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What is a power of attorney?

A power of attorney is a document that provides authority for someone, the attorney, to act on behalf of another, the donor (known as the granter in Scotland).

Ordinary power of attorney

The attorney can be given powers that are:

• general powers that would allow the attorney to do most things that the donor could do, or
• specific powers that would stipulate exactly what the attorney is allowed to do on behalf of the donor.

An ordinary power of attorney will generally* cease upon the mental incapacity of the donor.

* Scottish ordinary powers of attorney created between 1 January 1991 and 2 April 2001 will continue after mental incapacity of the granter unless the document states otherwise.

Lasting power of attorney (England & Wales)

Lasting powers of attorney (LPA) replaced enduring powers of attorney from 1 October 2007 and allow the attorney to continue to act even after the donor loses mental capacity.

LPAs can cover decisions concerning not only the donor's finances but also their personal welfare, such as decisions on long term care and medical treatment. The donor can include one or both aspects and can appoint different attorneys for each purpose.

An LPA attorney cannot act until the power is registered with the Office of the Public Guardian (OPG). Unlike enduring powers of attorney this needs to take place prior to the donor becoming mentally incapable. A registered LPA can still be revoked by a donor who has mental capacity.

The powers relating to financial matters can apply either:

• only after the donor loses mental capacity, or
• both before and after the donor loses mental capacity.

However, personal welfare decisions can only be made by the attorney once the donor has lost mental capacity.

Enduring power of attorney (England & Wales)

It is no longer possible to create an enduring power of attorney (EPA). If a person has made one before 1 October 2007, it can continue to be used regardless of whether it has already been registered.

An EPA allows the attorney to make decisions about the donor's finances and property, but not their personal welfare. The powers within the EPA can apply either:

• only after the donor loses mental capacity, or
• both before and after mental capacity is lost.

A donor with mental capacity can continue to make their own decisions without the involvement of their attorney and can revoke the EPA.

EPAs only need to be registered with the Office of the Public Guardian once the attorney believes the donor has begun to lose or has lost mental capacity. Failure to register the EPA after the donor loses mental capacity will result in any decisions the attorney makes being treated as invalid.

More information on powers of attorney in England & Wales can be obtained from the Office of the Public Guardian website.

Continuing power of attorney (Scotland)

Continuing powers of attorney (CPA) enable an attorney to deal with the granter's property and finances. The attorney's powers continue after the granter becomes mentally incapable.

The document must specify the exact powers given to the attorney. For example, this could include paying bills, buying and selling investments, making gifts, creating trusts and tax planning. Careful drafting is required as the attorney cannot do anything that the power of attorney document does not expressly state.

A continuing power of attorney is only valid after it has been registered with the Office of the Public Guardian (Scotland). The powers may be valid from registration or the granter can specify that the attorney can act only after a certain event or time. This could include moving abroad, or the granter becoming mentally incapable.

Welfare power of attorney (Scotland)

Welfare powers of attorney (WPA) allow an attorney to make decisions about a granter's health and personal welfare. The type of decisions could include social care arrangements, medical treatment and diet. The attorney's powers are limited to those expressly stated by the granter in the WPA document.

A welfare power of attorney must first be registered with the Office of the Public Guardian (Scotland), before the document is valid, but it can only be used by the attorney after the donor loses mental capacity.

More information on powers of attorney in Scotland can be obtained from the Office of the Public Guardian (Scotland) website.

Acting after a loss of capacity

An individual can only complete a power of attorney while they are of sound mind. If a suitable power of attorney is not in place, the Court will appoint someone to act on their behalf. This could be a relative, friend or a professional such as a solicitor.

England & Wales

Where an individual has lost mental capacity without having completed an enduring or lasting power of attorney, the Court of Protection will appoint a deputy to look after the individual's financial affairs. The Court will be specific in what powers are granted to the deputy. These powers are often more limited than would typically be available had the individual created a power of attorney.

Scotland

Where an individual has lost mental capacity without completing a power of attorney, the Sheriff Court can appoint a guardian. The guardianship order will give the guardian specific powers to look after the individual's financial or welfare decisions. The order can be created to last indefinitely or for a specific period of time.

