Later LifeOct 24 2017

Are wills and LPAs about to enter the digital age?

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Are wills and LPAs about to enter the digital age?

A decline in mental capacity could result in an individual becoming incapable of managing their financial affairs, meaning lasting powers of attorney (LPA) may be necessary. Failure to plan for these scenarios means that the surviving family members, and the professional firms they work with, are often left to pick up the pieces.

However, these situations could well become simpler in the future if two recent proposals, both of which have focused in part on the use of electronic signatures, come into force.

There are differences between the pair: changes to LPAs have been proposed by the FCA, and as such appear likely to proceed sooner than an overhaul of wills – the latter has been advocated by the Law Commission, an independent organisation.

But there is another common thread aside from going digital. The Law Commission consultation, open until 10 November 2017, has also honed in on how mental incapacity is viewed in the eyes of the law, as Box 1 shows. The growing popularity of LPA powers underlines just how significant the issue is becoming in modern society.

 

LPAs came into force in October 2007, replacing enduring powers of attorney, which were perceived as being subject to abuse. The legal document allows an individual to appoint one or more people, known as attorneys, to help them make decisions or to make decisions on their behalf. According to the government, this can give individuals more control over what happens to them in the event of an accident or illness.

Despite a slow initial uptake, LPAs are becoming more popular. On 28 September the Ministry of Justice released its quarterly family court statistics for England and Wales from April to June. During this period, a total of 194,012 LPA applications were received, an increase of 30 per cent over the same period in 2016.

Until the start of 2009, fewer than 20,000 LPA applications were being made per quarter, and the figure still shy of 100,000 prior to 2015. Some have attributed the growing interest to the risk of mental decline in old age. Data from the Office for National Statistics shows that Alzheimer’s and dementia accounted for 12 per cent of all deaths in 2016.

Rachael Griffin, a tax and financial planning expert at Old Mutual Wealth, says: “Dementia and Alzheimer’s are now so widespread that it is hard to meet somebody who hasn’t been affected by these diseases in some fashion.”

This can have direct implications for advisers. If an individual lacks the necessary mental capacity to make important financial decisions, then a third party will need to act on their behalf. Scott Gallacher, a director and adviser at Rowley Turton, believes intermediaries are obliged to stress the importance of LPAs, as advice cannot be given to those who lack the capacity to contract.

He says: “I always use Michael Schumacher’s skiing accident as an analogy. Although they think it’s their parents and grandparents that need a power of attorney, it shows it would be useful for someone to look after their own financial affairs in such a situation.”

Willpower

Ms Griffin describes wills and LPA arrangements as “the cornerstone of any financial planning”. But in contrast to the growing interest in LPAs, research carried out by Unbiased last year shows that 31m people, or 60 per cent of UK adults, had not made a will, suggesting this sentiment is yet to feed through to the wider public.

This figure correlates with the experience of Mr Gallacher, who emphasises that dying without a will has wider implications on the surviving family unit.

He says: “The first thing that happens on death is that everyone falls out, and if you’ve got a non-traditional family with stepchildren, the situation is worsened. We’ve seen examples where close family members have taken advantage of each other if the will hasn’t been in place or it isn’t right.”

For those failing to make a will before death, the preferred distribution of assets may not be possible. In this scenario, the rules of intestacy apply, as outlined in Box 2. Importantly, only married or civil partners and some other close relatives can inherit under these rules, and the deceased must be married or in a civil partnership at the time of death.

 

Mr Gallacher notes that clients are often shocked by this, and adds that many also voice concerns about children receiving assets at a less-than-preferable age. 

“If [the children] are younger, assets are held in a statutory trust until they’re 18 and then they get the money, which generally is not going to go down well,” he says.

Although consumers will seek out advisers, solicitors and accountants for different needs, there is still a degree of overlap. On an individual level, complexities can be mitigated through prudent tax planning – something that should involve both advisers and solicitors, says Kelly Greig, private client partner at law firm Irwin Mitchell.

Great responsibility

LPAs also carry obvious risks. Some worry a power of attorney can have a devastating effect on family relationships. In August, Denzil Lush, a former Court of Protection judge who has overseen more than 6,000 cases, said that the public must be alerted to the lack of safeguards in the current system. He warned a lack of transparency “causes suspicions and concerns that tend to rise in a crescendo and eventually explode”.

Ms Greig currently sits on the Court of Protection panel, focusing on instances where attorneys have been removed for wrongdoing. She says: “Because the attorneys are often the beneficiary, they think that what they’re doing is not wrong. There are varying degrees: some are point plank wrong – it’s theft really – but some are well intentioned.”

The use of discretionary fund managers (DFMs) with LPAs has proved a further sticking point. In December last year a number of experts warned that a client’s LPA should hold an explicit permission to outsource investment decisions. Failing to fulfil this requirement could result in advisers being vulnerable to regulatory reprisal and potential legal challenges.

“It started when HSBC changed its guidance and said ‘if you’re acting under a power of attorney, and you haven’t got provision to use a DFM, then we can longer use one – it has to be on a execution-only basis’,” Ms Greig explains.

However, she adds that after discussions with the Office of the Public Guardian, this serves as guidance rather than a strict rule.

An overhaul to the current LPA system is now in motion. In a paper published in September titled ‘Ageing Population and Financial Services,’ the FCA outlined a greater need to make, register and store LPAs, which could be achieved through a slicker online system. As things stand, it is possible to register LPAs online, but physical signatures are still a mandatory requirement. The watchdog has proposed permitting electronic signatures instead.

Others are clamouring for a similar makeover for wills. In mid-July the Law Commission voiced concerns that current rules offered little protection to the vulnerable. The body suggested that one remedy would be to move to an electronic system.

Some argue that online processes could pose a security issue, though Ms Griffin is very much in favour of embracing the digital route, arguing this should not only benefit a number of parties but would also encourage consumers to plan their estates effectively.

“Although you can register LPAs online, if you’re dealing with financial institutions – such as your bank or a utility company – you would have to provide each of those with a copy,” she says. 

“Wouldn’t it be great if there was a place where those companies could do a search online and get the details? Whether it’s wills or LPAs, anything the government can do to make things more accessible and user friendly, and less legalistic, is all for the better.”