The making of gifts by attorneys

 In Elderly/Vulnerable Client

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Tax planning & CoP – PBC v JMA & others [2018] EWCOP 19

Case Summary from LawSkills | Private Client specialist trainersThe making of gifts by attorneys regularly crops up in cases before the CoP usually because the attorney has overstepped the mark and retrospective approval is sought or the misbehaviour is so severe as to justify the Court removing the attorney. By contrast this case is an application for prior approval to make substantial gifts with a view to improving P’s potential IHT position on death.

Background

On the 5th August 2010 JMA executed a Lasting Power of Attorney for Property and Affairs in which she appointed PBC as her sole Attorney. A few months later, JMA provided funds of over £500,000 for PBC to purchase a property.

On the 12th April 2011, JMA executed a Will leaving legacies to her sister JG, grandson JAA, eight charities and her residuary estate to PBC. In 2012 JMA made further gifts to her sister JG and her son PBC. It would appear that JMA’s lifetime gifting from her own assets amounted to £936,499 with most of it going to PBC.

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At the time of the application JMA’s estate was worth £18,650,000. It is clear that both RA and JMA together and since RA’s death took professional advice about the management of their assets.

An application was made to execute a statutory Will for JMA which replicates her existing Will save that:-

  • It also included a legacy to the Alzheimer’s Society of £100,000 – The charities would benefit from 10% of the estate to attract the lower rate of inheritance tax of 36%
  • If PBC died before JMA, JAA and the charities must bring into hotchpot any gifts made to them under the Court Order

And also for certain lifetime gifts to be made:

  • A gift of £6 million to PBC
  • Gifts of £50,000 to each of the charities named as legatees under the 2011 Will and also to the Alzheimer’s Society
  • A gift of £422,800 to be transferred to the Trustees of a Discretionary Settlement under which JAA is the primary beneficiary
  • Further gifts of certain chattels to PBC

PBC agreed to enter into further agreements under which he covenants with JAA and the eight charities that he will make a Will which provides that if he predeceases JMA they will receive the sums that they would have received under JMA’s 2011 Will had the gift to PBC not been made.

Was it in JMA’s ‘best interests’ to make such gifts?

The law

Whenever a person lacks capacity to make a decision in respect of their property and affairs, the powers of the Court are set out generally in s.16 of the Mental Capacity Act 2005, and more specifically in s.18. The power to make a gift is set out in section 18 (1) (b), and to execute a Will in section 18 (1)(i).

The exercise of those powers is subject to principles set out in s.1 of the Act, including the requirement at section 1 (5) that “An Act done, or decision made, under this Act for or on behalf of a person who lacks capacity must be done, or made, in their best interests.”

‘Best interests’ as a phrase is not defined within the MCA. Instead at s.4 of the Act, a series of requirements of the decision-maker are set out.

Positive factors relevant

  • The value of JMA’s estate
  • The substantial gifts are affordable without any risk that JMA will be left without sufficient funds to meet her needs for the rest of her life
  • The likelihood that JMA, if she had capacity would have been advised about the potential inheritance tax savings which in effect accelerate the inheritance that PBC would take under her Will
  • JMA always took advice when she could to reduce her exposure to tax without adversely affecting her own financial security
  • JMA’s provisions for charities in her Will
  • The agreement between the parties which provides the position of substituted beneficiaries if PBC predeceases JMA

Negative factors relevant

  • When JMA had capacity her tax mitigation did not extend to post-death taxes unless it affected her lifetime tax planning
  • The gifts that were being proposed would deplete JMA’s estate by nearly 38% during her lifetime so she would have less funds to live on
  • JMA had expressed on one occasion that PBC should know that the end of her fiscal support of him was in sight

The decision

After creating the balance sheet of positive and negative factors HHJ Hilder authorised the gifts and the Statutory Will as she concluded those factors in favour outweighed those against. HHJ Hilder took account of Charles, J’s view in Watt v ABC and the Official Solicitor [2016] EWHC 2532 which entailed taking each case on its individual facts and not applying ‘presumptions, starting points or a bias to be displaced in any application of the best interests test under the MCA 2005.’

Implications

  • Affordability is a must but on its own is not a sufficient reason for approving lifetime gifts
  • It is best to gain unanimous approval to proposals from the family and the Official Solicitor before applying to the Court which will scrutinise the proposals in any event
  • The Judge did not approve of the assertion that there was a presumption that a person lacking capacity would want to embark on tax planning if they had capacity. This approach is inconsistent with the ‘best interests’ policy of the MCA 2005

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