If you are an attorney under a Lasting or Enduring Power of Attorney or deputy under an deputyship order of the Court for a family member you may discover that inheritance tax will become an issue for the donor (the person giving you the power to act over their affairs) or person whom the order is about. A person can become incapable of handling their financial affairs instantly through a catastrophic incident or gradually through mental decline. Either way, it is common for someone to not have fully considered their estate or for circumstances to have changed to an extent that inheritance tax becomes an issue as assets are spent on care.
Once you have established that inheritance tax is payable on the death, you may be considering how to mitigate the tax. Gifting is a popular method, but you should be aware of your responsibilities as attorney or deputy.
It may help if I outline some gifting examples:
- Making an interest free loan from the person’s assets. The waived interest is a gift to the recipient of the loan.
- Creating a trust of the person’s property.
- Selling a property at an undervalue (less than its market value).
- If the person is entitled to an inheritance from another’s estate, it is possible to vary the will of the person who has died to redirect the funds.
In order to make any of these gifts, you will first require the authority of the Court of Protection. You may also ask the Court to allow direct gifts to be made to beneficiaries in any will already made by the person in order to reduce the inheritance tax liability on death.
If you fail to obtain the permission of the Court before making or receiving a gift from the person concerned, you risk being removed by the Court of your position, having to repay the funds and being investigated by the police for fraud by abuse of position.
There are exceptions to this general rule which exist in order that the attorney’s and deputies can make simple gifts out of the estate. These must be gifts made on a customary occasion such as to relations on birthdays or at Christmas. Especially if this was performed whilst the person had the capacity to make these gifts themselves. Charities can also benefit where the person was a regular supporter. Finally, the value of the gift must be reasonable taking into account the circumstances and the funds available.
It is important to consider current and future care needs of the person and whether the making of the gift is in their best interests. If it is envisioned that the person may go into care or they are currently living in a care home, you will need to be careful that any distribution via gift does not constitute deprivation of assets as this can have financial implications for any local authority funding that may be needed.
It is helpful to know what a donor would have wanted to happen with respect to gifting and instructions or guidance can be written into the Power of Attorney itself.