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Creating an “estate plan” – a detailed plan of how and when you wish to pass your wealth on to your chosen beneficiaries – takes time.
Even if you plan to leave a more traditional inheritance, stipulating who receives what in your will and appointing an executor, you need to think about how you want your legacy to last after you’re gone.
When there are individuals living with vulnerabilities involved, the need for a comprehensive estate plan is amplified.
“Vulnerability” is a broad term that encompasses a vast range of circumstances, including:
- Physical disabilities, including those that require lifelong medical care
- Cognitive impairments, such as dementia or a brain injury acquired either at birth or during a person’s lifetime
- Learning disabilities or difficulties
- Circumstances that greatly impact a person’s mental health or capacity, including addiction and depression.
All of the above could affect how your beneficiary manages their inheritance. For someone living with a cognitive impairment of any kind, you may question whether they are able to make informed financial decisions.
If you want to pass wealth to a family member you would consider to be vulnerable, there are crucial considerations that could help you, and them, throughout the process.
1. Capacity – How it’s assessed and why it matters
Defined in the Mental Capacity Act 2005, “mental capacity” – which can be lost either over the short term or permanently – is the ability to understand information and make decisions about your life. [1]
If a person lacks capacity (or you are unsure whether they do), a capacity assessment can confirm this. A person can also undergo a financial capacity assessment, which will help to determine whether they are capable of understanding the money they have, how to access it, and the consequences of financial decisions.
Remember that if a person is determined to have mental capacity, they have “the right to make unwise decisions”. If a vulnerable beneficiary does have capacity – and this must be assumed until proved otherwise by a formal capacity assessment – they can choose to make financial decisions that you wouldn’t make yourself. [2]
Importantly, if your beneficiary is deemed to lack mental capacity either short-term (such as during a mental health crisis) or long-term (for example, after a dementia diagnosis or a severe stroke), you will need to put guardrails in place when passing wealth to them. Without setting these structures up prior to your death, your executor and beneficiaries may be at a significant disadvantage later on.
2. The kind of help available for beneficiaries who need it
Lasting Powers of Attorney (LPAs)
These documents allow a person (who has full capacity) to register “attorneys” who can step in and manage their wealth and/or healthcare decisions should they be unable to. Property and financial affairs attorneys can be asked to help even by someone who does have capacity, whereas health and wellbeing LPAs can only be employed once a person loses capacity.
Read more – How to choose a suitable attorney to safeguard your wealth
If a person does not have capacity, they can’t register an LPA. At this stage, anyone who wants to manage their wealth and decisions must apply to become a Deputy through the Court of Protection.
Deputyship
If an intended beneficiary loses capacity without having LPAs in place, or is born with an impairment meaning they have never retained capacity, you or another trusted person can apply for deputyship via the Court of Protection.
In brief, deputyship gives a person almost the same rights as an attorney, allowing them to make decisions on behalf of the vulnerable individual.
In the event that this person eventually inherits your estate, or part of it, their Deputy (or attorney) would be able to help them manage the funds and safeguard your family’s wealth.
Deputies acting on behalf of individuals with a loss of capacity can be lay or professional.
Trusts
Whether your beneficiary retains mental capacity or not, a trust structure could be a useful tool to consider when passing on a large estate.
From a safeguarding perspective they require the involvement of a third party – the trustee – whose job is to manage and distribute the wealth within the trust according to its rules and regulations.
There are countless examples of how trusts can be advantageous for all kinds of beneficiaries, such as:
- Helping a young beneficiary manage a large estate with strict guardrails in place
- Ringfencing funds for specific purposes, such as ongoing medical treatment for someone living with a physical disability
- Designating an annual income for certain beneficiaries to ensure fairness and maintain your wishes
- Giving you and your beneficiaries peace of mind that the trustee is making decisions in line with everyone’s best interests.
Specialist advice is recommended to set up a trust.
3. The importance of specialist advice
As you form your estate plan, it’s understandable that your loved ones’ wellbeing will remain the utmost priority.
Not only does IPS Capital provide a comprehensive wealth planning and investment management service, but we also provide specialist care for clients involved with the Court of Protection (in particular, Deputies).
Read more – Court of Protection and Personal Injury
Our team understands the crucial considerations that must be made when bequeathing wealth to a vulnerable person, or when someone receives compensation after a life-altering injury – especially if they no longer retain mental capacity.
To discuss anything you have read about here, contact your relationship manager or email info@ipscap.com for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning. IPS Capital does not provide tax or legal advice.
Sources
[1] April 2023 Mental Capacity Act 2005 Mind Charity
[2] [Unknown] Mental Capacity Act 2005 at a glance Social Care Institute for Excellence
