Power of Attorney
This leaflet considers what a Power of Attorney is, why we should all have one in place, and what actual powers an attorney has.
What is a power of attorney?
A power of attorney is a legal document that allows someone to make decisions for you, or act on your behalf, if you’re no longer able to or if you no longer want to make your own decisions.
There are a number of reasons why you might need someone to make decisions for you or act on your behalf:-
- This could just be a temporary situation: for example, if you are in hospital and need help with everyday things such as making sure bills are paid.
- Alternatively, you may need to make longer-term plans if, for example, you have been diagnosed with dementia and you may lose the mental capacity to make your own decisions in the future.
What is Mental Capacity?
Mental capacity means the ability to make or communicate specific decisions at the time they need to be made. To have mental capacity you must understand the decision you need to make, why you need to make it, and the likely outcome of your decision.
Some people will be able to make decisions about some things but not others. For example, they may be able to decide what to buy for dinner, but be unable to understand and arrange their home insurance. Alternatively, their ability to make decisions may change from day to day.
Needing more time to understand or communicate doesn’t mean you lack mental capacity. For example, having dementia does not necessarily mean that someone is unable to make any decisions for themselves. Where someone is having difficulty communicating a decision, an attempt should always be made to overcome those difficulties and help the person decide for themselves.
However, if there does come a time when you’re unable to make your own decisions, you will have lost mental capacity and someone else may need to make decisions for you.
These could be decisions about:
- finances- paying your mortgage, investing your savings or buying items you need
- health and care- what you should eat, or what type of medical treatment you should have.
Different types of power of attorney
It’s important to be aware that there are different types of power of attorney and you may want to set up more than one. Those available are:-
- Ordinary Power of Attorney
- Lasting Power of Attorney
- Enduring Power of Attorney
What is an Ordinary Power of Attorney?
An Ordinary Power of Attorney allows one or more persons, known as your attorney(ies), to make financial decisions on your behalf. It is only valid while you still have mental capacity to make your own decisions. You may want to set one up if, for example:
- you need someone to act for you for a temporary period, such an when you’re on holiday or in hospital
- you’re finding it harder to get out and about to the bank or post office, or you want someone to be able to access your account for you
- you want someone to act for you while you’re able to supervise their actions.
You can limit the power you give your attorney so that they can only deal with certain assets, for example, your bank account but not your home.
It’s important to remember that an Ordinary Power of Attorney is only valid while you have mental capacity to make your own decisions. If you want someone to be able to act on your behalf if there comes a time when you don’t have mental capacity to make your own decisions you should consider a Lasting Power of Attorney.
What is a Lasting Power of Attorney?
A Lasting Power of Attorney (LPA) is a way of giving someone you trust, your attorney, the legal authority to make decisions on your behalf if you lose mental capacity at some point in the future, or if you no longer want to make decisions for yourself.
There are two types of LPA: an LPA for financial decisions and an LPA for health and care decisions.
LPA for financial decisions
An LPA for financial decisions can be used while you still have mental capacity or you can state that you only want it to come into force if you lose capacity.
An LPA for financial decisions can cover things such as:
- buying and selling property
- paying the mortgage
- investing money
- paying bills
- arranging repairs to property.
You can restrict the types of decisions your attorney can make, or let them make all decisions on your behalf.
If you’re setting up an LPA for financial decisions, your attorney must keep accounts and make sure their money is kept separate from yours. You can ask for regular details of how much is spent and how much money you have. This offers you an extra layer of protection. These details can be sent to your solicitor or a family member if you lose capacity.
LPA for health and care decisions
This covers health and care decisions and can only be used once you have lost mental capacity. An attorney can generally make decisions about things such as:
- where you should live
- your medical care
- what you should eat
- who you should have contact with
- what kind of social activities you should take part in.
You can also give special permission for your attorney to make decisions about life-saving treatment.
If you’re married or in a civil partnership, you may have assumed that your spouse would automatically be able to deal with your bank account and pensions, and make decisions about your healthcare, if you lose the ability to do so. This is not the case. Without an LPA, they won’t have the authority.
What is an Enduring Power of Attorney?
Enduring Powers of Attorney (EPA) were replaced by LPAs in October 2007. However, if you made and signed an EPA before 1 October 2007, it should still be valid.
You might already be using an EPA without having registered it, so that someone can act on your behalf. This is fine, until you become unable to make your own decisions relating to financial and property matters. Once this happens, your attorney must register your EPA before they can take any further action on your behalf.
An EPA only covers decisions about your property and financial affairs; an attorney doesn’t have power under an EPA to make decisions about your health and care. You might want to consider setting up an LPA for health and care decisions to work alongside the existing EPA.
