M&G: Why a power of attorney does not replace a will
As people, on the whole, live longer, proxies play a greater role in planning for future life.
But while it’s extremely important to appoint an attorney to act on your behalf in case you lose your capacity, an attorney is not a “super-sub”; they shouldn’t be an excuse to avoid making important financial planning decisions now.
There are things that a lawyer cannot do or, if he can, that are not simple. Donating the donor’s assets during their lifetime or indicating how their assets are to be distributed upon death falls into this category.
Generally, in England and Wales, a solicitor does not have the power to gift the donor’s property; in Scotland, it is possible to include powers allowing the trustee to make substantial gifts.
Proxy Questions
In England and Wales, a solicitor should ask three questions if considering making a donation on behalf of an incapable donor.
- Is the donation to someone connected or related to the person – or to a charity they would normally have been able to donate to?
- If the gift is for a person, is it given on a usual occasion?
- Is the gift of reasonable value, given the size of the person’s estate and their anticipated future needs?
If the answer to any of these questions is “no”, it is necessary to seek authorization from the protection court before making the donation.
Remember, however, that an attorney must act in the donor’s best interests at all times.
Giving away the donor’s property to help family members or to alleviate an Inheritance Tax (IHT) bill offers no obvious benefit to the donor, so don’t assume a claim will be granted.
It is important to remember that when lawyers exceed their authority to give gifts, the Office of the Public Guardian may investigate the actions of the lawyer.
They can ask the lawyer to seek retroactive approval from the court of protection and, in some cases, the gifts may have to be returned. The lawyer could be removed from office and, in extreme cases, the police could be alerted if fraud is suspected.
Why a will is important
A lawyer also cannot write or make changes to the donor’s will without applying to the protection court. Even if a request is made, the court requires detailed information on why the donor would have wanted to distribute his estate in this way.
A mental capacity assessment should also be done by a medical professional, as an attorney can only apply when the donor has lost capacity.
A well-drafted will ensures that your estate is distributed according to your wishes. It can also help with IHT planning, so it’s important to review a will if there are any changes to the IHT rules.
Make sure this information is up-to-date rather than assuming your attorney can deal with it later, ensuring your estate is distributed efficiently to the right people.
And while a lawyer can transfer the donor’s pension, they can’t make a death benefit appointment.
Most plan administrators have discretion to allocate death benefits, so a member appointment is not legally binding.
But it is still a useful document that helps plan administrators understand the affiliate’s wishes.
The absence of a nomination completed by the member could result in death benefits being distributed in a way that the member did not want, but there are also potential tax benefits to having a nomination in place.
The flexible death benefit options available under Retirement Freedoms mean that a pension can continue across generations without IHT. If the member dies before age 75, it can also provide tax-efficient income to family members.
However, the legislation stipulates that when the member dies with one or more dependants, only these can access the flexi-access draw, unless other people have been specifically designated.
Designated death benefits
Failure to nominate (or inaccurately nominate) may lead to undesirable results. For example, a member could die leaving a dependent spouse and non-dependent adult children. Assuming the scheme offered flexible death benefits, the spouse would have the option of receiving a lump sum or income via an annuity or dependant’s levy.
But unless adult children were specifically named, they would be limited to a lump sum with no possibility of retaining death benefits in the pension system. This could lead to IHT issues as well as the loss of tax-efficient investment packaging.
If the past two years have taught us anything, it’s that no one knows what the future holds. It’s impossible to plan for every eventuality, but good financial planning can help mitigate some of the risks.
Although there are restrictions on the powers that lawyers have, having a power of attorney in place is one of the cornerstones of good financial planning. Remember that there is no substitute for the dealer to act while still mentally capable of doing so.
Neil Macleod is Technical Director at M&G Wealth