Opening doors

The Court of Protection has been around for many years. It was set up to provide a legal framework for handling the financial affairs of those who are, usually by reason of some form of mental illness or acquired brain injury, incapable of making decisions for themselves, and are therefore vulnerable and open to abuse.

For those who have seen the film The Madness of King George, it is interesting to note that the Court of Protection was originally set up as a consequence of the king’s illness, when it was realised that there was no mechanism in place to deal with the situation where a person, in this case the king, was incapable of making rational decisions, and thereafter the Court of Protection was formed.

With statistics continuing to show increased longevity in the population, bringing with it a similar increase in the less appealing by-product of Alzheimer’s and other forms of dementia, it is likely that a significant number of people will have cause to deal with the Court of Protection in the future.

Precautionary tale

The Court of Protection has on average around 20,000 to 25,000 cases which are ‘live’ at any one time. The majority of these are people suffering from various types and stages of dementia. Many of them have taken the prudent precaution of establishing some form of enduring or lasting power of attorney, appointing an attorney or attorneys, usually family members, to take over the running of their financial affairs should they become incapable of doing so.

Such arrangements are entered into while the person still has the capacity to make that decision, and the power of attorney is only triggered once the person is deemed not capable of handling his or her financial affairs. At this point the power of attorney is then registered with the Court of Protection.

Sadly, there are many occasions where no previous arrangements have been made, which necessitates the appointment by the Court of Protection of a deputy to handle the property and financial affairs of the protected party (P). This will often be a family member or a member of the Court of Protection panel solicitors, and even in some cases the social services department of the local authority.

But there is another significant and growing body of people whose affairs also come under the jurisdiction of the Court of Protection, mainly recipients of damages awards for personal injury or clinical negligence, and whose needs and requirements often differ materially from those of the elderly mentally infirm. These are atypical in a number of respects, and mainly involve much younger people, with substantial awards to administer.

The average lifespan of a typical file is around three to five years, which is perhaps understandable given the fact that, by definition, the effects of dementia have already taken hold by the time the Court of Protection gets involved. As such, the role of the attorneys/deputies is often confined to overseeing P’s day-to-day expenses and liabilities, payment of bills, etc, with the jurisdiction of the Court of Protection ceasing on the death of P.

The situation is fundamentally different for claimants who have often received substantial damages awards. Although no formal record exists, before the implementation of the Mental Capacity Act in 2005 (more of which later), any settlement involving a patient (as was) required the approval of the Court of Protection as well as the High Court. The Master of the Court of Protection (now Senior Judge Lush) had kept an informal log of all such applications, which were averaging between 250 and 300 per year.

Long-term load

Although formal approval is no longer required, the cases still find their way to the Court of Protection, and the previous figure has been maintained, if not increased, due to the volume of litigation currently facing the court. Given that the average age of the claimant is around 20 to 25, with a large proportion being birth-related cases and often with only minor constraints on life expectancy, the average lifespan of this type of case can often be 50 years or more. It therefore follows that these types of case, with their diverse long-term needs and requirements, will form an increasingly large proportion of the overall Court of Protection caseload as time goes on.

At the moment, these damages cases are not distinguished from the more usual dementia cases and are simply mixed in with the overall caseload of the court. We have long advocated the creation of a dedicated ‘damages team’ within the Court of Protection, dealing solely with the often more complex and frequent requirements of those who have ongoing long-term needs. Given the increasing proportion of such claimants who find themselves under the jurisdiction of the court, this is something that will hopefully come to pass in the future.

By far the most significant recent piece of legislation to affect this field is the Mental Capacity Act 2003 (MCA), which came into force in April 2005. Originally drafted as the Mental Incapacity Act, it was swiftly changed, both in name and in focus, and now sets out the five fundamental principles for dealing with people who cannot manage their financial affairs:?

1. Every adult has the right to make his or her own decisions and must be seen to have capacity to make them unless it is proved otherwise.

2. A person must be given all practicable help before anyone treats them as not being able to make their own decisions.

3. Just because a person makes an unwise decision, they should not be treated as lacking capacity to make that decision.

4. Anything done or any decision made on behalf of P must be done in their best interests.

5. Anything done for and on behalf of P should be the least restrictive of their basic right to freedom.?

The Act, and in particular these five principles, created a fundamental shift in cases coming before the Court of Protection. Whereas previously cases were decided on what was ‘reasonable’ in the circumstances of the case, any applicant to the court now will have to demonstrate that the proposed course of action is not only reasonable, but is also in P’s best interests.

Focus shift

This shift is well illustrated by a couple of recent cases that came before the court. In the first, Re JDS, the parents of a child born in 1991, and who had received a substantial damages award following negligent procedures at his birth, applied for the transfer of assets from P to them in order to mitigate liability to inheritance tax. Initially, the application had been to transfer equity to the value of £500,000 in the home, owned by P but held by his parents and a local solicitor as his trustees.

However, this application had been refused, and the second application was made for permission to transfer £325,000 of P’s funds into a flexible power of appointment trust with the intent that substantial inheritance tax would be saved provided P lived for seven years.

The question of P’s life expectancy was a major factor, and, although it was difficult to predict with any accuracy, there was an expectation that P would pre-decease his parents; however, he was expected to comfortably exceed the seven years required to ensure the tax efficacy of the arrangement.

