Protecting the vulnerable

In today's complex financial world, manging your own finances and estate planning can be testing enough. If someone loses their mental capacity however, what estate planning can be done on their behalf?

The first question will be to check whether they have a power of attorney in place, or whether someone will have to apply to be appointed as deputy by the Court of Protection.

Clearly the power of attorney route is preferable, because the procedure for being appointed deputy can take a number of months and be quite costly.

Whichever route is taken, the issue of the steps that should be taken by the attorney or deputy on behalf of the incapacitated individual arises. While a power of attorney or deputyship order gives the attorney or deputy the ability to deal with financial assets, their powers are limited.

By their very nature, business owners and entrepreneurs tend to have estates and assets that give rise to tax and estate planning requirements.

Before the Mental Capacity Act 2005 (MCA), legislation was far more prescriptive of what could be done on behalf of a mentally incapable person. When the MCA came into force, the thrust of the legislation was more about general principles than prescriptive lists. So what can be done?

Gifts and settlements

An attorney or deputy's power to make gifts is severely limited to usual gifts of a minor nature (such as birthday or Christmas gifts). These may extend to gifts of a minor nature such as use of the annual £3,000 inheritance tax annual allowance, but even then this is usually only possible if there is a past history of gift making.

For inheritance tax planning purposes, one of the main planning tools is the use of gifts, both the use of annual exemptions and reliefs (such as the gifts of annual allowances, excess income and normal expenditure out of income) together with making more substantial gifts with the hope of the donor surviving seven years. Gift planning might not be motivated by inheritance tax planning, but also a desire to pass the business assets on to the next generation or maintain family members.

However attorneys and deputies powers are limited with no inherent power to make gifts. However attorneys and deputies can apply to the Court of Protection for consent to make gifts. Where there is no history of annual giving, consent can also be obtained for making gifts of £3,000 per year and excess income.

Statutory wills

Even if someone is incapacitated, a will (or new will) can be made on their behalf, using the statutory will procedure.

The Court of Protection will look at making a new or amended will where the provisions of the new will are in the person's best interests. One judge gave guidance to say that this could go as far as to ensure the incapacitated person is seen as having 'done the right thing' by their family.

While a detailed analysis of the procedure for making a statutory will is the subject to a more detailed article, the availability of the statutory will process should be noted. As far as estate planning is concerned, making an efficient will on estate planning grounds may be sufficient for a statutory will application.

Re-arrangement of assets and other estate planning

Aside from gifts, attorneys and deputies can also look at sensible estate planning through re-arrangement of assets. For example, attorneys and deputies might want to consider re-arranging business assets to maximise or protect inheritance tax business property relief.

If a business owner of a limited company has significant cash or investment assets within the company, a re-arrangement of the company assets should be considered to shift the assets out of the trading company, and into another investment vehicle.

For smaller businesses, if the main business owner becomes incapable of carrying out their business activity, the attorney or deputy might want to take protective action to preserve the business property relief for the company. This can be done by re-investing the business assets in trading assets such as an AIM (Alternative Investment Market) portfolio, or one of the investment houses specialising in business property relief investments.

Provided there is no gift or gratuitous intent, the attorney or deputy won't require Court of Protection consent. However to prevent any query and to give the attorney or deputy some comfort or re-assurance of their proposed planning, an application can be made to the court for consent to the re-arrangement/re-investment of assets.

Deeds of variation

Where an incapacitated person inherits assets, a deed of variation is often a useful tool to reduce their potential inheritance tax liability, especially where they do not require that inheritance to maintain themselves in the future.

As a deed of a variation can be a type of gift with gratuitous intent, an application to court for consent to enter into a deed of variation will have to be made. Again the court will accept applications for consent to enter into a deed of variation, provided the usual 'best interest' principles are adhered to. Provided that this is the case, the court is usually amenable to giving consent.

Applications for consent

When an application for consent is made to the court, the court will analyse the purpose of the gift being made. The court may be sympathetic to the idea of making gifts, provided the motivation is in the 'best interests' of the donor. The court will want to ensure the donor's income and capital requirements are catered for and sufficient assets retained to ensure they have sufficient resources for their ongoing needs.

Subject to that basic requirement, the fact that a proposed gift, deed of variation or other estate planning may be motivated by reducing the potential tax liability, is a perfectly legitimate reason to ask for the court's consent.

There are certain procedures that need to be followed, but none so onerous as to deter any application being made.

John Rouse is a partner at Wright Hassall