The Essential Document Your Family Should Have.

power of attorney

During my review meetings, I often remind clients to update their wills and powers of attorney. Most have completed wills, but powers of attorney can often be put in the ‘too-difficult’ pile. 

While we are not legal experts, we are your financial planners, and we know the value of having these documents in place. Therefore, we often provide a useful reminder to do the right thing and get them drawn up.

You’ve probably heard of Kate Garraway, the journalist and TV presenter whose husband Derek became severely ill with COVID. They had not set up powers of attorney, and Kate found she was unable to access the money required for their remortgage. She was not even allowed to see Derek’s medical records. There is a common misconception that partners or family members will be given decision-making rights. 

This simply isn’t the case.

If no power of attorney is in place, there is a time-consuming process to follow. A court will appoint a deputy to make decisions on finances and healthcare. The powers granted by the court can be limited, and they decide how far the powers go. A deputy’s application could be refused and the local council appointed instead.

So, let’s now assume you’ve got around to completing your powers of attorney, and I mean both types, not just the financial one, and have a look at what your attorney can and cannot do in the context of financial planning and your relationship with your advisory team at Capital.  

General banking

With a registered power of attorney, the attorney can usually:

·   Manage the donor’s bank account, but not normally arrange an overdraft.

·   Make payments in or out of the account.

·   Hold a debit card and order replacement pins.

·   Set up, amend, cancel, direct debits, and standing orders.

·   Apply for ISAs.

·   Open and close a bank account.

·   Retrieve items for safekeeping.

·   Sign a mortgage loan agreement.

Gifting

Generally, an attorney cannot make any meaningful gifts to save on the donor inheritance tax (IHT). {The donor is the person giving authority to the attorney to act on their behalf}. 

Such gifts are not normally viewed as being in the donor’s best interests as they reduce the resources available for the donor’s future needs, such as long-term care.

Naturally, the donor can still make gifts if they still have full capacity. As a rule, if providing for family members and saving IHT is important, you should do that while you can, because your attorney cannot do it for you.

Once mental capacity has been lost, such gifts will no longer be possible in England and Wales without application to the Court of Protection. There will be time and cost associated with this, and there is no guarantee that authority will be granted. It’s unlikely that including powers in the power of attorney document itself will prevent this.

Trusts

Generally, an attorney can only set up a trust or make large gifts if they have authority from the Court of Protection.

An attorney cannot usually set up a discounted gift trust as they are not able to complete the health questions on behalf of the donor.

Gifts that are allowed

The gifts an attorney can make without application to the Court of Protection are limited to occasions such as birthdays and Christmas or to charities the donor may have previously supported. 

The attorney can consider giving financial support to dependents that the donor might reasonably have done themselves, considering their past and present wishes.

The value of those gifts must be reasonable based on the individual circumstances. It may not be reasonable to make gifts even in these circumstances if, as a result, the future financial needs of the donor may be compromised.

Attorneys should also be mindful that any gifts that are made, even with Court of Protection approval, could still be regarded as a ‘deprivation of assets’ and, therefore, included in the local authority assessment for any contributions towards the cost of care should they need to go into a care home full time.

Investing

As a rule, an attorney can make sensible investment decisions that are in the best interests of the donor. They can look at a wide range of investments to help them achieve this. 

Typically, this would include:

·   Cash

·   Bonds and fixed-income securities

·   Property

·   Shares

These can be accessed directly or indirectly through investment funds.

A power of attorney is vital in ensuring that the donor’s investments can continue to be managed flexibly and in their best interests. It is essential that the donor continues to have a choice of investment wrappers, such as ISAs, investment bonds, and personal portfolios. 

Any new investment or savings account must be opened in the name of the donor. 

The attorney should manage the investments within the donor’s normal risk profile and balance that with the donor’s needs and best interests. A record of the advice given and all transactions should be kept.  

In the absence of an attorney, investments cannot be changed or new wrappers opened, which may not be good news, particularly if the donor’s loss of capacity dictates a different investment strategy to meet future needs.

While an attorney 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.

Pensions

Often the second-largest asset to the house, a power of attorney is vital to managing the donor’s pension.

To ensure flexibility, the donor, while fit and well, should consider having a pension that offers flexible benefits and a flexible income drawdown. The attorney can, therefore, access tax-free cash and income in the most tax-efficient manner.

An attorney cannot update the death benefit nomination on behalf of the scheme member. The member should regularly update these, so they reflect your wishes in case capacity is suddenly lost. 

You cannot rely on your will to manage your pension on death. A will does not determine who inherits your pension, as, generally, death benefits are not part of the estate.

Financial planning and meeting changing income needs

The onset of ill health can drastically change retirement income needs. For some, as they become less active, they may need less income to live on. At the other end of the scale, it could require additional expenditure to make adaptations to the family home or even the need to enter residential care.

Having an attorney in place allows greater choice over how the donor’s needs can be met tax efficiently from savings, which may typically include pensions, ISAs, personal portfolios, and bonds. An attorney can also consider purchasing an annuity to provide secure income.

The absence of a registered power of attorney when needed can mean that there is little flexibility when it comes to meeting the donor’s income requirements. It may not be possible to start, stop, or vary pension withdrawals from a flexible pension. It may also mean that other lifetime savings are not accessible. 

As a result, a client may not be able to make the most of their tax allowances and end up paying more tax than necessary. In turn, this could mean that savings do not last as long as they might otherwise. With restrictions on gifting, it could also preserve a larger estate for inheritance tax.

Act now

As financial planners, we are not experts on powers of attorney, but we have experience with the pain and stress that not having them can create for your loved ones in times of incapacity. 

The thought of my family having to apply to the Court of Protection or that there was an outside chance my local council could control my finances was enough for me to sort out my own powers of attorney.

I am also aware that my attorneys cannot do everything and that, while I have the capacity, I should ensure my finances are as flexible as possible and that I keep my will, powers of attorney, death in service, and pension nominations updated. 

If the worst happened to me, I would have done all I could to help my family by acting now.

We have relationships with a number of specialist legal firms that can assist you in putting your POA (Powers Of Attorney) in place. Please, get in touch with your adviser to discuss your best options. 

I would like to thank abrdn’s Technical Support for their assistance in authoring this article.

Graham McCulley
Chartered Financial Planner,
Director

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