Where a one-off decision needs to be made, an application can be made to the Court for an intervention order. This would allow the intervener to act for the purpose of this sole decision. An intervention order can also be applied for where the guardian wishes to act outside the powers specified in the guardianship order.

Attorney’s making gifts

England & Wales

Both enduring and lasting powers of attorney have limited powers to make gifts. This is usually restricted to reasonable seasonal gifts (such as birthday or Christmas presents) and any donations to charity that the donor supported. It does not extend to larger gifts, for example, for IHT planning.

The attorney must make a formal application to the Court of Protection for authority to make a larger gift. The Court would need to be satisfied that any gift is in the best interest of the donor. Any application to the Court of Protection will incur costs and there is no guarantee the Court will approve the gift.

The gifts will be treated as void if made by the attorney without receiving authorisation. This could have severe tax consequences on the death of the donor.

Donors with mental capacity can make larger gifts themselves as they can still act without the attorney's involvement.

Standard power of attorney forms include sections which allow the donor to include specific instructions and preferences for their attorneys to follow. This may be to help meet the 'needs' of a person the donor was obilged to provide for, such as a spouse or dependant. But equally the attorney can do what the donor might reasonably have done themselves taking into account their past and present wishes.

For example, the donor may have provided financial support for their eldest child for property purchase prior to their incapacity. The attorney can consider giving similar financial support to the donor's other children.

To be effective any instructions by the donor cannot be binding upon the attorney and the attorney must always ensure any actions they take remain in the best interest of the donor.  These instructions should not be relied upon as a means of allowing effective estate planning. 

Scotland

As in England and Wales, the attorney is able to make gifts such as reasonable seasonal gifts or donations to any charity that the granter supported. The attorney will only be able to make larger gifts, such as for IHT planning, or create trusts if the CPA document expressly allows it. The CPA document may also express limitations, such as the size of such gifts, or potential recipients. If there is no such express power, the attorney can make an application to the court for authority.

Making investments

Attorneys can generally invest in:

• Investment bonds
• OEICs
• ISAs

Any investment must be owned by the donor/granter but the attorney can sign on their behalf. The original power of attorney document, or an official court copy, or a copy certified as a true copy of the original at the foot of each page by the donor/granter, a solicitor, notary or a stockbroker will usually be needed.

An attorney generally cannot delegate decision making to someone else. They can seek professional help from a financial adviser, solicitor, accountant etc. to help with their decision making. However, this may present an issue if funds are intended to be discretionary managed.  

It is now understood that an attorney may instruct a Discretionary Fund Manager  (DFM),  to continue, or engage the services of a new DFM, without express wording in their power of attorny. This was confirmed  to the Society of Trust and Estate Practitioners (STEP) by the OPG.

However, OPG guidance currently states that where a person already has  investments that are managed by an investment professional (known as a discretionary fund manager) or they would like to allow their  attorney to use any scheme involving a DFM , a person should consider taking legal advice on whether it is necessary to make specific provision for this in their LPA.    This appears to be a 'belt and braces' approach in case a DFM is  refusing to act without a specific provision. But on the basis that a DFM is happy to act in principle, there should not be an issue.

In Scotland, the CPA should still be checked to see what investment powers the attorney has been given.

Managing investments 

Generally the attorney will deal with the donor's day to day finances, such as bills, claiming and collecting benefits, the state pension and other income. The attorney may also need to manage financial needs. The attorney should take appropriate financial advice to review the suitability of the investment portfolio in providing the required level of income tax efficiently. The investment strategy should be managed and kept within the donor's normal risk profile. A record of the advice given and all transactions should be kept. 

A pension is often a person's largest asset, if the donor has a pension that offers flexible income drawdown this will enable an attorney to start or stop withdrawals in line with the donor's income needs. It's therefore important to check if the existing pension contract offers flexible inome drawdown. If a transfer is needed to access full flexibility, ideally this should be done whilst the donor has full mental capacity and is in good health to avoid the possibility of IHT.   Having a power of attorney in place allows the pension to be accessed immediately if donor loses mental capacity.

