Many advisers ask this question, and the truth is that planning is severely restricted but sometimes possible.
Large lifetime gifts
Firstly the adviser must consider the position of the person who has lost capacity, let’s call them P. Do they have a Power of Attorney in place? If not, has anyone been appointed as a deputy by the Court of Protection? To what extent have they lost mental capacity?
For example P may still have the mental capacity to understand and approve a simple lifetime gift, but not have the mental capacity to understand and approve a sophisticated investment such as a Discounted Gift Trust. As such, it would be prudent to request and record a mental capacity test prepared by a professional at the point of making such a gift. Of course, P could fail the test.
Hereafter we will assume that P does not have any remaining mental capacity and that they have an appointed attorney under a Lasting Power of Attorney for property and affairs.
The attorney must act in Ps best interests. So it would appear to be logical that there is no way that gifting monies or assets to others could possibly be in P’s best interests. However if an attorney or deputy want to present a case to make a lifetime gift or a specific investment for Inheritance Tax planning they can ask the permission of the Court of Protection.
The Court of Protection will take into account the following:
- The information presented to them
- How much the gift is in relation to the size of their estate
- Will there be enough financial resources remaining for P for the rest of their life?
- Will the gift change the treatment of beneficiaries bearing in mind the contents of the last Will?
- Had P done any Inheritance Tax planning before loss of mental capacity?
The Court may agree that making a gift is in P’s best interests, bending the “best interest” principle somewhat. However there may be situations where it is not worth making an application to the Court, for example where P’s wealth has been derived from a successful personal injury payment which was meant to provide for them only.
What if the attorneys just go ahead and make lifetime gifts?
In serious cases this may be regarded as fraud and a matter for the police. Alternatively the attorneys may be asked to pay the money back personally, or at least have their appointment as an attorney revoked. Not good options if the gift is likely to be contentious.
Answer, they can’t. The attorney cannot create, change, or update a Will. However once again an application can be made to the Court of Protection for what is known as a Statutory Will. This can be a new Will that can take advantage of IHT planning.
The Court takes this very seriously and is likely to involve the Official Solicitor. The fullest information should be presented similar to the bullet points above for lifetime gifts. However anyone who may be disadvantaged by such a Statutory Will that would benefit under the previous Will or intestacy can object to the application.
Incidentally all these actions involve expense, and you should consider the legal costs and where the burden of the costs will fall. In some cases however it will definitely be worth the trouble.
So in conclusion, the moral of the story is to ensure that elderly clients act while they have their full mental capacity and deal with these issues as urgent before it becomes impossible.