It’s well known financial attorneys (and deputies) must act in the best interests of the donor of the Power of Attorney. Considering a person's best interests doesn’t only apply to the impact those decisions have during their lifetime, but also how those decisions might affect what happens after they pass away.
Attorneys often become involved when the individual is going through great financial upheaval, because they’re either in or are moving into care. It’s essential for the attorney to get a copy of the Will as soon as possible, so that they’re aware of the implications of their decisions for the distribution of their estate. There are many things that an attorney should consider when completing financial planning for the estate.
Does the Will contain a gift of the house to a specific beneficiary?
Sale of the property to purchase a care annuity or to release cash to pay for care will leave the particular beneficiary disappointed. The attorney must consider amending the Will to make alternative provision for that beneficiary. The sale of such a valuable asset will increase the residuary estate, potentially resulting in the residuary beneficiaries receiving much more than intended by the donor.
Does the Will contain large cash legacies?
The inevitable reduction in the estate's value over the donor’s lifetime will affect the benefit proportionately received by the beneficiaries of the Will. It must be remembered that, when distributing the estate, the residue is depleted first. Accordingly, those receiving cash may benefit, pro rata, to a much greater extent than the donor intended.
Is the attorney making gifts or paying expenses of third parties (e.g. paying a grandchild’s school fees)?
The attorney may not have authority to make the gifts. An attorney only has limited power to make gifts of a reasonable value on customary occasions. A common misconception is that an attorney can make the ‘usual’ inheritance tax (IHT) planning gifts (using annual exemptions, making small gifts, and gifts out of surplus income). However, if unauthorised, the gifts will not be exempt and always taken into account by the Revenue for IHT purposes on death (even if the donor survives for more than 7 years).
This may result in an unexpected inheritance tax liability depleting the residuary estate leaving less for the beneficiaries. Even if authorised the attorney must keep a careful eye on the value of the estate to ensure the Will still fairly represents the interests of the beneficiaries of a diminishing estate.
Is the attorney undertaking IHT planning?
The attorney may consider that gifting isn't an option and will invest assets in IHT favourable investments such as business property instead. While this may be effective for IHT planning purposes, the attorney must consider whether the increased investment risk and potential difficulty to sell the of the investments are in the best interests of the donor.
Further, if the attorney is also a residuary beneficiary of the donor’s Will, they will directly benefit from the inheritance tax savings. Attorneys must not act if they are conflicted and, potentially, in doing so the investment will be unauthorised and the IHT savings lost.
In most cases updating the donor’s Will can address the issue. Unfortunately, if the donor doesn't have capacity to amend their Will, an attorney cannot simply do it for them. All is not lost, however. The Court of Protection is very receptive to attorneys seeking authority to undertake tax-planning and rebalance interests under the donor’s Will but the “statutory Will” process is not swift or simple. As a start it is necessary to notify anyone whose interest under the Will or intestacy is affected which may result in family disagreements. Accordingly, in bringing an application for a statutory Will, the attorney must be suitably armed and have good evidence to show the application is in the best interests of the donor.
A properly planned a statutory Will can avoid significant headaches, unexpected tax liabilities and claims following the donor’s death.
Published: February 2020
A monthly briefing from Irwin Mitchell
February 2020
For general enquiries
0808 291 3524
Or we can call you back at a time of your choice
Phone lines are open 24/7, 365 days a year
