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Chartered Insurance Institute
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Settlors and problems with mental capacity

The issues surrounding mental capacity are ever more topical which is not really surprising given the increasingly aging population. Financial planning advisers will come across this issue when dealing with trusts or estate planning generally, especially when considering making gifts, but also when advising on wills or even making investments.

It may indeed be surprising how a loss of capacity may impact not just on the financial planning of the individual in question but those around them, as is well illustrated by a number of recent Court decisions which we will cover this month and next month. In addition, given a recently issued guidance on making gifts by attorneys on behalf of those who have no capacity, we will cover some of those points. Next month we will look specifically at capacity issues in the context of trusts.

First, some fundamentals and general consideration of how loss of capacity impacts decision making based on English law.

When a person becomes mentally incapable.

An assessment of someone’s mental capacity would normally need to be made at the time a particular decision has to be made.

Under the Mental Capacity Act 2005 any assessment starts with the assumption that the person has the capacity to make the decision in question.

An assessment of an individual must never be based simply on:

  • their age
  • their appearance
  • assumptions about their condition
  • any aspect of their behaviour.

A solicitor can decide if someone is capable of making decisions or understanding things, such as a will or a Lasting Power of Attorney. If in doubt, they can obtain an opinion from a doctor or another appropriate professional.

The Court of Protection has the power to decide whether someone has mental capacity or not if there is a disagreement.

It should be borne in mind that there are different tests for capacity depending on the matter in question. Thus the test for making a will may be different from that applying to a lifetime gift or to the general capacity to do other things, e.g. to get married. Indeed, we have a couple of recent decisions which illustrate the problems in these areas.

Mental capacity and wills

As far as wills are concerned the problems arise in two sets of circumstances. First, when the individual is still alive and there is a desire to change a will or make a new will – do they still have capacity? Second, when a will is challenged after the testator's death on the grounds of incapacity. 

If there are proceedings to determine capacity, the decision will be made on the balance of probabilities.

The High Court decision (not yet reported) in the case last year involving a will of the property tycoon Michael Collins, age 78, who suffers from dementia, is an example of the first scenario.

Mr Collins made a will in 1990 leaving almost all his assets to the National Trust.  In 2014 his wife died and, while her solely owned assets passed to various charities (the couple had no children) her share of their jointly owned assets passed by survivorship to her husband.

Both Mr and Mrs Collins fell out with the National Trust many years ago and the Judge dealing with an application to vary the 1990 will accepted that Mr Collins now felt "strong antipathy to the charity". Nevertheless, he ruled that Mr Collins' will could not be altered because he lacked mental capacity - to make or alter a will the testator must have capacity. This should serve as a reminder to regularly review your will.

As for the second scenario, there are volumes of case law on wills being challenged by disgruntled beneficiaries on the grounds that the testator lacked capacity at the time they made the will. In such a case the Court has to determine retrospectively whether the testator had capacity or not.

In the recent case of James v James, 2018 EWHC 43 (Ch) the High Court has confirmed that the applicable test for assessing capacity to make a will after death is the common law test in Banks v Goodfellow (1870), which has survived the enactment of the Mental Capacity Act 2005 and remained the sole test for capacity in these circumstances.

In this case a Dorset farmer lost his challenge to a will in which his 79-year-old father left his entire estate to his wife and two daughters. Sam James claimed that the will was invalid due to mental incapacity and that, in any case, his father had promised him the land, and he was entitled to it by proprietary estoppel equity in his favour.

The High Court judge dismissed both claims deciding that whilst he accepted that the testator suffered from “memory loss and confusion from time to time, and even some irrational behaviour” that in considering the events before him it was his judgment that the testator had demonstrated a rational and balanced approach to the disposal of his estate. In particular, the son had already received land and money from his father during his lifetime and the father, as testator, was entitled to seek to redress the balance between his wife and other children on his death.

This shows that even if the testator shows apparent signs of lack of capacity, the Court may still find that there was sufficient capacity to make a will.

Mental capacity and marriage 

The fact that a different test for capacity may be applied depending on the decision in question is well illustrated by yet another recent case which also illustrates some perhaps unintended consequences of marriage.

In England and Wales marriage automatically revokes a will (that is, unless it meets the requirements of a will that has been made ‘in contemplation of marriage’). If an individual’s will is revoked upon marriage, and they do not get around to replacing it with another valid will prior to their death, then their estate passes under the rules of intestacy.