Under the old, pre-MCA rules, the court may well have found that the proposals set out in the application were perfectly reasonable, and had historically approved applications which may have looked, on the face of it, very similar (Re C (a patient)). However, on the new principles espoused by the Act, it is difficult to demonstrate that the proposed course of action would be in P’s best interest.

Although it is clear that the proposals would have benefitted the parents, IHT mitigation inherently benefits the remaindermen, not the donor. This is particularly the case when considering a damages award, which has been calculated on the basis that the award will be such that, when invested, and drawing down both the capital and interest over P’s lifetime, the last penny will be spent the moment P exudes his last breath.

While this approach invariably involves a large degree of speculation, it is not designed so that there will be any money left for the estate. As such, it is the Court of Protection’s duty to ensure that as much money as possible remains available to meet P’s ongoing needs throughout his lifetime; there are no such duties to the parents to mitigate IHT.
Another area where the new emphasis has been brought to bear is the matter of private trusts. To the casual observer (or independent financial adviser) the Court of Protection can seem like a giant state-backed trust, with its own rules, safeguards and costs provisions, and to a certain extent they would be correct. Trusts are a well-known, recognised vehicle for administering the financial assets of people, both with and without capacity, and carry similar statutory safeguards ?and remedies.

While it was accepted that trusts were the exception to the rule, applications to implement a private trust rather than utilise the Court of Protection were regularly filed over the past ten to 15 years and, in our experience, while the formal procedure had to be followed, pre-MCA my firm submitted around 20 such applications, all of which were approved by the court without exception.

However, it became clear that there had not been a precedent set post-MCA, and this resulted in the judgment in the case of HM, which was handed down last November. In the judgment, HHJ Marshall QC set out the considerations to be taken into account when attempting to determine which route should be chosen to be in P’s best interests.

• The limits of a deputyship as against a trust
• The less restrictive option for P
• The degree of supervision applied to each
• The degree of protection each affords to P
• Costs oversight and control
• Administrative efficiency
• Investment powers

HHJ Marshall came down heavily in favour of the deputyship route (albeit allowing the application on the particular facts of the case). The primary causes for concern were the statutory oversight which would be lost by the use of a trust, coupled with the potential for ‘fee drift’ in respect of the charges levied by the professional trustee, a pre-requisite for the approval of a trust. In most other respects, the judge contended that there was little to choose between the approaches, and that in the absence of a ‘factor of magnetic importance’ a deputyship was likely to be preferred over a trust arrangement in all but the most singular circumstances.

Tracker fund

Speaking of trusts, there is a similar dilemma facing the courts (not the Court of Protection) when dealing with personal injury/clinical negligence awards for minors. The Court of Protection would only become involved if it is clear from the medical evidence adduced for the purposes of the case, that the minor would be incapable of handling his or her financial affairs upon attainment of his or her majority at the age of 18.

Although they are under a ‘legal disability’, under normal circumstances an award will remain in court until the claimant reaches the age of 18, whereupon the jurisdiction of the court will cease. In the meantime, the monies will either be retained on deposit at the Court Funds Office, or can be placed into an equity tracker fund run by Legal & General on behalf of the Ministry of Justice.

The rate payable currently on special account is 0.5 per cent per annum, which is hardly awe-inspiring. Similarly, although the tracker fund offers some exposure to equities (70 per cent FTSE All Share, 30 per cent World Index Ex-UK), it is hardly a balanced portfolio. The facility does exist to apply to the court to set up a private trust for the benefit of the child, and this would be done using the ‘reasonable’ test; it does not fall under the MCA rule.

The key facts to take into account when considering this option are:?

• the amount of the award;

• the age of the client (hence length ?of time to majority); and

• cost controls.?

Such applications will invariably involve a professional trustee, and therefore a level of costs which would not be present if the monies were left in court. Such costs need to be taken into account when attempting to demonstrate that a better return can be obtained by establishing a trust, and allowing the trustees to place the money in the market (not hard given the 0.5 per cent per annum rate on offer...).

Finally, looking at the aspects of the Court of Protection as they affect financial advisers who may be approached to get involved in this type of work, the implementation of the MCA heralded the departure of the Court of Protection investment division, which had, with the assistance of the panel brokers, previously been responsible for the investment of P’s award upon settlement of the action.

Today, a typical deputyship order will direct that the deputy should obtain financial advice from a person authorised by the Financial Services Authority (FSA) without any further specification. Given that any person giving financial advice must be authorised by the FSA, including banks and tied agents as well as IFAs, the deputy would be acting within his powers as long as that person was authorised. There has not yet, to the best of my knowledge, been a case to decide whether or not this course of action could be deemed to be in the ‘best interests’ of P, but, as a slightly biased IFA, I believe that would be difficult to demonstrate.

The Court of Protection provides ?a valuable function for some of the ?more vulnerable members of the society and has done this for hundreds of ?years. There has been a fundamental ?shift in emphasis following the introduction of the Mental Capacity Act, and advisers involved in this area need to be aware of the pitfalls presented when dealing with the financial affairs of protected parties, as the Court of Protection is likely to be around for many years to come.