Estate planning under an LPA
Lorraine Wilson explores acting under a Lasting Power of Attorney (‘LPA’)
A recent article in the Financial Times suggested that an attorney acting under a Lasting Power of Attorney (‘LPA’) should consider investing in assets which may attract relief from Inheritance Tax. Certain investments can attract Business Property Relief once they have been held for a period of two years before death. It is important to seek financial advice when considering these types of investment. However, an attorney must also consider their legal obligations when managing another person’s finances.
Best interests test
An attorney must always act in the best interests of the patient (the person who has lost mental capacity). The default position is that any form of estate planning is of limited benefit to the patient themselves which can make it difficult for an attorney to satisfy the ‘best interests’ test. In most cases, the attorney must seek approval from the Court of Protection.
Tax efficient investments
Attorneys have wide powers of investment but should exercise caution before investing the patient’s funds in higher-risk investments. This is particularly important where the proposed investments are not aligned with the patient’s own attitude to risk and/or investment strategy when they had mental capacity. Best practice is to seek authorisation from the Court of Protection before proceeding with any such investments. This will protect the attorney from personal liability.
The attorney will need to satisfy the court that specific investments are in the patient’s best interests. It can be very difficult for an attorney to show that the mitigation of Inheritance Tax after the patient’s death is in their best interest – the patient themselves will not benefit from any tax-saving.
All that said, it may be easier to satisfy the ‘best interests’ test for certain types of investment than, for example, making lifetime gifts on the patient’s behalf. An attorney acting under an LPA has very limited authority to make gifts. Certain small gifts are permitted in restricted circumstances. Whilst small gifts (for birthdays and customary occasions) can have a cumulative impact on estate planning over a long period of time, many attorneys will want to make more substantial gifts on the patient’s behalf. The idea is that after seven years, the gift will be outside of the patient’s estate for Inheritance Tax purposes.
An attorney is also permitted to make limited gifts where a ‘de minimis’ exemption applies. The patient’s estate must be worth more than £325,000 and the patient has a life expectancy of less than five years. However, even where the criteria are met, ‘de minimis’ gifts are restricted to £3,000 per year. This gives attorneys very limited scope to carry out more significant estate planning on the patient’s behalf.
Any other estate planning or lifetime gifting by an attorney must be approved by the Court of Protection. It is important that the attorney is able to demonstrate that the gift is in the patient’s best interests. Often, the Court of Protection will insist on a hearing and it is common practice for the Official Solicitor to be appointed to represent the patient’s interests. This can make the process complex, lengthy and expensive.
An attorney must be extra cautious if any gifts they propose to make will benefit them personally. Even if that is what the patient would have wanted, the attorney must be able to show that the gift is in the patient’s best interests. The threshold is high and the court will want to see clear evidence that the best interests test is met.
Attorneys should always seek the Court of Protection’s approval before making any gifts. Best practice suggests that attorneys should seek approval from the court before embarking on a new investment strategy. Otherwise, the attorney could face criticism or, in some cases, prosecution.