The Importance of Lasting Powers of Attorney

Tony Wickenden, Managing Director at Technical Connection, explains the importance of lasting powers of attorney.

A power of attorney is essentially authority for one person to act on behalf of another. Powers of attorney are relevant to everyone whatever their age but they are particularly relevant to the elderly client market as they enable delegation of property and financial matters when it’s becoming difficult – either physically, mentally or both – for the elderly person to manage their own affairs independently.

The older client market is an ever-expanding area of rapid growth. The general lifestyle changes (including changes to diet and smoking habits) and advances in science and medicine we have witnessed over the last 50 years mean that people are now living far longer. However, the fact that people are living for longer does not necessarily mean that people will stay fit and healthy for longer. It’s well known, for example, that the incidence of dementia increases with age - and mental incapacity brings with it a whole host of issues.

Lasting Powers of Attorney (LPAs) therefore have an important role in the elderly client advice process as, unlike ordinary powers of attorney, they are not revoked by the mental incapacity of the person creating the power (the donor). LPAs were introduced in 2007 by the Mental Capacity Act 2005 and replaced the old system of Enduring Powers of Attorney (EPA) from that point. Enduring powers of attorney still exist (and pre-2007 EPAs can still be registered) but any new power will be a lasting power.

Like the LPA, the EPA remains effective after the donor loses mental capacity. However, there are some important differences. For example, while an EPA can be used prior to registration but must be registered when the donor becomes or is becoming mentally incapable for it to have an ‘enduring’ effect; an LPA cannot be used until it is registered but it can be registered as soon as it is executed.

Why make a Lasting Power of Attorney?

The benefits of creating an LPA are probably fairly obvious – as this type of power of attorney (like its predecessor the EPA) lasts (or endures) notwithstanding the subsequent incapacity of the donor, the donor of an LPA can be assured that if he or she becomes either physically or mentally incapable of dealing with his or her own business affairs, precautions are in place. Provided the power has been registered, the attorney –who will have been hand-picked by the donor – will be able to step straight into the donor’s shoes for the purposes of:

• Paying bills and operating bank accounts
• Managing investments
• Buying or selling or property
• Making business decisions
• Entering into contracts – for example, to pay residential care home fees
• Claiming, receiving and using benefits, pensions and allowances

Where a health and welfare LPA is also in place, the donor can be further assured that a trusted person will be responsible for making decisions about where the donor should live, health care, medical treatment and other day-to-day issues once the donor has lost the mental capacity to make such decisions him or herself.

What happens where no LPA/EPA is in place?

Where an individual loses capacity to act for himself and no power of attorney is in place, an application will need to be made to the Court of Protection before any action can be taken or any decisions made. Under the Mental Capacity Act 2005 (MCA 2005) the Court of Protection has the power to make a one-off decision on behalf of any person who lacks mental capacity; however, if there are a number of decisions which need to be made now and in the future, the court will usually ned to appoint a Deputy to make these decisions on the vulnerable person’s behalf.

Applying to be a deputy can be onerous and elderly clients should always therefore be advised to create a power of attorney if none is already in place. The costs and administrative burden involved in creating and registering an LPA will be negligible compared to those involved with applying for a deputyship order. For example:

• The standard deputyship application fee is £371 however an additional £494 may be payable if the court decides that the case needs a hearing.  There is also a one-off ‘deputy assessment’ fee of £100 payable to the Office of Public Guardian (OPG) on registration and an annual supervision fee of £320
• The deputy is closely supervised by the OPG - annual returns will need to be submitted and the deputy may be asked to explain any large expense claims or items of expenditure. The deputy must also take out an annual ‘security bond’ to protect against any financial loss that may occur due to their handling of the vulnerable person’ finances.

Joint bank accounts

Many people are unaware that when one party to a joint bank account loses mental capacity, the other party may be restricted in operating the account and using the funds within it.  If the bank or building Society become aware that one account holder has lost mental capacity, the account may be frozen or restricted to essential transactions only. This is in accordance with guidance issued by the British Bankers Association in March 2013.

The reason for this (typically, unexpected) outcome is that a joint bank account operates on the premise that both parties give their consent to either account holder operating the account.  If one joint account holder loses mental capacity, then they lose their ability to give consent.  Legally this is a minefield and can put the bank or building society in a difficult position whereby they feel that they have little choice but to limit the transactions or to freeze the use of the account.  This applies even if the other account holder is the spouse or civil partner of the vulnerable person.

Of course, where an LPA is in place and has been registered soon after creation (or at least before mental capacity has been lost), this situation will be avoided.

What can’t an attorney do?

The primary duty of an attorney is to make decisions in the best interests of the donor. The attorney must keep their own money separate from the donor’s and must not take advantage of their position as attorney.  To this end, the ability of an attorney to use the donor’s money to directly or indirectly benefit themselves or others is closely regulated. In particular, the attorney will not be able to do any of the following without approval from the Court of Protection:

• exercise trustee functions of a donor other than where the trustee function relates to land (or the capital proceeds or income from land), in which the donor has a beneficial interest;
• make a Will on behalf of the donor;
• make gifts other than on “customary occasions” (such as birthday, Christmas, marriage etc) to persons (including himself) who are related to or connected with the donor; or to any charity to whom the donor made or might have been expected to make gifts. Even where gifts are allowed, the value of gift must not be “unreasonable” either in terms of itself or in terms of the size of the donor's estate”.
• carry out IHT planning on behalf of the donor (although it was suggested in the 2013 case of Re GM that gifts within the annual exemption could be within the scope of the attorney’s authority in certain circumstances);
• make interest-free loans to, for example, a loan plan arrangement or loans to the attorney or to members of the attorney’s family;
• make investments that could be considered not to be wholly in the donor’s best interests

Conclusion

Recommending an LPA is a vital part of the elderly client advice process; and making sure that there is an LPA in place may provide invaluable cost and administrative savings for the client’s family later on.

However, as we have seen the attorney’s powers are not without restriction and the LPA cannot be relied upon as a catch-all mechanism that can be used to implement any and every arrangement that the donor may have wanted to attend to before mental incapacity thwarted his plans.  The Court of Protection has the power to approve applications made by the attorney but there is no guarantee of approval if the proposed gift or arrangement is not considered by the Court to be in the donor’s ‘best interest’s’.

The LPA should therefore not be thought of as a substitute for timely planning but of an additional tool that can make life easier for the client and their family in the event that mental incapacity strikes.