Avoiding pitfalls with Power of Attorney
Martin Jones, Technical Consultant at AJ Bell, highlights some traps to watch out for with clients who are thinking about setting up a Power of Attorney
While the incidence of many diseases has declined in recent years, the prevalence of dementia and Alzheimer’s disease has increased, and indeed figures from the Office of National Statistics show that this is one of the principal causes of death in England and Wales.
If you also factor in increasing life expectancy and a wealthy baby boomer generation reaching later life, there is a growing cohort of older clients who may need support with decision making.
A tool often used in these circumstances is the Lasting Power of Attorney (LPA). This allows a client to delegate decision-making to a trusted friend or family member. While most of us are familiar with the concept, there are a few pitfalls to be aware of.
Firstly, a client must have mental capacity in order to grant an LPA.
The charity Age UK defines mental capacity as, “being able to understand a specific decision, retain information for long enough to make it, weigh up different choices and communicate the decision in any way possible.”
If a client does not have mental capacity, they cannot grant the LPA. You could then end up in a situation where important financial decisions need to be made – perhaps in respect of taking pension benefits – but there is no one with the lawful authority to make them.
The recourse in that situation is to ask the Court of Protection to appoint a Deputy, which is effectively a court-appointed attorney. The Deputy can then make the decisions and provide the necessary instructions.
However, this can be a costly and lengthy process. The Deputy will need to keep detailed accounts, and they still might need to refer some decisions to the Court of Protection.
Therefore, if you are advising a client, and mental capacity could be an issue down the line, it may be worth raising the idea of an LPA ahead of time.
An LPA does not cover any decisions made as a trustee.
A trustee can delegate some of their powers via a Power of Attorney, but it must be via a specific Trustee Power of Attorney (TPA) as per the Trustee Act 1925.
Helpfully, the Act provides some standard wording that you can use. However, a TPA can only last for twelve months, so it’s not a long-term solution.
If you have a client who is a trustee, perhaps of a family trust or Will trust, and they are starting to lose mental capacity, they may want to consider passing on the trustee mantle to someone else.
In the absence of an express power of removal in the trust deed, the worst case scenario is that the other trustees might have to apply to the court. Therefore, this will be much easier to sort out while they still have capacity, rather than trying to deal with it afterwards.
You might also have clients who are members of Small Self-Administered Schemes (SSASs). A SSAS member is usually a trustee of the scheme as well, so a client in a SSAS may need to execute a TPA alongside an LPA or General Power of Attorney (GPA) if they are looking to delegate any decision making.
Also if loss of capacity could be an issue in the short or medium term, it might also be worth thinking about an exit strategy to another pension arrangement where the client is not a trustee.
Somewhat surprisingly, financial advisers are not permitted to certify LPAs.
Providers will typically insist on seeing a certified copy of the LPA or the original LPA itself. But while advisers are used to certifying documents as originals, they cannot certify an LPA.
This is a legislative requirement under the Powers of Attorney Act 1971, which says that an LPA can only be certified by a solicitor, stockbroker, notary public or the client themselves. The fact that financial advisers are regulated individuals does not unfortunately come into it.
So while an LPA is clearly a very useful tool, there are things to watch out for. As ever, a bit of forward planning can help your clients (and their families) steer clear of the traps.