Lasting Power of Authority’s (LPA’s): Entrepreneurs must read the small print first
No one can predict the future. And for someone with assets and responsibilities on the line, it can be costly when the future comes with surprises, among the worst of which is losing the capacity to decide your own affairs, whether mentally or financially.
It is why putting in place an ‘attorney’ acting under a Financial and Property Affairs Lasting Power of Attorney (LPA) or Enduring Power of Attorney (LPA replaced this on October 1st 2007) is becoming more prevalent today, particularly with entrepreneurial investors as they try to protect and ensure their capital and businesses while they still have the ability to do so. Today there is 2.5 million power of attorney agreements currently registered in England and Wales. Last year alone nearly 600,000 applications were made to register power of attorney, compared to about 440,000 applications the previous year.
Typically, as part of a ‘Wealth Planning’ review into someone’s financial affairs, a planner will recommend that individuals have in place either a Property and Financial Affairs Lasting Power of Attorney (LPA), Health and Welfare LPA, or both – and some entrepreneurs will have the older style Enduring Power Attorney (EPA) in place if taken out pre-2007. These ‘legal authorisations’ are particularly important if you ever have an accident or suffer from an illness that means you lose your capacity to make decisions regarding your mental health and your business interests.
It’s especially so when they have a notable number of dependents. Many business owners will already have general LPAs in place that covers their financial affairs if they lose the capacity to make decisions for this very reason - however - in most cases, their attorneys will be their spouses or other family members. But are these family members in any way qualified to sit on a company board and make the crucial business decisions? It will certainly be overwhelming to suddenly be given the final say on assets that could be worth anywhere between £5,000 to £500 million.
In order to ease their role, an attorney might wish to open a new discretionary portfolio on behalf of the ‘donor’ of the LPA with an investment manager, or may wish to instruct the investment manager to continue to manage the assets on a discretionary basis after the donor loses the mental capacity to do so
However, there is an important pitfall that the donor and appointed attorney should be aware of - where a Power of Attorney is already in place, the donor gets limited flexibility, meaning they can’t appoint a professional expert, i.e. an investment manager, as a nominated attorney to manage the donor’s financial affairs.
This includes financial investments and would, therefore, require that the attorney manage the donor’s assets on an advisory basis rather than a discretionary basis. This adds various complications where there is already a discretionary managed portfolio in place and means that the attorney has the responsibility for making final decisions with regards to investments which they may not be comfortable or familiar with doing.
Therefore, when setting up a Power of Attorney it is possible to insert wording that will allow the attorney to delegate investment decisions to a discretionary investment manager. It should look like this:
“My attorney(s) may transfer my investments into a discretionary management scheme. Or, if I already had investments in a discretionary management scheme before I lost the capacity to make financial decisions, I want the scheme to continue. I understand in both cases that managers of the scheme will make investment decisions and my investments will be held in their names or the names of their nominees.”
Whether you are a sole trader, a partner in a partnership, company director or shareholder with voting rights, it is advisable to speak with a solicitor when establishing a Power of Attorney in order to ensure that such wording is included in order to provide your attorney with a greater degree of flexibility in managing your investments.
Unfortunately, if you have already established a Power of Attorney in the past, it is not possible to amend it but, it is possible to revoke any existing arrangements and make a new Power of Attorney if you still have mental capacity. Once the donor’s mental capacity is lost it will no longer be possible to appoint any new Power of Attorneys so, it is important that you review any existing arrangements with your solicitor and ensure that they are tailored towards your needs.
An entrepreneur or high net worth individual taking out an LPA during their lifetime is clearly a responsible move for your dependents, and to be frank, your life’s work. But this is simply not the end of the story, and it is important that the donor that is shrewd enough to take one out, does not inadvertently burden their appointee. It is crucial the appointed ‘attorney’ provides them with enough flexibility to act truly in their appointer’s best interests in the event of them having to exercise powers.
The information provided in this article is of a general nature. It is not a substitute for specific advice with regards to your own circumstances. You are recommended to obtain professional advice from a professional accountant or solicitor before you take any action or refrain from action.
5 key factors for entrepreneurs to consider before making contingency plans about their wealth, investments and business:
Flexibility for executor;
Powers of delegation;
Specialist knowledge of appointed attorney;
Ability/power to transfer;
Accessibility to legal (and other professional) advice for executor;