The England and Wales Court of Protection has recently published its judgment in the case of DMM, (Re DMM, 2017 EWCOP 33) concerning an elderly man with dementia who desired to marry his long-term cohabitant against the wishes of the daughters from his first marriage.

DMM was married and divorced many years ago, and has three daughters from that marriage. Now in his mid-eighties, he has cohabited with another woman for more than twenty years. In 2013, he made a will giving his cohabitant most of his pension, a £300,000 cash legacy and the right to live in his house for two years after his death. His daughters were his residuary beneficiaries and would inherit most of his estate.

In late 2016, DMM announced his intention to marry his cohabitant. At this stage he suffered from Alzheimer's disease. One of his daughters then sought and obtained a medical opinion to the effect that DMM did not have the mental capacity to marry.

The father's marriage would automatically revoke his will and his advancing dementia would probably leave him legally incapable of making a new will after the marriage. If intestacy applied, the daughters would get only the statutory legacies.

The Court of Protection instructed an assessment of DMM's capacity to consent to marriage, being not just his understanding of the strictly personal aspects of marriage, but also the effect on his daughters' finances. The conclusion was that DMM did indeed understand that his children might receive less than before and the cohabitant might receive more, and so the decision was that DMM had the capacity to marry.

Setting up a trust - is the settlor capable?

Given that a settlement may involve potentially making a substantial gift, it is of course essential that the prospective settlor has the capacity to make such a gift. What happens if such a person has no capacity?

Ideally an individual will have made a power of attorney before he lost capacity. But can the attorney set up a trust on behalf of the donor?

The Office of the Public Guardian for England and Wales has recently updated its legal guidance for professional deputies and attorneys on making gifts of a protected person's property. The new guidance does not make any new rules but clarifies the position in the light of a number of recent decisions from the Court of Protection (CoP). As most advisers will be aware the power to make gifts by an attorney (acting under a Lasting Power or an Enduring Power) or a deputy is very limited:  gifts are allowed as an exception to the rule in very specific circumstances - see immediately below. We will cover the full guidance in another article, here we will just mention some specific points about trusts and estate planning. 

Generally speaking, for any gift to be covered by the "exceptions" rule, it must be habitual,  given on a customary occasion for making gifts within families or among friends and associates (for example, births, birthdays, weddings or civil partnerships, Christmas etc),  to someone related or connected to the person or  to a charity the person supported or might have supported,  and  of reasonable value, taking into account the circumstances in each case and, in particular, the size of the person’s estate. In all other cases the attorney needs to apply to the CoP before they go ahead.

In particular the guidance states that any gift or transfer of real property (for example, land or a house) – either the whole property or a part share – is almost certainly outside of the attorney's powers despite what the donor might have said when they had mental capacity. To make such a gift, they are likely to have to apply to the CoP for permission.

The guidance also suggests that particular care should be taken if an attorney is thinking of accepting a gift for themselves from the person’s estate. The conflict of interests is obvious and an attorney must not take advantage of their position to benefit himself.

‘De minimis exceptions’ and IHT planning by an attorney.

The CoP has recognised that there are exceptions to the rule that an application to the CoP will always be required if the gift is not covered by the "exceptions" mentioned above. Those exceptions from the rule are when an attorney would go beyond their authority to make a gift but in such a minor way that it doesn’t justify a Court application – as long as the person’s estate is worth more than £325,000. These exceptions are often called ‘de minimis exceptions’.

Specifically, the exceptions can be taken as covering the annual IHT exemption of £3,000 and the annual small gifts exemption of £250 per person, up to a maximum of, say, 10 people when:

  1. a) the person has a life expectancy of less than 5 years;
    b) their estate is worth more than the nil rate band for Inheritance Tax purposes (currently £325,000);
    c) the gifts are affordable, taking into account the person’s care costs, and won’t adversely (negatively) affect their standard of care and quality of life; and
    d) there is no evidence that the person would be opposed to gifts of this value being made on their behalf.

However, being able to gift small amounts up to the IHT annual £3,000 and small gifts exemptions without the permission of the Court doesn’t mean that an attorney can carry out ANY IHT planning without the Court’s permission.

Neither can an attorney rely on other IHT exemptions to avoid applying to the Court for permission to make a gift.

In one recent case the Senior Judge at the CoP specifically stated that attorneys who want to make larger gifts for IHT planning purposes – such as setting up monthly standing orders to themselves (perhaps to take advantage of the normal expenditure out of income exemption), should apply to the CoP for permission.

The above is all based on English law, as different rules apply in Scotland and in Northern Ireland.