Lasting Power of Attorney – Things for an attorney to consider when investing a donor’s funds
Saturday 17th September, 2022
Lasting Powers of Attorney naturally raise a number of difficult circumstances and considerations for the attorney responsible for the donor's finances. With the cost of care costs spiralling, managing money effectively for attorneys has become a nightmare. Attorneys are worried that a failure to invest at least some of the funds available will result in them running out of money to fund the donor’s care costs. However, the risk of potentially losing money by investing in asset backed investments is equally daunting. Some even question their authority to do so.
I feel genuine sympathy for their plight. A vast number of attorneys are simply the concerned offspring, with no professional investment or legal background, looking to manage their parent’s assets in a way that will protect their mum or dad’s financial future. For many of them, the high care costs mean that they are watching the funds available become more and more depleted on a monthly basis.
Unfortunately, there is no silver bullet in this situation. There are no cash deposits offering fantastically high rates of return with minimal levels of investment risk. The greatest security for many may come from purchasing an immediate needs annuity, but the prospect of paying a considerable sum for an income that may only last a matter of months, is an unpalatable option.
This is a very complex area, and it is crucial for any attorney thinking about investing a donor’s money, to take financial advice.
In this article, I have looked at case law to try and determine the circumstances in which it is suitable for the attorney to invest the donor’s money. Furthermore, I have highlighted some principles and considerations that may help attorneys to decide whether they should be looking to invest to maximise the donor’s returns.
As inflation bites, I have seen a considerable increase in the number of questions from attorneys with regards their options for investing the donor’s money with the aim of generating higher returns in order to try and grow the money in line with inflation.
This is a tough ask, at the best of times. According to the Knight Frank 2021 UK Care Homes Trading Performance Review, care costs in the South East grew by 11.7% in 2021. That is a pretty horrifying statistic. I shudder to think what care home costs will have ballooned to in the high inflation environment of 2022.
In reality, it makes sense for an attorney to try and grow the money faster, because even at 11.7%, care costs are going to spiral up. The best cash rate I could find today, was 3.5% with Aldermore, provided you lock your funds in for 5 years. That isn’t great, considering inflation has spiralled to well over 9%. At that rate, the donor’s money is losing 5.5% of its real value per year.
Unfortunately, it isn’t as simple for an attorney to invest the donor’s funds. The problem is that the attorney is not investing their own money and they are accountable if the investment decisions go wrong and the donor ends up without enough money to meet their costs.
However, if the attorney simply leaves the funds in cash, knowingly causing the buying power of the money to fall, it stands to reason that they are liable for not taking actions to address that situation. In a round about way, it seems that the attorney is damned if they do, and damned if they don’t.
As you can see, like most cases that involve a fiduciary role, there are a lot of grey areas, as well as a fair amount of responsibility for things going pear-shaped. Therefore, in this article I will address the following areas:
- Does the attorney have a right and corresponding duty to invest the donor’s funds to get better returns?
- What are the considerations when investing a donor’s money
It is important to note that in this context, investing means purchasing a portfolio of asset backed investments that could go up in value, as well as down. In other words, exposing the donor’s funds to investment risk to get better returns.
Does the attorney have a right and corresponding duty to invest the donor’s money?
The starting point in this discussion is the fact that the attorney has a duty to act in the best interest of the donor. If this is the foundation of any attorney’s role, then we can assume that there will be circumstances where keeping money in cash is in the best interests of the donor, and other circumstances where holding all the donor’s funds in cash will be detrimental. The reason for this is that each case is different and should be judged on its individual merits.
As a general rule, there can be no doubt that a property and financial affairs attorney has the power to invest the donor’s funds. There are exceptions where clauses are included within deed that restrict how the money may be used. However, even these exceptions can be overridden by the Court of Protection, which indicates (under certain circumstances) that greater force is given to enabling the attorney to manage finances in the best interests of the donor, than are necessarily given to maintaining the wishes of the donor themselves. However, is there any basis in law for a duty for an attorney to exercise their investment powers?
The powers of an attorney are frequently compared with those of a trustee. When we look at case law regarding trustee duties, we can firstly see in Stone v Stone (1869) 5 Ch App 74 that the trustee has a duty to acquire assets to produce a return. In Cowan v Scargill (1984 3WLR 501) the judge goes further and says, “In the case of a power of investment, as in the present case, the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of yield of income and capital appreciation both have to be considered in judging the return from the investment.”
Based on these judgements the duty of the trustee (and by inference, the attorney) is to manage the money in the best interests of the beneficiary/donor, which includes a duty to invest the money if this is necessary.
What are the considerations for an attorney when investing a donor’s money?
One of the most often quoted cases that I can find is Re Buckley (2013): The Public Guardian versus C, where the judge lays out some important principles and considerations for attorneys looking to invest on behalf of their donor.
Reading through this, I found the principles quite useful in helping to understand the things that the attorney needs to consider when looking to invest for their donor. A key to this is that the judge started by highlighting that ‘There are two common misconceptions when it comes to investments.
The first is that attorneys acting under a Lasting Power of Attorney (LPA) can do whatever they like with the donors’ funds.
The second is that attorneys can do whatever the donors’ could – or would – have done personally, if they had capacity to manage their financial affairs.’ However, an Attorney is governed by his fiduciary duties to the Donor and also by his obligation to act in the best interests of the Donor (section 1 (5) MCA 2005).
