of action to deal with an individual losing capacity. It can also be a lengthy and time-consuming process, which could be problematic if even simple financial decisions need to be made quickly. Importantly, the donor will not be in a position to choose who takes control of his/her finances or guide the next generation over how he/she would want them to act.
Putting in place LPAs also provides an opportunity to actively involve future generations in intergenerational wealth planning early on. This can provide comfort to donors and attorneys alike in terms of having a plan for what would happen in difficult circumstances. If the donor’s adult children, for example, are appointed as attorneys, they will have to sign the LPA and think about what their role and duties will be in a situation where their parent loses capacity.
Attorneys have a duty to act in the best interests of the donor, and guidance on what they are authorised to do and how they should make decisions is set out in the Code of Practice for the Mental Capacity Act 2005, providing certainty for both the donor and the attorneys as to how financial affairs will be managed in these circumstances. Further guidance is provided by the OPG.
The wealth preservation benefits of an LPA from an intergenerational planning perspective
From a wealth preservation perspective, LPAs are important for clients seeking to pass on their wealth to future generations. LPAs allow attorneys to pay bills and interest on loans, for example, which could prevent financial loss to the individual if they were to default on loans or be charged interest on unpaid bills.
Attorneys also have the authority to access investments, and this power can be used to enable the transfer of investments to obtain a higher return, thus financially benefitting the individual and, in turn, the future generations set to inherit their wealth. A donor can give their attorneys permission to transfer investments into a discretionary management scheme, or for a scheme that the donor put in place before they lost capacity to continue. This allows the investments of someone who has lost capacity to be managed most effectively, thus helping to preserve and grow the individual’s wealth despite the individual not being able to make their own decisions.
If an individual owns business assets, they should think carefully about who would be best placed to manage these for them in the event of an accident or loss of capacity. An individual can have more than one LPA in operation at the same time, and so they can have a separate LPA for a business if necessary. It might be that an individual would like their family members to manage their personal finances but would prefer for a business partner to manage their business affairs, to ensure that someone with the requisite skills to preserve the business asset as best as possible has authority over this asset.
A donor can also include wording permitting their Will to be disclosed to their attorneys. This means that attorneys can ensure that they do not make decisions that conflict with the terms of the Will, such as disposing of a particular asset that the Will directs should be given to a specific person. In this way, an LPA can work together with a Will as part of an individual’s ‘succession plan’ to ensure that assets are passed down to future generations in line with the donor’s wishes.
One important restriction on an attorney’s powers, however, is the ability to make gifts on the donor’s behalf (other than small, modest amounts on customary occasions such as family birthdays etc). LPAs cannot be used by attorneys to pass more significant wealth down the generations. This requires a separate application to the Court of Protection on behalf of a mentally incapacitated person. Therefore LPAs cannot themselves be used to facilitate lifetime intergenerational succession planning in this way.
A key element of succession planning is ensuring that the wealth of older people is protected so that it can be passed on to the younger generation. Making an LPA can provide an important level of protection in situations where an individual loses capacity or cannot manage their own financial affairs for other reasons. It is vital that advisers consider LPAs in the context of intergenerational planning, not least because of the practical benefits that they can provide for future generations when someone close to them loses capacity. Additionally, as seen above, LPAs assist in the preservation and good management of an individual’s wealth, thus maximising the assets which can be passed on to future generations, even though the attorneys have only very limited gift-making powers themselves.
LPAs need to be registered at the OPG in order to be effective, and solicitors can assist individuals in filling out the necessary forms to make an LPA, as well as guiding them through the registration process.
This article was originally published in the FT Advisor on Wednesday 25th August 2021.
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