It is important to keep the pension death benefit nomination up to date as once capacity has been lost changes cannot be made.  A power of attorney cannot update the death benefit nomination on behalf of the scheme member.  Importantly the death benefit nomination helps ensure that the death benefits are paid to the right people in the right way.  A will does not determine who inherits pension death benefits as generally death benefits are not part of the estate. 

IHT Planning

If the donor is mentally capable, they can undertake IHT planning  without the attorney's involvement. If the donor is no longer capable of making their own financial decisions the ability to undertake IHT planning by gifting to individuals or a trust can be constrained.

In England & Wales and Northern Ireland  

An attorney can only set up a trust or make larger gifts  if they have authority from the Court of Protection. 

In Scotland,

The continuing power of attorney document would need the express power to allow an attorney to make gifts and to set up trusts. If the attorney does not have the necessary express powers, they can apply to the court for authority.

Even where there is court approval or an appropriate express power an attorney can't usually set up a Discounted Gift Trust with a discount as they cannot complete the health questions on behalf of the settlor.

An attorney does not have the authority to write a will on behalf of the donor. If the donor doesn't have a will or if the current will no longer meets the needs of the donor, an application to the court would be required to draft a new will.

Preserving the estate

Without court approval, or an express power (in Scotland) it's not generally possible for an attorney to make lifetime gifts on behalf of a donor, even if it could be argued that the gifts are to save IHT and would have been something the donor would have done if they were of sound mind. To avoid this problem, where substantial lifetime gifts are required to mitigate IHT, these should be done while clients have full mental capacity.

However, an attorney, can take some steps which will help preserve the value of the donor's assets, which indirectly also could mean that there is more left for the beneficiaries of the estate. With appropriate financial advice, the attorney can ensure the donor's income and capital needs are provided for tax efficiently, by making the most of tax allowances and accessing savings in the most favourable order.

For example, if the donor is faced with increasing care costs, it may be better to fund these from non-pension savings before accessing pensions. This could be a benefit as 

• Tax cold be saved if unused allowances are available, this might mean smaller withdrawals are needed to produce the required amount of net income.
• More assets are left inside the pension which are outside the scope of IHT and a lower value of assets outside the pension which are subject to IHT. 

Investments by deputies

The deputy's powers will be detailed in the Court order and the deputy cannot exceed them. The order may give wide powers to the Deputy, for example, to invest as if it were their own property. Alternatively, it could limit those powers, for example providing that large items of expenditure or investment cannot take place without further permission of the Court. The deputy can only make substantial gifts or create trusts with the approval of the Court of Protection.

The investment provider would typically need to see the Court order or a copy certified as a true copy of the original at the foot of each page by a solicitor, notary public or a stockbroker.

Investments by guardians

The position in Scotland is similar whereby the guardian can only invest, make gifts or create trusts if authorised to do so within the guardianship or intervention order or by application to the Sheriff Court.

Typically the provider will need to see the original Guardianship or Intervention Order together with the Certificate of Appointment. If the originals are not available, a copy certified as  a true copy of the original at the foot of each page by a solicitor, notary or a stockbroker should be supplied.

Attorney’s acting as a trustee

England & Wales

Generally trustees are unable to delegate their duties as trustee. However, there are a couple of exceptions:

1. Trustees can generally delegate their duty as trustee under a power of attorney for a period not exceeding 12 months, provided the trustee has full mental capacity. Typically, this may be useful if a trustee will be residing abroad for a period and unable to easily complete their duties as a trustee.

If the Trustee has lost mental capacity, the attorney cannot just automatically step in to act as a trustee on their behalf, even for a 12 month period.  This can be an issue as the trustees may not be able to make decisions that require unanimity before the trustee in question has been removed.     

The person with the power to remove and appoint trustees (often the settlor in the first instance) could be contained in the terms of the trust. If there are no such provisions, it is possible for a trustee to be removed under the terms of the Trustee Act 1925.

Ideally trustees who feel their mental capabilities may be diminishing should consider retiring from their duties whilst they still have capacity. 

2. Attorneys of an enduring power of attorney (EPA) can carry out trustee duties on behalf of the donor if the EPA was created before 1 March 2000 and registered before 1 March 2001

Scotland

It's possible to delegate trustee powers to an attorney. The granter would have to include an express power in the continuing power of attorney document to allow this.