I think this is important, as we have already established above that there is no real question as to the whether an attorney can manage their donor’s finances or invest on their behalf. The main question is whether there is a sound financial benefit to the donor for doing so. Therefore, it may be very sound financial management to invest at least some of the donor’s money over the medium to longer term in order to help it keep pace with inflation and ensure that there are funds available to keep paying care home fees. However, investing in a way that risks the money required in the near term, or which makes it difficult to meet the donor’s care costs would be poor management and could invite sanction. Similarly, taking more risk than is necessary to achieve a particular goal is likely to be frowned upon. I met a client recently who told me that they were encouraged to invest the donor’s money into a fly-by-night property development scheme that promised astronomical returns. The attorneys felt that the risk was simply too much and were proved right a few months later when the scheme imploded.
The judge specified in the Buckley case that attorneys hold a fiduciary position which imposes a number of duties on them. Like Trustees and other fiduciaries, they must exercise such care and skill as is reasonable in the circumstances.
The judge then set out a number of principles that Attorneys should follow when investing a Donor’s funds. As there is no guidance offered by the Public Guardian or the Court of Protection, the judge suggested that the principles are similar to those that should be followed by trustees, who also have to act in the best interests of the trust beneficiaries. The judge explained the principles as follows:
Although it does not expressly apply to attorneys, attorneys should be guided by section 4 of the Trustee Act 2000, which requires Trustees to have regard to what are known as ‘standard investment criteria’ when exercising any power of investment. There are two standard criteria:
- The suitability of the investments; and
- The need to diversify the investments, in so far as it is appropriate in the circumstances
Attorneys should also comply with Section 5 of the Trustee Act 2000 which requires Trustees, before exercising any powers of investment, to obtain and consider proper advice about the way in which, having regard to the standard investment criteria, their power should be exercised and that the advice should be provided by individuals or firms who are regulated by the Financial Services Authority.
Before the Mental Capacity Act 2005 came into force, both the Court of Protection and the antecedents of the Public Guardian (the Public Trust Office and the Public Guardianship Office) were actively involved in the investment of patient’s funds. There was a discrete investment branch which issued in-house guidance for staff – with an investment code that was broken down into 4 short-term codes and 8 long-term codes. It is recommended that Attorneys should have regard for the factors set out by this guidance.
Two of the most important factors when considering the suitability of investments are the Donor’s life expectancy and age. Most Donors are older people. Their average age is 80 years and 11 months.
Short term investment codes (cash deposits) are generally more appropriate where an individual has an anticipated life expectancy of five years or less and the guidance to court staff suggested that ‘without clear medical evidence it would be prudent to consider a life expectancy of less than five years for new patients aged 80 or over’.
The Donor’s money should be kept separately from the Donee’s own funds and that all monies invested on behalf of the Donor should be in the Donor’s name (MCA Code of Practice 7.68). If for any reason the Donor’s name could not be registered on the investment, the Attorney should sign a declaration of trust or such other legal document confirming the Donor’s beneficial interest.
An application should be made to the Court of Protection (subject to a sensible de minimis exception) in the form of an Order under section 23 MCA 2005 for authority in any of the following cases:
- Gifts that exceed the limited scope of the authority conferred on Attorneys by s12 MCA 2005
- Loans to the Attorney or to members of the Attorney’s family
- Any investments in the Attorney’s own business
- Sales or purchases of an undervalue and;
- Any other transaction where there is a conflict of interest between the Donor and the interests of the Attorney
I am not a lawyer, and I am most certainly not trying to give you legal advice, but I think that the above criterion are really useful in deciding whether it is in a donor’s interest to invest the money. There may be case law out there that rejects these principles, but I have not found it. I think the main points to consider are points 1, 4 and 5.
Point 1: Suitability of the investments – in other words, are they suitable for the donor, given their circumstances and what they need to achieve. Will the investment cause detriment to the donor and, would they have invested if they still had the capacity to do so. As the judge correctly points out, suitability is inextricably linked with life expectancy and age.
Points 4 and 5: I think these are most important overall. If medical opinion is that the donor is likely to live for more than 5 years, then it might be prudent to consider longer term investments (with greater risk and growth potential) in order to protect at least some of the funds from inflation. However, in the absence of clear medical evidence, it is prudent to assume that the donor has a life expectancy of less than 5 years and therefore, the short-term investment code (i.e. safer, low risk cash deposits) should be followed.
Furthermore, where the donor clearly has limited life expectancy, I think it is safe to assume that long term investment in riskier investment vehicles would be frowned upon. If the medical evidence is there to show that the donor is likely to live for more than 5 years, then it may be worth considering investing, however that should still be with caveats. Firstly, it is important to ensure that there are sufficient funds available in safe deposit-type accounts to cover any shortfall in care home fees. It is important to consider how much of the donor’s income provision is inflation linked, as this will help determine how much the attorney needs to safely hold back.
As you can see, there are a broad number of factors that need to be considered when looking to invest money for a donor, in order to establish whether such an action is in their best interest. Furthermore, it is very hard for an attorney to be entirely objective in these circumstances when they may allow their own knowledge of the donor and prejudices colour the decisions that they make.
The guidelines above do make provision for taking professional advice to help the attorney make the correct decisions. Taking professional advice means that the attorney has done everything possible to make sure that the decisions made are the correct ones.
If you are an attorney and are struggling with whether you should invest some of your donor’s money, feel free to give us a call to discuss your options. You can book a free initial consultation with us through our website, emailing us, or by phoning on 01420 446777.