Enduring powers of attorney have been widely used since the implementation of the Enduring Powers of Attorney Act 1985. In 1989, however, the Law Commission launched a five-year consultation that revealed the need for the law to be improved and concerns over the potential abuse of EPAs to be addressed.
As a result, the Mental Capacity Act 2005 came into effect in England and Wales from October 1, 2007. This act provides a framework setting out how decisions should be made on behalf of people who lack mental capacity and are therefore unable to look after their own affairs.
The framework replaces EPAs with lasting powers of attorney as a new method of appointing an attorney to act on behalf of an individual when mental capacity to make decisions for themselves is lost. Properly executed EPAs made prior to October 1, 2007 will continue to be valid. However, from October 1, 2007, it will no longer be possible to effect an EPA.
There are two forms of LPA available. One will be used to appoint an attorney to deal with a person’s property and financial affairs (akin to what an EPA currently does) and the other will relate to personal welfare such as their day-to-day care and the power to give or refuse medical treatment.
Individuals can also make an advance decision – also known as a living will – in relation to medical treatment in the event that they lose capacity in the future. It is possible to choose to have just one or both types of LPA.
Under both types of LPA, the donor may appoint an attorney to manage their affairs while they have full mental capacity. The donor may alternatively include a restriction that the LPA can only be used when they lack the capacity to make decisions for themselves, similar to EPAs. An important change, however, is that an LPA can only be used once it has been registered with the Office of the Public Guardian.
Under an LPA for property and affairs, the attorney usually has no power to make gifts on behalf of the donor, just as is the case with an EPA. The only exceptions to this general rule include gifts of a seasonal nature at birthdays, for example, or to a charity to which the donor has previously made gifts and/or may be expected to make gifts in the future.
Therefore, any inheritance tax mitigation exercise by the attorney on the donor’s behalf is severely restricted.
Life insurance policies or capital redemption policies placed into trust involve gifts of the market value of the policies concerned or the premiums paid, if greater. Where an LPA has been registered and is operating and the donor is not mentally capable, the attorney must first apply to the Court of Protection for permission to make the investment. It would be necessary, just as it has always been where an EPA has been registered, to seek permission from the court before an investment into a discounted gift scheme or a loan trust can be considered by the attorney, as well as situations where it is intended to write single-premium bonds/capital redemption policies or regular-premium policies subject to trust.
Where the donor is still mentally capable, it is possible for him to make gifts of this nature rather than the attorney.
Application to the Court of Protection for authority to make gifts is normally made via a solicitor. It is difficult to give a firm indication of how long the process would normally take but it would be sensible to allow a period of at least three months for the court to make a decision. IHT mitigation is a perfectly valid reason for an application to be made to the court to gift monies out of the donor’s estate. When considering gifts, the overriding requirement for the court is to ensure there is sufficient income or funds for the remainder of the donor’s lifetime.
Estate planning is becoming an increasingly important area where advice is needed and it is vital for advisers to be aware of the introduction of LPAs. An LPA should also always be discussed where provision for long-term care is being considered.
Brian Murphy is financial planning manager at Axa Sun Life