Acting after a loss of capacity
An individual can complete a power of attorney only whilst they are of sound mind. If a suitable power of attorney is not in place, the Court of Protection will appoint someone to act on their behalf – this could be a relative, friend or a professional such as a solicitor. The Court will be specific in what powers are granted to this person (“the deputy”) and these powers are more limited than would be typically available under a Power of Attorney.
What powers does an Attorney have?
There is often some confusion as to the actual powers an attorney has with regard to decisions made on your behalf and there are a number of restrictions. We consider these restrictions below with regard to making gifts, making and managing investments and Inheritance Tax Planning. Overriding these restrictions are the following principles:-
- Your attorney must assume that you can make your own decisions.
- Your attorney must help you to make as many of your own decisions as you can.
- Your attorney must act and make decisions in your best interests if you are unable to make a decision.
Making Gifts
There are normally limited powers in an LPA to make gifts, but these are normally restricted to reasonable seasonal gifts (Christmas, birthdays) or donations to charities that you may have supported. These powers do not extend to larger gifts, for example Inheritance Tax planning.
Of course, if you still have mental capacity then you can make large gifts yourself as you can still act without your attorney’s involvement.
If an attorney believes that a larger gift is warranted, he/she must make a formal application to the Court of Protection for authority. The Court would need to be satisfied that any gift is in your best interests as the donor. An application to the Court will involve costs and there is no guarantee that the Court will approve the gift. If a gift is made by the attorney without receiving the required authorisation it will be treated as void.
Standard power of attorney forms include sections which allow you to include specific instructions and preferences for your attorney to follow – for example to help meet the needs of a person you are obliged to provide for such as a spouse or dependant. Equally the attorney can do what you might reasonably have done yourself taking into account your past and present wishes – for example, if you have provided support for one child for property purchase prior to your incapacity, the attorney can consider similar financial support for your other children.
Throughout, your attorney must always ensure any actions taken remain in your best interests.
Making Investments
Attorneys can generally invest in ISAs, collective investment accounts, investments bonds as well as bank accounts and ns&i products.
Any investment must be owned by you but the attorney can sign on your behalf – the original power of attorney or an official court copy or a copy certified as a true copy on each page by you or a solicitor, notary of stockbroker will be required.
An attorney cannot delegate decision making to someone else. They can seek financial help from a financial adviser, solicitor, accountant etc.
Managing Investments
Your attorney would generally deal with your day to day finances but may also need to manage your financial needs.
Your attorney may therefore need to take advice to review the suitability of an investment portfolio to provide a required level of income tax efficiently, whilst keeping the investments within your normal risk profile.
The same would apply to any flexible drawdown pension plan.
It is however important that you keep your death benefit nomination (expression of wishes) up to date since once capacity is lost changes cannot be made even under power of attorney.
Inheritance Tax Planning
If you are mentally capable then of course you can undertake your own Inheritance Tax planning without involving your attorney.
If however you are no longer capable of making your own financial decisions then the ability to undertake Inheritance Tax planning (such as by using gifts or trusts) can be constrained. An attorney can only set up a trust or make larger gifts if they have authority from the Court of Protection as indicated above.
Similarly, an attorney does not have the authority to write a will on your behalf. If you do not have a will or if an existing will no longer meets your needs then an application to the Court of Protection would be required to draft a new will.
Considerations for Attorneys When Making Investments
(A) The Duty Of Attorneys
In general, an attorney cannot pass responsibility for their duties to anyone else.
Whether investing the money is appropriate depends on several factors, particularly attitude to risk, whether the donor (the person granting power of attorney) can afford to take risk, whether any risk is needed, age and life expectancy. It is for the attorney to determine whether these aspects are catered for in any decisions made (perhaps taking advice).
(B) Case Law
Some case law guidance regarding investments (Court of Protection No 12228697) was provided by Senior Judge Lush:-
(a) The Judge explained that attorneys hold a fiduciary position which imposes duties on them so that they must exercise such care and skill as is reasonable in the circumstances when investing such assets.
(b) Short-term investment codes are generally more appropriate where someone has a life expectancy of five years or less. Previous guidance suggests that “without clear medical evidence it would be prudent to consider a life expectancy of less than 5 years for patients aged 80 or over”.
Short term investment codes generally mean bank accounts or NS&I products.
(C) Other Duties
Although it does not expressly apply to attorneys, Section 4 of the Trustee Act 2000 requires trustees to heed “standard investment criteria” when exercising power over investments, including their suitability and need to diversify.
Setting up a Power of Attorney
Once set up, a Lasting Power of Attorney will need to be registered with the Office of the Public Guardian.
You can download Lasting Power of Attorney forms to complete and register although I would generally suggest that you arrange this via a legal representative.
Please note that the above is the position as it relates in England and Wales only.