According to Intelligent Partnership, who researched the issue for their recent report on Business Property Relief, many attorneys who have appointed a Discretionary Investment Manager (DIM) could have inadvertently implemented a solution that is open to challenge.
Most Lasting Power of Attorneys (LPA) do not give the attorney express powers to delegate investment decisions. This means that where investments are managed by a discretionary investment manager, the decision to appoint the manager could be open to challenge in the future. Depending upon the sequence of events and the nature of the complaint, the adviser, attorney, solicitor or manager could all find themselves at potential risk of non-compliance.
According to the Office of the Public Guardian, the suggested wording that should be included in the Power of Attorney is:
“My attorney(s) may transfer my investments into a discretionary management scheme. If I already had investments in a discretionary management scheme before I lost capacity to make financial decisions, I want the scheme to continue. I understand in both cases that managers of the scheme will make investment decisions and my investments will be held in their names or the names of their nominees.”
However, once an LPA has been granted, the donor cannot extend the attorney’s authority informally. Instead, where the donor still has mental capacity, a new LPA would need to be drafted incorporating the authority to delegate investment decisions to a discretionary investment manager, and the old LPA cancelled. The legal fees for doing so are in the region of £650 – £700 plus VAT per LPA and it would need to be registered with the Public Guardianship Office at a cost of £110. The process takes around 5 to 7 weeks from instruction.
Where the donor does not have mental capacity, an application to amend the LPA will need to be made to the Court of Protection. Legal fees are likely to be around £1,800 – £2,000 plus VAT, plus a court fee of £400 and the costs of a doctor’s report confirming that the donor does not have capacity. The doctor’s fees are likely to be around £200 – £500. The process is likely to take around 4 to 6 months.
The issue could have a big impact on Business Property Relief (BPR) services. BPR is a popular estate planning option where an LPA is in place, as the attorney can only make gifts with the permission of the Court of Protection. However, attorneys can invest in BPR qualifying assets, which will be 100% free of IHT, subject to a minimum two year holding period. Many BPR services are structured as DIMs.
Dan Kiernan, the Director of Research at Intelligent Partnership, commented:
“It is likely that some BPR providers will stop accepting cases where the POA does not contain specific authority to delegate to a discretionary investment manager, and there could be major issues where discretionary managers won’t be able to act in cases where they have already been appointed, but for which they now discover that they do not have the authority to do anything further.”
This is also a live issue for advisers who operate on a discretionary, rather than an advisory basis, for clients with a POA in place.
POAs are becoming increasingly prominent as the population ages, and the costs of putting a POA in place have come down significantly in the last few years. The application process has been simplified and awareness of this option is increasing. However, there is little in the way of support or training for advisors who work with attorneys.
Dave Robinson, director of Centurion Wealth Care, said he became aware of the issue with power of attorney and DFMs a while ago, but that it came as a surprise to most of the advisers he has spoken to.
Mr Robinson, who is also a member of the Court of Protection Practitioners Association, said:
“It is absolutely vital that financial planners review their fiduciary clients to make sure they haven’t unwittingly advised them to breach their powers. Failure to do that could have major repercussions, particularly if investments do not perform to expectations.”
In October, the Society of Trust and Estate Practitioners (Step) asked its members to provide examples of how the Office of the Public Guardian guidance might be difficult to apply in practice.
The issue has also been highlighted on FTAdviser: click here for the story.