Planning ahead – protecting your assets if you cannot manage them
Losing your mental capacity and not being able to manage your affairs is a situation many of us avoid thinking about. However, if you want to ensure that your assets are protected so you can be cared for, if necessary, and your loved ones inherit what you want them to, it is important to plan ahead.
We would always recommend that you talk to us and your solicitor before making any arrangements to safeguard your assets. In particular, you should take measures before you are unable to make decisions for yourself. Working with your solicitor, we can help you make the right decisions on Lasting Powers of Attorney and creating Trusts.
1. Arranging Lasting Powers of Attorney (LPAs)
Arranging Lasting Powers of Attorney is an effective way of ensuring that decisions about your life, financial arrangements and assets can be made on your behalf if you lose the ability to make decisions for yourself.
This involves appointing people as Attorneys to act in your best interests. You can set out your wishes on what Attorneys can and cannot do and how you want them to carry out their powers. You should also write a Letter of Wishes, outlining your attitude to risk and how willing you are to allow certain types of investment. There are three types of LPA and you may choose to set up one, two or all three, depending on your needs.
Property & Financial Affairs LPAs
LPAs that cover your property and financial affairs enable Attorneys to pay any bills, manage your bank accounts, buy and sell property or make any investment decisions on your behalf. You can decide if you want Attorneys to have these powers while you still have the mental capacity to carry them out yourself, or only after you lose that ability.
Health & Welfare LPAs
Under a health and welfare LPA, Attorneys can make day to day decisions on medical care and any treatment you need. This kind of LPA only comes into force when you lose the capacity to make decisions yourself and this has been verified independently by someone who has known you for at least two years.
As a business owner, it is important to plan what happens to your business if you can no longer manage your affairs. In particular, it is a good idea to set up a business LPA apart from any personal LPAs, so these interests are managed separately.
Choosing your Attorneys
When you set up an LPA, you place a large amount of trust in the people you appoint as Attorneys. In effect, you are asking them to take control of your life if you become incapacitated and relying on them to act in your best interests. Therefore, before choosing, you should think carefully about how they are likely to manage your affairs. In particular, if you take out a Business LPA, you should choose someone who understands your business and can run it effectively.
Although the Office of the Public Guardian oversees LPAs, Attorneys are not legally obliged to report to anyone, so the system is open to misuse. You should always ask your solicitor for advice on who to appoint and report to the Office of the Public Guardian if you feel you are being pressured into choosing an Attorney against your will.
What if you do not have an LPA in place?
If you lose your mental capacity and have not set up an LPA, your affairs could be in limbo, with no-one able to make decisions. In this case, the Court of Protection will appoint a Deputy who can manage your affairs. This could be a family member or a friend, or the Court may appoint someone from their panel.
Deputies can charge for their services, but they are more accountable than Attorneys, as the Court of Protection issues orders that govern what they can and cannot do. Although this can be more robust than appointing Attorneys, appointing a Deputy can take a long time and the costs can be far higher than if you set up an LPA.
Protecting assets as an Attorney
If you are acting as an Attorney as part of an LPA, your main commitment is to manage the person’s affairs with their best interest in mind, by following the LPA agreement. This means you should understand what they would do if they still had the capacity to do it. You must not act in your own interest or for your own personal gain. In terms of investments, you should always consult a solicitor for advice and ask the Court of Protection for approval on any decisions you make.
LPAs are not very effective when it comes to mitigating against Inheritance Tax. For example, you cannot make large gifts on the person’s behalf, even if these are exempt from Inheritance Tax, as they would not be deemed to be in their best interest. You must also be careful not to put money outside their estate if this means they no longer have the assets they need, for example to pay care home fees.
Investing in Business Property Relief as an Attorney
As an Attorney, your investment choices are limited. However, you can invest in a Business Property Relief-friendly ISA. Before investing, you must consider carefully if the person would have also made that investment and if it has the liquidity to cover any expected expenses. If you are in this position, we would always recommend taking professional advice before making any final decision.
2.Trusts in Wills
If you want to protect your assets after you die, setting up a Trust in your Will can be an effective way of achieving this. However, there are a number of different Trusts available and it is important to take professional advice on which one would best suit your needs.
Life Interest Trusts in Wills (LITs)
This is particularly useful if you want to guarantee that your children receive their inheritance after you die. It involves transferring any assets you own by yourself or jointly with your spouse into a Trust and nominating your children as beneficiaries when you die. While you remain alive, you can benefit from any income from the assets in the Trust, and the Trustees can also grant you any capital at their discretion. When you die or remarry, the assets go to the beneficiaries. This approach protects your capital in the Trust from any care home fees. However, if you want to include property in the Trust, ask your solicitor for advice, as this may automatically go to your spouse on your death, depending on the nature of your joint ownership.
18-25 Trusts in Wills
If you die while your children are still young, your assets are held in a Trust until they reach 18. However, in your Will you can give the Trustees guidance on how to manage the Trust and at what age your children should receive the benefits. The Trustees will manage the assets for your children’s maintenance and education until they reach the age you specify. There are no charges on assets that leave the Trust while children are under 18. When they reach 18, any assets that leave the Trust incur an Inheritance Tax rate of 4.2% up to the age of 25 and 6% after this.
Bare Trusts of property
A Bare Trust enables you to protect your assets by gifting a share of up to 100% of a property to beneficiaries, including any children aged under 18. This is useful for buy-to-let properties or second homes, and there are no associated on-going tax or exit charges. However, the advantages can depend on the ages of the beneficiaries and if you own the property or rent it out. There may also be Capital Gains Tax implications, so we advise you to seek professional advice.
In this kind of Trust, the Trustees control the assets and decide to advance any income or capital to beneficiaries at their discretion. This not only protects your assets, but if you keep the value of the Trust below the nil-rate band, it incurs no charges and after seven years it becomes exempt from Inheritance Tax, meaning you can set up a new one every seven years.
Business and Agricultural Property Relief Trusts
You can transfer any business or agricultural property into a Trust and when you die, your spouse or children will benefit. While your spouse would inherit the property tax-free, if any changes mean you lose the tax relief, your spouse will still benefit from more favourable tax treatment than if they own it direct. It can also be passed on to your spouse with no tax implications for up to two years after you die.