The new guidance is included in Public Guardian practice note (PN7) updated on 18 January 2018. It does not make any new rules but clarifies the position in the light of a number of recent decisions from the Court of Protection (CoP). As most advisers will be aware, the power to make gifts by an attorney (acting under a Lasting Power or an Enduring Power) or a deputy is very limited.
From now on we refer to attorneys and donors, but the same rules apply to deputies.
Attorneys can only make gifts on behalf of the donor:
• in some limited situations, and
• if it’s in the person’s best interests.
Before making a gift, an attorney must consider whether the donor:
• has mental capacity to understand the decision to make a gift, and
• if they can take part in the decision.
If the donor has capacity to make a gift, then they should normally make the gift themselves, rather than tell the attorney to make it on their behalf. If the attorney considers that the donor has capacity to make a gifting decision, they should keep a record of the steps they took to make sure they did. However, the guidance goes on to say that even if the donor apparently has capacity to make a gift, the attorney must still use care and caution when the donor expresses a desire to make one. If a substantial gift is involved, the attorney may need to seek advice or arrange for a mental capacity assessment, or both.
If the donor lacks capacity then, as with all decisions an attorney makes, the main test is whether it is in the donor’s best interests.
A best interests’ decision is not the same as asking what the person would decide if they had capacity. You have to think about:
• whether the person was in the habit of making gifts or loans of a particular size before they lost capacity
• the person’s life expectancy
• the possibility that the person will have to pay for care costs or care home fees in future
• the amount of the gift – it should be affordable and no more than would be normal on a customary occasion or for a charitable donation
• the extent to which any gifts might interfere with the inheritance of the person’s estate under his or her will, or without a will if one has to be created
• the impact of inheritance tax on the person’s death.
The general rule for attorneys in relation to making gifts on behalf of the donor is simple: apart from some exceptions, the law says you must not make gifts from the person’s estate.
To count as an exception, the gift must be:
1. given on a customary occasion for making gifts within families or among friends and associates (for example, births, birthdays, weddings or civil partnerships, Christmas, Eid, Diwali, Hanukkah and Chinese new year)
2. to someone related or connected to the person or (if not a person) to a charity the person supported or might have supported
3. of reasonable value, taking into account the circumstances in each case and, in particular, the size of the person’s estate.
If an attorney wants to make a gift that falls outside the restrictions they must apply to the Court of Protection for approval.
Often the most difficult point will be the last one, i.e. whether the gifts are reasonable. This will, of course, depend on the circumstances, however the OPG gives the following guidelines.
To work out whether or not a gift is reasonable, you must consider:
1. The impact of the gift on the person’s financial situation. You must consider not only their current and future income, assets, capital and savings but also their present and future needs. Consider whether their income covers their usual spending and will continue to do so in the future – and whether the gift would affect that.
2. Whether making the gift would be in the person’s best interests (see above).
In deciding whether gifts are reasonable, the following should also be considered:
• are all members of the family being treated equally – if not, is there a good reason?
• is the attorney taking advantage of their position by making gifts only to himself or their family and not considering making gifts to others
• is the proposed gift for someone who is not a relative of the person or closely connected to them – if not, the gift may be beyond the attorney’s authority
• has the donor made gifts to someone before they lost capacity, and so would it be reasonable to give gifts to them now?
The guidance also states that the contents of a person’s will may be taken into account when making gifting decisions, as it is an indication of the donor’s wishes.
It is also important to remember that a gift is when you move ownership of money, property or possessions from the person whose affairs you manage to yourself or to other people, without full payment in return.
A gift can include:
• making an interest free loan from the person’s funds, as the waived (dropped) interest counts as a gift
• creating a trust of the person’s property
• selling a property for less than its value
• changing the will of someone who’s died by using a deed of variation to redirect or redistribute the person’s share in the estate (meaning someone’s property and money)
For any gifts which are not covered by the “exceptions”, the attorney needs to apply to the CoP before they go ahead. The CoP has the power to either approve or refuse an application.
The guidance also states that any gift or transfer of real property (for example, land or a house) – either the whole property or a part share – is almost certainly outside of the attorney’s powers despite what the donor might have said when they had mental capacity. To make such a gift, they are likely to have to apply to the CoP for permission.
The guidance suggests that particular care should be taken if an attorney is thinking of accepting a gift for themselves from the person’s estate. The conflict of interests is obvious and an attorney must not take advantage of their position to benefit himself.
The CoP has recognised that there are exceptions to the rule that an application to the CoP will always be required if the gift is not covered by the “Exceptions” mentioned above. Those exceptions from the rule are when an attorney would go beyond their authority to make a gift but in such a minor way that it doesn’t justify a court application – as long as the person’s estate is worth more than £325,000. These exceptions are often called ‘de minimis exceptions’.
Specifically the exceptions can be taken as covering the annual Inheritance Tax (IHT) exemption of £3,000 and the annual small gifts exemption of £250 per person, up to a maximum of, say, 10 people when:
a) the person has a life expectancy of less than 5 years
b) their estate is worth more than the nil rate band for IHT purposes (currently £325,000)
c) the gifts are affordable, taking into account the person’s care costs, and won’t adversely (negatively) affect their standard of care and quality of life
d) there is no evidence that the person would be opposed to gifts of this value being made on their behalf
However, being able to gift small amounts up to the IHT exemption without the permission of the court doesn’t mean that an attorney can carry out ANY IHT planning without the court’s permission.
Neither can an attorney rely on other IHT exemptions to avoid applying to the court for permission to make a gift.
In one recent case, Senior Judge at the CoP specifically stated that attorneys who want to make larger gifts for IHT planning purposes – such as setting up monthly standing orders to themselves – should apply to the CoP for permission.
The above is all based on English law, as different rules apply in Scotland and in Northern Ireland.
The subject of powers of attorney as well as wills is often a good starting point to discussing clients estate planning. Where the client acts as an attorney, making gifts as part of IHT planning for a donor will frequently come up in any such discussion and so all advisers should be familiar with the legal rules for such planning.
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